This story has been updated to include additional information about Illumina's restructuring and severance expenses.
NEW YORK – Illumina's rollout of its new NovaSeq X high-throughput sequencer is "more challenging than anticipated," interim CEO Charles Dadswell said on Wednesday in a conference call with investors following the release of the firm's second quarter financial results.
The snags the firm is hitting weren't atypical of a new product release, he said, and include software bugs but are causing installations to "take longer than expected." Not all customers are experiencing the issues, he added. The firm has deployed additional resources to help customers bring systems online faster, he said.
Still, Illumina placed 109 NovaSeq X instruments in the quarter, ahead of expectations of 80 placements. Illumina now expects to place 390 instruments in 2023, up from 330.
In addition to the rollout issues, Illumina saw reduced demand for high-throughput sequencing consumables as customers transition to the NovaSeq X along with weak sales in China, resulting in only a 1 percent increase in total revenues year over year. "This is the flip side of being able to deliver more [NovaSeq] Xs," CFO Joydeep Goswami said.
As a result, Illumina is lowering its 2023 guidance for total revenue and EPS. The firm now expects consolidated revenue growth of approximately 1 percent year over year with core Illumina revenues flat year over year. In April, the firm said it expected growth between 7 percent and 10 percent year over year including core Illumina revenue growth of 6 percent to 9 percent. Illumina reiterated Grail revenue guidance in the range of $90 million to $110 million.
Illumina now expects a loss per share of $2.08 to $1.93 and adjusted EPS of $.75 to $.90.
Meanwhile, the churn in Illumina's C-suite continues following the resignation of former CEO Francis deSouza, as the firm announced the departures of Chief Technology Officer Alex Aravanis and Chief Medical Officer Phil Febbo.
On the positive side, Dadswell said early demand for the NovaSeq X remains high, with 20 percent of customers ordering more than one instrument.
"By the end of the quarter, Illumina said it had 260 NovaSeq X orders since launch, implying a ~84 [instrument] backlog," UBS analyst John Sourbeer wrote in a note to investors.
And the firm's win rate in the mid-throughput market outside China increased compared to the first quarter, Dadswell said, though he did not provide additional details.
Illumina's second quarter "was fine to good," TD Cowen analyst Dan Brennan wrote in a note to investors. "While 2 percent year-over-year growth is nothing to write home about, we are in the second quarter of arguably the biggest new high-throughput launch in history … and quarterly growth is supposed to be very weak early on."
For the three months ended June 30, the San Diego-based sequencing technology company recorded total revenues of $1.18 billion compared to $1.16 billion a year ago, beating the consensus Wall Street estimate of $1.16 billion. On a constant currency basis, revenues were up 3 percent, Goswami said.
Nearly all revenues came from the core Illumina business. Grail, Illumina's cancer liquid biopsy subsidiary, recorded revenues of $22 million from Galleri test fees.
Illumina reported $1.00 billion in product revenue, flat compared to $1.01 billion in Q2 2022, and $175 million in service and other revenue, up 12 percent from $156 million a year ago.
Sequencing instrument revenues grew 2 percent to $193 million compared to $190 million a year ago, driven by NovaSeq X sales, and partially offset by a decrease for the low-throughput MiSeq instrument. Sequencing consumables revenues were $739 million, down a fraction of a percent from $744 million a year ago, driven by headwinds in China and the high-throughput segment and partially offset by strong sales in oncology. Service revenue grew 7 percent year over year driven by higher instrument service contracts.
Revenues from the Americas were $623 million, down 2 percent from the prior-year period; revenues from China were $115 million, down 3 percent; revenues from Europe were $303 million, up 11 percent; and revenues from Asia, the Middle East, and Africa were $118 million, down 10 percent.
Weakness in China was multifactorial. The country's economic recovery after the lifting of COVID-19-related restrictions is "slower than expected … especially for clinical customers," Goswami said, with effects continuing into the second half of the year. The firm is also seeing "intense competition" in China in the mid-throughput sequencing market.
COVID-19 surveillance contributed $6 million in revenues, down 78 percent year over year from $27 million.
Illumina reported a net loss in the quarter of $234 million, or $1.48 per share, compared to a net loss of $535 million, or a $3.40 loss per share, in Q2 2022. During the year-ago quarter, Illumina recognized $609 million in legal contingencies, including $453 million for an expected fine from the European Commission for prematurely closing the Grail acquisition — which was handed down last month at €432 million ($479 million) — and approximately $156 million for an intellectual property-related legal settlement with BGI.
On an adjusted basis, Illumina reported EPS of $.32 compared to $.57 in the year-ago quarter, beating the consensus Wall Street estimate of net income of $.02 per share.
Illumina's core R&D expenses grew 10 percent to $274 million in Q2 from $249 million a year ago, while its core SG&A expenses grew 6 percent to $359 million from $339 million a year ago. The firm reported $12 million in legal contingency and settlement expenses and $33 million in restructuring charges, primarily related to severance.
Grail R&D expenses were $89 million, up 3 percent from $86 million a year ago, while SG&A expenses were $91 million, up 26 percent from $72 million a year ago.
The company finished the quarter with $1.55 billion in cash and cash equivalents and $6 million in short-term investments.
Dadswell said that Illumina is still searching for its next CEO, interviewing both internal and external candidates. The firm is promoting Steven Barnard, VP and head of global advanced science, to replace Aravanis, who "will be departing Illumina to pursue another opportunity outside of the company," the firm said in a statement. Aravanis is a cofounder of Grail and came into the CTO role in 2020, about a year before the firm acquired Grail over objections from US and European regulators.
The firm will be slower to replace Febbo, Dadswell suggested. "We'll take time to look at the organization and evaluate where we are on the clinical side and medical side," he said. "We'll open up that search after we examine where that organization fits and what we need."
For the third quarter, Illumina expects consolidated revenues to grow 2 percent year over year to $1.14 billion, driven by a decrease in NovaSeq consumables and adjusted EPS of $.10 to $.15.
In Thursday morning trading on the Nasdaq, Illumina's shares were up 4 percent to $191.85.