The 33-year-old, who had a rough year on tour in 2022, was ousted 6-3 6-3 by world No.32 Alejandro Davidovich Fokina on Wednesday.
Millman, currently ranked 148 in the world, had battled through qualifying to reach the main draw of Adelaide and knocked off world No.38 Albert Ramos-Vinolas, another Spaniard, in the first round.
The Australian vented his frustration at the chair umpire after Davidovich Fokina won the first set following a line-call challenge.
Davidovich Fokina successfully challenged a shot by Millman which was originally called in.
Millman thought his opponent, who played and missed the next shot, took too long to challenge.
"He goes for the winner, misses it and then says challenge. That's where you have to go 'no it's too late'," Millman told the umpire.
He responded by breaking in the opening game of the second set but Davidovich Fokina broke straight back and won the next three games.
Millman, who notched a win over Roger Federer at the 2018 US Open and has been as high as No.33 in the world, dropped down the rankings last season after a bizarre eye injury in February.
Playing in Mexico, a ball deflected off his racquet and struck him in the eye scratching his cornea.
Davidovich Fokina will meet either compatriot and fourth seed Roberto Bautista Agut or Dutchman Robin Hasse in the quarter-finals.
The two remaining Australian men in the Adelaide draw, wildcard Jason Kubler and defending champion Thanasi Kokkinakis, play later on Wednesday.
Kubler meets sixth seeded Serbian Miomir Kecmanovic, while Kokkinakis faces a huge challenge against Russian Andrey Rublev in the night session.
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