NEW YORK – Illumina said after the close of the market on Tuesday that it is planning to trim more than $100 million from its annual expenses over the next several years in an effort to improve its margins.
The spending cuts come as the firm's management is under fire from activist investor Carl Icahn, who has suggested that buying and operating Grail has been a drain on Illumina's core business.
"These cost savings will accelerate progress toward higher margins as well as free up capital to increase investment in high-growth areas," the firm said in a statement. "The company will continue to prioritize and invest in initiatives that generate highly differentiated products that are valued by Illumina's customers."
The announcement accompanied the release of the firm's first quarter financial results, which saw an 11 percent decrease, year over year, in total revenues for the San Diego-based genomics technology firm.
Illumina plans to achieve cost savings in several ways. "We will leverage the recent modularization of R&D innovation created as part of the NovaSeq X development, including XLeap-SBS and new flow cell technology, to lower the cost and accelerate time to market for future platforms," the firm said. It will also reduce its workforce through a combination of "streamlining" its operation and offshoring and reevaluate its global real estate portfolio and third-party vendor spending, among other strategies.
"Our commitment to higher margins will set Illumina on the best path to deliver long-term sustainable success for our shareholders," CEO Francis deSouza said in a statement.
In the meantime, Icahn is seeking to unseat three directors on Illumina's board, including DeSouza and Chairman John Thompson. On Monday, Evercore ISI Analyst Vijay Kumar noted that Illumina's proxy statement from April 20 disclosed plans to add two additional board members — a public company CEO and CFO — following its annual shareholder meeting in late May.
For the three months ended April 2, Illumina recognized revenues of $1.09 billion, compared to $1.22 billion in Q1 2022, beating analysts' average estimate of $1.07 billion. On a constant currency basis, revenues were down 9 percent, the firm said.
Product revenue for the quarter totaled $922 million, down 14 percent from $1.07 billion a year ago, and service and other revenue totaled $165 million, up 8 percent from $153 million.
Core Illumina revenues were $1.08 billion, down 12 percent year over year. Grail, Illumina's cancer liquid biopsy subsidiary, recorded revenues of $20 million from Galleri test fees, up 100 percent from a year ago. Grail shipped more than 20,000 tests in the quarter.
The lower core revenues were attributable to COVID-based disruptions in China, customer transition to the NovaSeq X, and constrained capital markets around the globe, partially offset by stronger than expected NovaSeq X shipments, according to the firm.
Core Illumina R&D expenses grew 9 percent to $259 million from $238 million in the prior-year period. Core SG&A expenses grew 14 percent to $286 million from $251 million a year ago.
Grail R&D expenses were up slightly at $86 million from $85 million in Q1 2022, while its SG&A expenses were $93 million, up 60 percent from $58 million a year ago.
On a conference call following the release of the financial results, DeSouza said that manufacturing for the NovaSeq X is "scaling nicely" and that the firm shipped 67 of those instruments in Q1, above expectations of between 40 and 50. Now, the firm expects to deliver a total of 330 NovaSeq Xs this year, up from 300. Illumina expects NovaSeq X customers to decommission approximately 10 to 12 NovaSeq 6000s across Q1 and Q2, company officials said.
Sequencing instrument revenues were $154 million in Q1, down 27 percent from $212 million a year ago, attributable to a decrease in NextSeq 550 placements in China. Sequencing consumables revenues were $692 million, down 12 percent from $784 million in Q1 2022, driven by COVID surveillance headwinds and lower NovaSeq 6000 pull through. At least half of consumables revenues came from clinical customers for the first time, DeSouza said, while TruSight Oncology test sales grew 26 percent, year over year, to more than $25 million.
COVID-19 genomic surveillance added approximately $11 million in revenues for the quarter, Illumina CFO Joydeep Goswami said.
Sequencing services and other revenues were $119 million, up 7 percent year over year, driven by growth in instrument service contracts.
Goswami noted that Illumina has reorganized its global commercial structure and will report European revenues separately while folding the Asia-Pacific region in with the Middle East and Africa.
Revenues from the Americas were $605 million, down 6 percent year over year from $646 million; revenues from Europe were $261 million, down 9 percent year over year and 4 percent on a constant currency basis; revenues from China were down 28 percent to $91 million; and revenues from Asia-Pacific, the Middle East, and Africa were $119 million, down 27 percent, partially attributable to the impact of sanctions affecting the ability of Illumina to conduct business in Russia.
Net income for the quarter was $3 million, or $.02 per share, compared to net income of $86 million, or $.55 per share, in Q1 2022. On an adjusted basis, EPS was $.08, beating the consensus Wall Street estimate of $.02 per share.
Goswami noted that in Q1 the firm used $500 million to repay the outstanding principal of its 2023 term notes that matured in March.
As of April 2, Illumina had $1.49 billion in cash and cash equivalents and $24 million in short-term investments. The firm reiterated its expectations of full-year 2023 consolidated revenue growth between 7 percent and 10 percent, year over year, including core Illumina revenue growth of 6 percent to 9 percent and Grail revenue in the range of $90 million to $110 million. Headwinds due to the impact of sanctions affecting the firm's ability to conduct business in Russia could total approximately $60 million for the full year, Goswami said, with an approximately $18 million headwind in Q2.
In Wednesday afternoon trading on the Nasdaq, shares of Illumina were down 3 percent at $212.24.