Illumina is holding an earnings conference call for the second quarter of 2023. During the call, Charles Dadswell and Joydeep Goswami will provide an update on Illumina's business and review financial results, including GRAIL. The audio portion of the call will be archived on the Investor Relations section of the website. All forward-looking statements made during the call will be protected under the Private Securities Litigation Reform Act of 1995.

Illumina released their second quarter results with revenue of $1.18 billion and diluted non-GAAP EPS of $0.32, both of which exceeded their first quarter guidance. Charles Dadswell also mentioned the recent changes to their executive leadership team, including the departures of their Chief Technology Officer, Alex Aravanis, and their Chief Medical Officer, Phil Febbo, and the appointment of Steve Barnard as the new Chief Technology Officer. Stephen MacMillan was also welcomed as the new Chairman of the Board, alongside Andrew Teno and Scott Ullem.

Illumina has shipped 109 NovaSeq X instruments in the quarter and has increased its expectations for its full year supply capacity, however, it is reducing its guidance for 2023 due to a larger-than-expected temporary decline in high throughput consumables, customers remaining more cautious in their purchasing behaviors, and a more protracted economic recovery in China. Illumina has identified issues in the field with the NovaSeq X and has taken steps to address them, including a software update and deploying technical teams worldwide. Despite the challenges, there is still strong interest in the product, with 20% of customers who have purchased a NovaSeq X ordering more than one instrument.

In the second quarter, there was continued global interest in the NovaSeq X series, with more than 260 orders since launch. Customers have expressed the intention to increase their sequencing activities, including larger scale single cell and spatial analysis experiments, multiomic programs for population-specific variants, and whole genome sequencing. To support these activities, the company has reduced its expense base and global headcount, as well as its global real estate footprint, vendor spend, and travel-related costs. These actions will help mitigate the impact of lower revenue on the operating margin in 2023 and create flexibility for further investment in high-growth areas.

In Q2, Illumina shipped 109 NovaSeq X instruments, bringing the total installed base to 176. They now expect to ship more than 390 NovaSeq X instruments this year. They shipped 160 NextSeq 1k/2k units in the second quarter and saw an increase in their win rate outside of China. In the clinical market, Anthem and Blue Cross Blue Shield of Michigan added coverage for comprehensive genomic profiling, and Switzerland reimbursed for large next generation sequencing panels. Illumina's TruSight Oncology assay is on track to exceed $100 million in 2023 revenue, and they completed their TSO Comprehensive submission for IVD registration in the US.

GRAIL achieved its 100,000th commercial Galleri test milestone in Q2 and has been prescribed by more than 7,500 providers in the US. The NHS-Galleri study has achieved a retention rate of 91.3%. GRAIL announced results from the SYMPLIFY study at the American Society of Clinical Oncology, which reported high specificity, positive predictive value, and accuracy of the cancer signal detected. GRAIL and AstraZeneca presented new data at the American Association for Cancer Research annual meeting which showed GRAIL's blood-based methylation approach had a cancer detection rate of 92% in patients with relapsed or refractory disease across six hematological malignancies.

Illumina has been making progress in reproductive health, with five US state Medicaid programs now covering non-invasive prenatal testing and the same being available for all pregnancies in the Netherlands and Italy. In addition, the Alliance for Genomic Discovery, a collaboration between Illumina and Nashville Biosciences, now includes five founding members and will be sequencing 250,000 samples. Additionally, PrimateAI-3D, an AI algorithm that predicts disease-causing genetic mutations, was featured in Science magazine, and DRAGEN 4.2 was announced for analysis of next-generation sequencing data, which improves identification of the causes of genetic disease and aids in drug discovery and population genomics analysis.

Illumina is focused on execution, innovation, and supporting customers with their NovaSeq X instruments. They are working on margin improvement and investing in proprietary technology to generate differentiated products. Upcoming product launches include the 25B flow cell, Illumina Complete Long Reads enrichment assay, and XLEAP-SBS chemistry on NextSeq 1k/2k. They are also looking to address the needs of emerging markets like proteomics, multiomics, and spatial. Illumina is committed to unlocking the power of the genome to improve human health and maximize shareholder value. Joydeep Goswami will provide additional details on financial results and outlook.

In the second quarter of 2023, Illumina's consolidated revenue was up 8% from the first quarter and 1% year-over-year, with non-GAAP net income of $50 million and non-GAAP EPS of $0.32 per share. Core Illumina revenue was flat year-over-year, with a reduction of approximately 180 basis points due to COVID surveillance. Sequencing consumables revenue was down 1% year-over-year, and the non-GAAP tax rate was 39.3%.

Core Illumina's sequencing instruments revenue of $193 million grew 2% year-over-year, driven by strong demand for NovaSeq X and NextSeq 1K/2K. Sequencing service and other revenue of $134 million was up 7% year-over-year, primarily due to higher instrument service contract revenue from a growing installed base, while contributions from codevelopment partnerships decreased. Mid-teens growth in clinical sequencing was offset by headwinds from COVID surveillance, sanctions in Russia, and constrained funding.

Core Illumina revenue saw a decline of 2% in the Americas, an 11% increase in Europe and a 10% decrease in AMEA, with a 3% decrease in Greater China. This was due to tighter funding and budget pressures, high throughput customers transitioning to NovaSeq X, the slowdown in COVID surveillance, and macroeconomic and geopolitical challenges. Core Illumina non-GAAP gross margin decreased 280 basis points year-over-year.

In the second quarter of 2023, Core Illumina's non-GAAP operating expenses were $531 million, a $12 million increase year-over-year due to headcount growth. GRAIL revenue grew 83% year-over-year due to increased adoption of Galleri, and GRAIL non-GAAP operating expenses totaled $174 million, an $18 million increase. Cash flow provided by operations was $105 million, capital expenditures were $47 million, and free cash flow was $58 million. Illumina has $1.6 billion in cash, cash equivalents, and short-term investments, as well as $750 million in convertible debt that matures this month. The European Commission imposed a €432 million fine on Illumina which will be deferred pending the outcome of an appeal. For 2023, guidance was provided.

Core Illumina sequencing instrument revenue is expected to grow by 3% year-over-year, while Core Illumina sequencing consumables revenue is expected to decline by 3%, due to funding issues, project delays, and decreased purchasing behaviors in China. Pull-through for NovaSeq 6000, NextSeq 550, MiSeq, NextSeq 1K/2K, and MiniSeq is expected to be in the range of $800,000 to $900,000, $80,000 to $130,000, $30,000 to $40,000, $120,000 to $170,000, and $20,000 to $25,000 per instrument, respectively. GRAIL revenue is expected to be in the range of $90 million to $110 million for 2023.

Illumina expects Core Illumina sequencing revenue to be approximately flat year-over-year, with non-GAAP operating margin of approximately 5% and Core Illumina non-GAAP operating margin of approximately 20%. This is despite lower revenue expectations for the year and lower gross margins. The non-GAAP tax rate is expected to be approximately 41%, with non-GAAP earnings per diluted share in the range of $0.75 to $0.90. For the third quarter, revenue is expected to grow approximately 2% year-over-year to approximately $1.14 billion, with non-GAAP diluted EPS of approximately $0.10 to $0.15.

Charles Dadswell discussed the positive aspects of the launch of the NovaSeq X, such as placing more instruments than expected and having some of the biggest software placements ever. However, the technical teams underestimated the amount of time it would take to get the instruments online, and so they are working to resolve any bugs that have been found in the field. Joydeep Goswami also commented on the situation, noting that this is common with launches of this magnitude.

NovaSeq X has seen some issues which have caused a temporary decline in 6K consumables, however, this has not caused a stall in the market. There is still strong interest in the X and it has enabled experiments and solutions that were not possible before. The company is working hard to fix the issues and expects the volume to come back when the Xs are fully ramped up.

Charles Dadswell provided an update on the CEO search, noting that the board is actively searching for a new CEO from both internal and external candidates. He also discussed the company's $25 billion flow cell, which is still on track for launch in the second half of 2023, and addressed questions about China, reference customer challenges, and the NovaSeq consumable pull-through card. He assured that the company is prioritizing investments and focusing on product differentiation to remain competitive.

Joydeep Goswami explains that China is seeing slower than expected recovery in the second half of the year due to economic challenges and increased competitive intensity. Outside of China, there is some conservatism due to economic uncertainty, resulting in longer purchasing cycles for instruments and consumables. However, the company's win rate for mid and high throughput products has picked up slightly compared to Q1 in Q2.

Joydeep Goswami discussed the strong interest in their instruments, which is a lead indicator for the company. He also discussed the many capabilities of their instruments, such as the DRAGEN onboard, faster capabilities, simpler workflow, and ambient ship reagents. He then addressed Dan Arias' question regarding op margins for the core business next year, noting that they have already begun a cost reset and have taken out more than $100 million in costs on an annual run rate basis.

The speaker addresses a question from Vijay Kumar about guidance for the second half of the year. He explains that the reduction in guidance can be attributed to a 25% decline in China, which is due to both the pandemic and the delayed launch of the NovaSeq X. He also mentions that the pull through per box is up and that the NovaSeq X's sample price point could lead to a lower pull through, but that restocking of inventory could lead to a rebound.

We are seeing a slower than expected recovery in the larger economy, as well as increased competition and customer conservatism. This has affected the mid and low throughput segments, as well as the transition to the X and the gap in high throughput consumables. In the second quarter, we saw an increase in X instrument shipments and 6k consumables, particularly in China. However, in the third quarter, we are seeing a decrease due to the transition to the X and the lack of full utilization of the X. We expect the full utilization of the X consumables to ramp up in the fourth quarter.

Chuck and Joydeep discussed the commitment to a 25% margin, which is stretchy, but is still a goal. They also mentioned that the mid-teens goal discussed at the analyst day is also a goal. Chuck provided information about the leadership changes, including the search for a new CTO and CMO.

Charles Dadswell thanked Alex and Phil for their work at Illumina and noted Alex's new role as CEO of another company. He highlighted the company's deep bench in R&D and the fact that their first scientist, Steve Barnard, is now taking over the role of CEO. They will take some time to evaluate their Chief Medical Officer position and their commitment to their clinical customers remains.

Joydeep Goswami explains that the long-term growth expectations for NGS and Illumina have not changed and are based on the company's ability to penetrate an under-served market and address core needs. He also notes that the X instrument has come online faster than expected, but this was offset by lower than expected mid-throughput and low throughput instruments in China.

Joydeep Goswami reported that cautious purchasing behavior was seen across both academic and clinical customers, excluding China, due to cash management. He also noted that there was no delay in the launch of the 25B sequencing technology, which offers better economics.

Joydeep Goswami stated that the guidance reset for the year was due to 25% coming from the impact from China, with the remaining 75% split between the impact on high throughput consumables due to the transition to the X and cash conservatism from customers outside of China. He also mentioned that there may be another tranche of stimulus packages in 4Q, which could be factored into guidance for the back half of the year.

In China, Joydeep Goswami of Illumina confirms that the company remains committed to serving customers in the market, and will continue to refine their strategy in order to better reach the highest growing segments of the market. The Illumina complete long reads have seen high interest from customers, who are already working on the current WGS product.

This paragraph discusses the expectations for the launch of a new technology, which is set to occur at the end of the year and will continue to pick up momentum in 2024. It also concludes the Q&A session of the conference call and reminds participants that a replay will be available on the company's website.

This summary was generated with AI and may contain some inaccuracies.