Analyst Conference Summary


conference date: August 11, 2022 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2022 (second quarter, Q2 2022)

Forward-looking statements

Overview: Revenue growth continues to slow, so how high of a P/E can be supported?

Basic data (GAAP):

Revenue was $1.16 billion, down 5% sequentially from $1.22 billion and up 3% from $1.13 million in the year-earlier quarter.

Net income was negative $535 million, down sequentially from $86 million, and down from $185 million year-earlier.

Diluted EPS was negative $3.40, down sequentially from $0.55, and down from $1.26 year-earlier.


For fiscal 2022, revenue growth in the range of 4% to 5%. GAAP diluted EPS of negative $2.93 to $2.78 and non-GAAP diluted earnings per share of $2.75 to $2.90. Core Illumina revenue growth expected in the range of 3.5% to 4.5%. GRAIL revenue expected in the range of $50 to $70 million.

For Q3 2022, y/y revenue growth expected from flat to up 1%. Non-GAAP operating margin 5%, with core margin around 20%.

Conference Highlights:

Francis deSouza, President and CEO, said "Our second quarter results did not meet our expectations as challenges in a complex macroeconomic environment more than offset the growth we continue to see in sequencing runs on our platforms. As we strategically navigate these dynamics, we continue to advance our innovation roadmap in support of our long-term growth trajectory. At our upcoming Illumina Genomics Forum and Investor Day events, we look forward to showcasing our breakthrough technologies that demonstrate the power and potential of genomics." On a constant foreign currency basis revenue would have been up 5% y/y. Guidance lowered due to foreign exchange rates, customer expansion delays, and macroeconomic effects on capital investments. Sequencing runs, however, grew. Some supply constraints caused shipments to slip from Q2 to Q3. Covid sequencing bolus mostly over.

Product revenue was $1.01 billion, services $156 million. Sequencing instrument revenue was $190 million, up 1% y/y. Consumable revenue was $744 million, up 6% y/y. Oncology testing led consumable sales.

In Q2 Illumina continued to make progress towards introducing next-generation technology. In Q1 2022 Illumina Launched TruSight Oncology Comprehensive in Europe, a single test that assesses multiple tumor genes and biomarkers to reveal the specific molecular profile of a patient's cancer.

Grail had $12 million in revenue and a $187 million operating loss, adding to the y/y decline in net income and EPS. In Q2 2022 GRAIL partnered with Munich Re Life US to give access to Galleri cancer detection. Announced strategic collaboration with AstraZeneca to develop companion diagnostic tests and identify patients with high-risk, early-stage disease. European regulators are requiring Grail to continue to be run as a separate company for now. The merger review is ongoing.

In Q2 2022, Illumina recognized $609 million in legal contingencies, including an accrual of $453 million, recorded in Q2 2022, for the potential fine that the European Commission may impose of up to 10% of our consolidated annual revenues and an estimated accrual of $156 million, also recorded in Q2 2022, related to the settlement of our litigation with BGI in July 2022.

Non-GAAP numbers: net income $91 million, down 46% sequentially from $169 million, and down 67% from $276 million year-earlier. Diluted EPS was $0.57, down 47% sequentially from $1.07, and down 70% from $1.87 year-earlier.

Cash, equivalents and investment balance was $1.29 billion, down sequentialy from $1.35 billion. Long term debt $ billion. Cash flow from operations was $125 million. Free cash flow was $54 million. Capital expenditures were $71 million. Cash used to repurchase stock was $0 million.

GAAP cost of revenue was $395 million, leaving gross profit of $767 million. Operating expenses were $1.35 billion, consisting of: $327 million for research and development; $410 million for selling, general, and administrative. Leaving income from operations of negative $579 million. Other expense was $58 million. Income tax benefit $102 million.

Q&A selective summary:

Lab expansion comments, competing products? A few of our large customers who planned to expand labs or setup new labs had delays, but they are still progressing.

Consumables inventory? Some customers are managing inventory to conserve capital, since they are confident in our supply chain. The end demand levels are actually increasing. The impacts should be transitory.

Color on flatish guidance? In 2H our customers challenges are around their own supply chains and inventory management. Plus FX. It is not related to ChemistryX or competitive products. We believe our guidance is balanced, there are always possible downsides and upsides.

End of quarter backlogs? Faster than expected decline in Covid surveillance and slowdown in China were two additional effects on results and guidance. Backlog exit of Q2 was $1.1 billion, in line with past 6 quarters.

Any pricing pressures in guidance? No.

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Disclaimer: My analyst call summaries may include both condensations of statements made by company representatives and my own analysis. They are not covered by any warranty. I cannot guarantee anything said by company representatives is true. I try not to make errors, but it is possible. This is journalism, not advice.

Copyright 2022 William P. Meyers