The operator welcomes participants to the Fourth Quarter 2023 Illumina Earnings Conference Call and introduces Salli Schwartz, Vice President of Investor Relations. The call will review financial results, commercial and regulatory activity, and include a question-and-answer session. Illumina's CEO and CFO will provide updates and review financial results, including GRAIL. The call is being recorded and forward-looking statements are subject to risks and uncertainties.

The second paragraph of the article discusses the current state of Illumina and its plans for the future. It mentions the company's focus on meeting with customers and developing strategic partnerships, as well as the recent announcement of the divestment of GRAIL. The CEO, Jacob Thaysen, has been meeting with customers and employees to understand their priorities and gather feedback. The company is also working with governments and the genomics community to accelerate whole-genome sequencing adoption and integrate comprehensive genomic testing into healthcare systems. Thaysen's leadership agenda is informed by these conversations and he has confidence in Illumina's core business.

In 2023, Illumina had a successful year with the launch of their high-throughput product NovaSeq X. Despite a challenging economic climate, they exceeded their expected shipments and ended the year with higher-than-expected revenue. However, their revenue in certain regions, such as Greater China, was impacted by geopolitical challenges and local competition. The company expects their customers to remain cautious in their investments and their 2024 results to be similar to 2023. The management team is focused on accelerating growth and profitability through increasing their installed base and promoting utilization of their instruments in various applications.

In 2023, we placed over 400 instruments and anticipate ongoing high throughput instrument orders throughout 2024. We will support the growing installed base and expect to see more orders from customers converting to the X, expanding their fleet, and new high throughput customers. We will also be making XLEAP available to mid-throughput customers, further strengthening our position in the market. As we continue to support our customers and launch new projects, we expect to see an increase in consumables demand. This was evident in Q4, with higher-than-expected growth in X consumables sales following the launch of our 25B reagent kit. We have also recently launched a 1.5B kit, expanding our product offerings for NovaSeq X customers.

The speaker discusses their second priority of delivering operational excellence by focusing on improving margins and reducing costs. They mention recent actions taken to optimize the global workforce and state their commitment to managing costs while also ensuring sustained growth and margins. They also mention their third priority of resolving GRAIL, with a goal of finalizing the terms of the divestiture by the end of the second quarter through either a third-party sale or capital markets transaction. Progress has been made and the process is actively moving forward.

Joydeep Goswami, the speaker, will discuss the financial results for Illumina and GRAIL, starting with the consolidated revenue of $1.12 billion, which was up 4% year-over-year. Non-GAAP net income was $22 million, exceeding expectations due to higher revenue and lower operating expenses. The non-GAAP tax rate for the quarter was 55.4%, impacted by R&D capitalization and GRAIL losses. The non-GAAP weighted-average diluted share count for the quarter was approximately $159 million.

In the fourth quarter, Core Illumina's revenue increased by 3% year-over-year, reaching $1.1 billion. This was due to a decrease in COVID surveillance and the impact of sanctions in Russia, as well as a reduction in China revenue. However, the company's revenue exceeded expectations thanks to strong demand for NovaSeq X placements and consumables, including the newly launched 25B flow cell. Sequencing consumables revenue remained flat, with stronger NovaSeq X purchases offsetting decreases in NovaSeq 6000 and pricing transitions. Total sequencing activity on connected instruments grew by 46% year-over-year and 13% sequentially. Core Illumina's sequencing instrument revenue also saw a 10% increase, driven by NovaSeq X sales.

In the fourth quarter of 2023, Illumina experienced growth in high-throughput instrument shipments, but this was partially offset by expected declines in mid and low throughput shipments. This was due to capital constraints and competition in China. The NovaSeq X had 390 orders and 79 shipments in the quarter, bringing the total installed base to 352 instruments. The company expects most customers to transition from the NovaSeq 6000 to the NovaSeq X over time. The net installed base for the NovaSeq 6000 was approximately 1,770 instruments as of the end of 2023, with 110 instruments being deactivated between 2017 and 2023, mostly due to customer transitions to the NovaSeq X. Going forward, the company will report annual instrument installed base figures on a net basis. Core Illumina sequencing service and other revenue increased by 16% year-over-year due to partnerships and higher instrument service contract revenue. However, non-GAAP gross margin decreased by 260 basis points due to a mix of lower-margin strategic partnership revenue, lower instrument margins from the NovaSeq X launch, and increased field services and installation costs.

In Q4 of 2023, Core Illumina saw a decrease in non-GAAP operating expenses and an increase in revenue, resulting in a higher operating margin. GRAIL also saw growth in revenue, driven by adoption of Galleri. Cash flow for the quarter was positive and the company ended with over $1 billion in cash. For 2024, the company is focusing on Core Illumina and expects flat revenue due to declining sequencing instrument sales offset by growth in other areas. This outlook takes into account the current challenging economic environment and potential divestment of GRAIL.

The reduction in expected revenue for 2024 is due to the transition from early adopters to the early majority, as well as capital and cash flow constraints. Core Illumina sequencing consumables revenue is expected to grow modestly, with annual pull-through figures calculated based on the net installed base of instruments. The expected annual pull-through ranges for different instruments are provided, with the total Core Illumina sequencing revenue expected to be flat. The Core Illumina Non-GAAP operating margin is expected to be around 20%.

The company expects to see a decrease in revenue for the first quarter of 2024 due to lower instrument shipments and changes in consumables pricing. However, they anticipate an increase in sequencing service and other revenue. The company also plans to focus on strengthening relationships with customers and driving greater adoption of next-generation sequencing technology.

The company's goal is to make customers the heroes in their labs and support their expansion in genomics and multiomics. This will help maintain their industry-leading position and drive innovation focused on customers' priorities. The company is working on a comprehensive strategy and will share more later this year. The 25B chip release, which reduces the cost per genome, has been well received since its launch in November and there are no signs of sample access issues.

The company expects the performance of X to continue driving growth, and the availability of 25B will attract more customers. About 40% of X customers have adopted 25B. The company is confident in achieving low single-digit growth in sequencing consumables, despite challenges from 25B5, X install reductions, and market conditions. They are also pleased with the progress and announcement of divesting GRAIL and have high expectations for its future.

The company's advisers are working with rural parties and they are continuing to run a dual track for a capital markets initiative or transaction. They expect to have all terms finalized by the end of June and are not providing guidance on GRAIL expenditures this year. The company saw an uptick in the uptake of 25B and 10B flow cells in the fourth quarter and is pleased with the growth in underlying sequencing activity. However, the expected price transition and reduction in NovaSeq 6000 consumables will lead to low-single-digit growth in consumables in 2024. The next question is about the GRAIL, and the asker wants to know when the confidential S1 will be made public.

The speaker asks about GRAIL's operating losses and the assumptions in the S1 filing. They also inquire about the NovaSeq 6000 pull-through and whether there is an assumption for starting at the low end and exiting at the high end of the range. The response is that the filing is confidential and will not be available until late Q1 or possibly Q2. There is no assumption for quarterly spread on pull-through, as it is a calculated number. The next question is about the transition to the NovaSeq 6000 and how it will affect clinical labs and their margins.

The speaker is responding to a question about the company's R&D spending, which has grown at a higher rate than revenue over the past few years. They explain that this is necessary in order to drive innovation in the NGS ecosystem, and that they do not plan to reduce R&D spending in the near future.

The speaker discusses the company's pipeline of innovation and the potential for future growth in the NDS and multiomics markets. They mention that R&D spending may decrease in the future but that they are still investing in key areas. The speaker also mentions that high-throughput customers who have purchased the X are considering expanding their fleet of instruments.

The company is looking to expand into production mode with their X technology, but only a few customers have done so. There is a lot of opportunity for growth, as less than half of their high-volume customers have purchased X. They expect to see fleet expansions this year. The company is aware of competition, particularly in the multiomics space, and is considering entering it with their relationships with Stemologic.

Illumina is constantly working on developing new modalities for their instrument and will only announce them when they are ready for the market. They believe their NovaSeq X platform offers a cost-effective solution for various applications. The company expects a constant tax rate for core Illumina until 2024 and operating margins may decrease in Q2 due to inflation-related factors.

The speaker discusses the expected increase in quarter-on-quarter revenue and potential for further improvement in tax rate. They also mention the development of a unique whole genome-based MRD assay with Janssen that has the potential to become IBD in the future. However, they clarify that they have no plans to commercialize it through their clear lab.

Joydeep Goswami and Jacob Thaysen discuss the company's future plans to work with customers and partners to continue developing their products. They also address a question about the company's gross margin in the fourth quarter, citing lower revenue, higher X contribution, and a mix shift from 6K to X consumables as factors. However, they mention that the company has made progress in COGS productivity and will see benefits in 2024 and beyond. Jacob Thaysen also discusses the company's pricing strategy and how they are approaching it going forward.

The speaker discusses Illumina's premium product and the company's ability to command higher prices. They also mention that customers are more interested in the overall cost for the entire sample-to-insight workflow, including automation and informatics. The speaker is excited about the new XLEAP-SBS chemistry and more attractive pricing for mid throughput instruments. They also address the decrease in next seat placements, attributing it to changing needs, financial constraints, and competitive dynamics.

The speaker discusses the factors that will impact normalized demand going forward, including the uptick in mid-throughput and low-throughput instrument sales due to COVID, macroeconomic conditions, and competition in China. They also mention that they have not yet done the math to determine the pull-through from the X and will provide that information at a later date.

Jacob Thaysen, CEO of Illumina, discussed the company's recent customer listening tour and the health of their diagnostics markets. He mentioned that the TSO 500 business has been growing rapidly and is expected to continue to do so. Thaysen also addressed the looming FDA regulation of LDTs and how it may impact demand for their products.

The speaker discusses the company's outlook and how they have chosen to set a conservative guidance despite having the opportunity to set a lower bar. They mention risks that could potentially impact their performance in the first half and second half of the year, and also mention the 6000 pull-through as a factor in their sales.

The decline in pull-through for the NovaSeq 6000 is expected to be less significant compared to the HiSeq due to the increase in clinical customers. The overall guidance for the company's forecast is considered a prudent approach, taking into consideration potential macroeconomic conditions. The adoption of the X platform and its impact on consumable spending will also play a significant role in the company's performance.

During a Q&A session, Rachel Vatnsda from JPMorgan asked about the company's gross margin in the fourth quarter. Joydeep Goswami explained that the lower margin was due to the shift in consumables mix from 6000 to X, but it is expected to normalize as the Xs scale up. In 2024, gross margins are expected to improve due to a decrease in instrument placement and COGS productivity improvements. The call ended and a replay will be available on the company's website.

The operator thanks the participants for attending the conference and wishes them a good day before ending the call.

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