What happened
Shares of Illumina (ILMN -1.28%) fell by 11.6% in April, according to data provided by S&P Global Market Intelligence.
The fall means that shares of the gene-sequencing company have only inched up 2.3% year to date.
Image source: Getty Images.
So what
Illumina reported a downbeat set of earnings for its fiscal 2023 first quarter (Q1 2023). Revenue fell by 11.1% year over year to $1.09 billion with lower shipments of its genetic-sequencing equipment. Higher research, development, selling, and administrative expenses pushed the business into an operating loss of $64 million. Illumina managed to eke out a small net income of $3 million because of an $81 million tax credit.
Its core Illumina segment saw gross margins slip from 69.7% in Q1 2022 to 63.8% in the current quarter as the company had lower operating leverage from reduced manufacturing volume, coupled with lower instrument margins as its new NovaSeq X system was just launched. For the quarter, the company also saw a free-cash outflow of $42 million, a reversal from the free-cash inflow of $111 million a year ago.
Investors were probably also feeling despondent after the Federal Trade Commission ordered Illumina to divest Grail. This is the latest development in a long-running saga in which the E.U. tried to block the deal last September based on antitrust laws.
Needless to say, this latest move deals another blow to Illumina's ambition to integrate the cancer test developer into its portfolio of products and services. It doesn't help that activist investor Carl Icahn is also waging a proxy fight with Illumina's management to gain a board seat with the argument that the Grail acquisition was an overpriced mistake.
Now what
Illumina intends to appeal both decisions but emphasized that it will proceed to sell off Grail should it lose. It will be a pity if the company has to do so, as Grail holds a massive opportunity for Illumina to scale up its business and offer effective cancer tests in tandem with its gene-sequencing technology.
Despite the weak quarter, CEO Francis deSouza remains optimistic as Illumina has exceeded expectations by shipping 67 NovaSeq X instruments during the quarter. The new instrument's order book stood at more than 200 at the end of Q1 2023, signalling strong demand for the company's latest iteration of its best-selling product. Management has also announced a plan to generate more than $100 million in run-rate cost savings that should not only lead to margin improvements but also allow the company to reinvest in promising growth areas.
