Illumina has refreshed its commitment to chase higher profit margins, with a plan to cut at least $100 million from its annual expenses and slim down operations, all set to take effect later this year.
The pledge comes as the DNA sequencing giant looks to “deliver long-term sustainable success for our shareholders,” according to a statement from CEO Francis deSouza—and while the company is embroiled in a proxy fight with activist investors over an upcoming vote on who will sit on its board of directors.
For its core DNA sequencing activities—that is, excluding Grail, the cancer screening blood test developer that it has managed as a separate business since its turbulent acquisition in August 2021—Illumina has set goals of achieving 25% operating margins in 2024 and 27% in 2025.
The company previously posted a 23.8% operating margin using the same internal metrics for the 2022 fiscal year and has projected an estimated 22% for 2023. The latest quarter’s gross margins, meanwhile, have fallen to 60.3%, down from 66.6% in the first quarter of 2022.
To expand its margins Illumina will explore several options, including “streamlining its organization and processes” and “rationalizing its global real estate portfolio and third-party vendor spend,” the company said in its latest earnings release.
It will also be reorganizing some of its work around “more cost-effective” overseas locations. The company opened its first manufacturing site in China in August 2022, with a Shanghai-area site set to supply clinical testing reagents before expanding to instrument production in the next five years.
Cutting more than $100 million from expenses will also free up cash for R&D investments in high-growth products, the company said.
Illumina said these moves would build on the layoffs it announced last November, when it began letting go 5% of its global workforce, which spanned more than 9,100 employees at the time. Those cutbacks came days after the company announced it was taking a $3.91 billion impairment charge to write down the value of its Grail acquisition, which has since been torpedoed by the FTC and European antitrust regulators.
On the other side of its ledger, Illumina posted $1.09 billion in revenue for the first quarter of 2023—a drop of 11% compared to the same period the year before, or 9% when accounting for changes in foreign currency exchange rates.
Still, CEO deSouza called the quarter a “solid start” to the year, pointing to higher-than-expected customer orders for its latest high-throughput machine, the NovaSeq X, which aims to provide fully sequenced human genomes for about $200 apiece. In addition, a recovering global supply chain helped Illumina ship more of the new units.
“Our manufacturing capabilities for NovaSeq X instruments and consumables are scaling nicely,” he said on the company’s earnings call with investors. “We shipped 67 NovaSeq X instruments in Q1, above initial expectations of 40 to 50, and now expect to deliver more than 330 NovaSeq X instruments this year, up from 300.”
By the end of the quarter, Illumina had logged more than 200 orders from over 30 countries, he added. The NovaSeq X platform launch has also contributed to the company’s shrinking profit margins, Illumina CFO Joydeep Goswami said on the call, adding, “We expect gross margins to improve sequentially through the year as we scale NovaSeq X manufacturing and continue to drive operating efficiencies.”
The past three months also saw the company launch its long-read DNA prep system, allowing its installed base of short-read sequencers to generate longer strings of the genome at a time—a product that’s aimed at competing with some of Illumina’s DNA sequencing rivals.
Grail, meanwhile, was included separately in Illumina’s earnings report, logging $20 million in revenues, doubling the $10 million it collected from its Galleri cancer detection test during the same quarter the year prior. The company’s total operating loss, however, topped $204 million, driven by the costs of Grail’s massive clinical trials programs and expenses in scaling up its commercial push.
Currently, Illumina is preparing for its annual shareholders meeting scheduled for May 25, where it will tally up votes on its slate of nominees for the board.
Activist investor Carl Icahn is waging a proxy fight against Illumina and its multibillion-dollar quest for Grail, and has put forward three names he wants to see added to Illumina’s nine-seat board—who each have at one time held senior positions among the billionaire’s funds and businesses.
He has also listed the three current members he would see replaced, including deSouza, as well as the board’s chair, John Thompson, and the company’s governance committee head, Robert Epstein.