Q2 2022 Illumina Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the second quarter 2020 to Illumina earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's call is being recorded I would now like to hand, the call over to <unk>.
Sally Schwartz Vice President of Investor Relations. Please go ahead.
Hello, everyone and welcome to our earnings call for the second quarter of 2022.
During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity.
After which we will host a question and answer session.
If you have not had a chance to review these earnings release. It can be found in the Investor Relations section of our website at Illumina dotcom.
Participating for Illumina today will be Francis Desouza, President and Chief Executive Officer enjoy deep Goswami, Chief strategy, and corporate development officer, as well as interim Chief Financial Officer.
Francis will provide an update on the state of aluminum business enjoyed equal to review our financial results which include grill.
As a reminder, pending the outcome of the European Commission's investigation into aluminum its acquisition of Grill. The commission has adopted an order requiring alumina and grill to be held and operated as distinct and separate entities for an interim period compliance with the order is monitored by an independent monitoring trustee.
Yes.
During this period alumina and grill are not permitted to share confidential business information unless legally required and grill must be run independently exclusively in the best interest of grill.
Actual interactions between the two companies must be undertaken at arm's length.
This call is being recorded and the audio portion will be archived in the investors section of our website. It is our intent that all forward looking statements regarding our financial results and commercial activity made during today's call will be protected under the private Securities Litigation Reform Act of 1995.
Forward looking statements are subject to risks and uncertainties actual events or results may differ materially from those projected or discussed all forward looking statements are based upon current available information and Illumina assumes no obligation to update these statements.
To better understand the risks and uncertainties that could cause actual results to differ we refer you to the documents that Illumina files with the Securities and Exchange Commission.
Including a limited most recent forms 10-Q and 10-K.
With that I will now turn the call over to France.
Thank you Sally.
Good afternoon, everyone.
<unk> delivered revenues of 1.16 billion in the second quarter up 3% year over year or 5% on a constant currency basis.
While the sequencing activity across our markets was robust in the second quarter with sequencing run on our connected high and mid throughput platforms more than 15% year over year and clinical growing even faster.
Our second quarter results were impacted by macroeconomic challenges that we expect to play out over the next couple of quarters.
Specifically, some customers experienced supply chain pressures that delayed their lab expansion and others managed inventory and capital more conservatively.
We also saw adverse effects of foreign exchange and anticipated COVID-19 related shutdowns in China.
The robust sequencing activity levels underlying growth of our target markets and our conversations with customers across the globe indicate these dynamics are temporary during the quarter. We also made terrific progress on our innovation roadmap and are poised to soon deliver the next generation of breakthrough technologies that will fuel.
Oh, the next era of genomics.
Turning now to performance across our platforms and high throughput Novus seed shipments in Q2 grew 23% year over year, our highest second quarter ever.
Consistent with prior quarters clinical customers, primarily in oncology testing drove half of iron overseas shipments.
And mid throughput next week, one K two K orders were up 20% year over year.
Despite some shipments shifting from Q2 to Q3 due to supply delays Q2 next week, one K two K shipments increased slightly year over year.
Low throughput shipments were relatively flat year over year, even though the comparison to last year's Covid surveillance driven volume.
Turning to our markets, we continue to gain traction and clinical with sequencing consumable shipments for the second quarter up 11% year over year and all of our clinical markets contributing to the increase.
As I mentioned earlier, we have seen continued growth in our oncology markets in Q2 oncology consumables grew almost 20% year over year.
An area of note is our market leading to site oncology assay.
Shipments of <unk> grew 45% year over year, and we now have deliver distributed comprehensive genomic profiling tests to every major market in the world.
We have worked closely with large evidence programs to facilitate clinical utility and drive market access and we have more than 10 pharma partners developing CTX claims with us.
Most recently, we expanded our portfolio by co developing a new tier so 500, HRD test with Merck that Leverages Illumina is work with myriad genetics.
We also co developed a pan cancer companion diagnostic for TSV comprehensive EU with there.
Also in oncology June marks the one year anniversary of <unk> launch of gallery.
In that time gallery delivered the fastest ever first year revenue ramp of our cancer screening test.
Rail continues to drive progress in clinical evidence generation and commercial use of their multi cancer early detection test gallery the.
The number of U S health system is partnering with <unk> to offer a gallery continues to grow.
Most recently with the addition of Mercy one of the 25 largest U S health system.
And Ochsner health, the largest Gulf South health system.
Also Grail recently partnered with Astrazeneca to develop companion diagnostic tests that identify patients with high risk early stage disease.
<unk> Zeneca will use <unk> technology to recruit patients with early stage cancer for Astrazeneca is clinical studies.
Cancer medicines available, where there is greater potential to transform outcomes.
More broadly the trials currently underway for gallery continue to progress.
The NHS gallery trial in the U K the largest multi cancer early detection study has enrolled 140000 volunteers and just over 10 months, an unprecedented speed, especially for a trial of this size.
The pending successful completion of the trial the NHS plans to rollout gallery to an additional 1 million people starting in 2024.
This collaboration supports the NHS long term plan to transform cancer care with three and four cancers diagnosed at an early stage by 2028. Additionally, Grill has completed a final analysis of its Pathfinder study with.
With data to be presented at the European Society of Medical Oncology Congress September 9th 13th.
Greg has made substantial progress building a network of partners that will support ongoing adoption of gallery.
The commercial progress is proceeding at a more measured pace as health systems ramp up.
These reasons Grill has revised its revenue guidance for the full year 2022 to a range of $50 million to $70 million.
Turning to infectious diseases, and microbiology, the genomic surveillance infrastructure built on Illumina instruments during the pandemic and more than 100 countries is now being used for other diseases like Monkey pox. This network is enabling a quicker genetic assessment of this new disease.
Momentum continues to build for a robust global pathogen infrastructure.
We're expanding our surveillance portfolio Accordingly in June we provided select customers access to our novel viral surveillance panel based on workflows implemented for COVID-19.
The patent provides targeted sequencing for the 66, most critical viruses of global public health concern.
Including Monkey pox, and polio and it will be commercially available later this year.
Our research and applied markets were relatively flat year over year with growth in the Americas, and a b J offset by declines in EMEA and China.
In the quarter, we announced our partnership with precision Health research, Singapore or precise to sequence whole genomes of 100000 Singaporean participants.
Together, we will develop southeast Asia, most comprehensive population study and gather deep insights into Asia, and genomic diversity and key genetic social environmental and other factors associated with disease.
Before I update you on further advances in our innovation roadmap I'll turn the call over to J D.
Thanks, Francis as a reminder, our second quarter financial results include the consolidated financial results for Grail.
Start by reviewing our consolidated financial results followed by a segment results for core alumina and Grail, then conclude with additional remarks on our current outlook for 2022.
I'll be discussing non-GAAP results, which include stock based compensation.
Encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and supplementary data available on our website.
In the second quarter consolidated revenue was 1.16 billion up 3% year over year or 5% on a constant currency basis net of the effects of hedging.
Revenue was impacted by the macroeconomic factors that Francis referenced.
As you know we had anticipated the headwinds from the China shutdowns, the negative impact of FX and slowing Covid surveillance.
Each of these was slightly worse than we expected and collectively they drove one quarter of the variance between our expectations and actual results.
The remainder of this variance.
It was driven by the lab expansion delays encountered by a few of our large customers as a result of global supply chain constraints as well as customer inventory and capital management.
Nonetheless overall sequencing activity on our connected instruments was strong in the second quarter with sequencing runs in our high and mid throughput instruments growing more than 15% year over year.
We believe this is a useful reference that shows the general activity trend across our installed base and is directionally correlated with revenue overtime.
For the second quarter GAAP net loss was $535 million or a loss of $3 40 per diluted share.
Which included $609 million in legal contingencies recorded in Q2 due to the potential fine that the European Commission may impose related to a grill acquisition and settlement of our litigation with <unk>.
non-GAAP earnings were <unk> $91 million or 57 cents per diluted share, including dilution from Grilles non-GAAP operating loss of $152 million for the quarter.
Our non-GAAP tax rate was 25, 8%, which increased 790 basis points year over year, and 800 basis points from Q1 2022, primarily due to the increased impact of R&D expense capitalization requirements implemented by the tax cuts and jobs Act.
Act of 2017.
Our non-GAAP weighted average diluted share count for the quarter was approximately $159 million.
Moving to segment results I will start by discussing the financial results of quarter alumina.
CT alumina revenue of 1.16 billion grew 3% year over year or 4% on a constant currency basis net of the effects of hedging.
Core Illumina sequencing consumables grew 6% year over year to $744 million driven by almost 20% growth in oncology testing.
Core consumables growth more than offset headwinds from lockdowns in China. The completion of the UK Biobank program in quarter three of 2021 reductions in corporate surveillance and negative FX impacts.
Sequencing instrument revenue for core Illumina grew 1% year over year to $119 million driven by a 23% growth in overseas shipments offset by a 14% decrease in the mid throughput shipments year over year.
The decrease in mid throughput shipments was primarily due to headwinds from Covid surveillance and Covid Lockdowns in China with next week, one K to get growth more than offset by a decrease in Mexico $5 50.
Next week <unk> instruments continued to grow year over year and the growth would've been stronger had it not been for temporary supply constraints that delayed shipments into the third quarter next.
Next week <unk> orders were up 20% year over year with continuing strong adoption of our newest platform.
During the second quarter covert surveillance contributor approximately $25 million in sequencing consumables revenue and $2 million in incremental instruments revenue.
Representing a decline of 55% year over year.
This decline was driven by lower than expected testing samples and the expected decline in instrument shipments as Covid surveillance capacity was largely established in 2021.
Core Illumina sequencing service and other revenue of $125 million was down 2% year over year, driven by 20 million over one time revenue recognized in 2021 from <unk> royalties received related to a patent litigation settlement, partially offset by increased instrument service contracts.
And contributions from oncology co development partnerships.
Moving to regional results for core of alumina.
Revenue from the Americas region was $633 million up 7% year over year, primarily due to an obviously strength with continued demand from oncology testing customers driving instrument placements and consumables growth.
Wrote in the region was nonetheless, lower than expected, primarily due to customer lab expansion delays and inventory on capital management, you had mentioned during the call.
EMEA revenue of 308 million represented a 4% decrease year over year, but a 1% increase on a constant currency basis net of the effect of hedges.
Sequencing growth driven by clinical and large scale research projects was more than offset by the UK Biobank program in 2021, and a decline in Covid surveillance revenue.
Cumulatively these significant headwinds and FX negatively impacted year over year revenue growth by 20 percentage points.
Greater China revenue of $118 million represented an 11% decrease year over year, and a 10% decrease on a constant currency basis.
This was slightly more negative than the approximately 35 million headwind the guidance, we provided last quarter.
As expected the region continued to be impacted by prolonged COVID-19 restrictions and shutdowns that began in March this year.
Finally, <unk> revenue of $97 million grew 14% year over year or 20% on a constant currency basis.
The effect of hedges.
Growth in the region was primarily due to increase in overseas shipments, which doubled year over year driven by a large scale research project demand as well as strength in ni PT and oncology testing.
Moving to the rest of the core Illumina P&L.
Paul Alumina non-GAAP gross margin of 69, 8% decreased 200 basis points.
Year over year, primarily due to less fixed cost leverage on lower manufacturing volumes margin impact from one time revenue from a patent litigation settlement in 2021.
And increased freight costs attributable to broader global supply chain pressures.
These factors were partially offset by a more favorable product mix as well as a number of productivity initiatives, we continue to execute.
CT alumina non-GAAP operating expenses of $519 million were up $48 million year over year, due primarily to head count growth and investments, we're making in R&D to support the continued advancements of our innovation roadmap.
Despite the year over year increase non-GAAP core Illumina operating expenses were lower than we originally planned as a result of lower performance based compensation expense, given our lower revenue outlook.
Cost containment initiatives focused on select hires and discretionary spending including travel.
Transitioning to the financial results for Grill.
Rail revenue of $12 million for the quarter consisted primarily of gallery test fees.
Rail non-GAAP operating expenses totaled $156 million for the quarter and consisted primarily of expenses related to head count and clinical trials.
These expenses were lower than expected as Grail managed its project spend in light of its lower quarterly outlook.
Moving to consolidated cash flow and balance sheet items.
Cash flow from operations was $125 million.
DSO was 50 days compared to 46 days last quarter due to revenue linearity.
Second quarter 2022 capital expenditures were $71 million and free cash flow was $54 million.
We did not repurchase any common stock in the quarter.
We ended the quarter with approximately $1 3 billion in cash cash equivalents and short term investments.
Moving now to 2022 guidance.
We have revised our outlook for the full year to represent the macroeconomic factors. We observed through early August and we assume will continue for the rest of the year.
We now expect full year 2022 consolidated revenue to grow in the range of 4% to 5%, including core Illumina on our revenue growth in the range of three to three 5% to four 5% and Grail revenue of $50 million to $70 million.
For the full year at the midpoint of our revenue guidance range. We now expect core lumina sequencing revenue to grow approximately four 5%.
This includes intercompany sales to Grail of approximately $25 million, which are eliminated in consolidation.
Within core Illumina sequencing revenue, we now expect.
Instrument growth of one, 5% and consumables growth of 5%, which reflects obviously pull through in the range of 1.1, the $1 2 million for system for 2022.
We continue to expect pull through for next week 1000, 2000 in the range of 130000 to $180000 per system.
And for the next eight $5 50 in the range of $100000 to $150000 per system.
Or my feet, we continue to expect pull through in the range of 35000 to $45000 for our system and for many C. We continue to expect pull through in the range of 20000 to $25000 per system.
We now expect revenue from covert surveillance in the range of $110 million to $130 million, while we anticipated a decline in COVID-19 surveillance and 2022. The deceleration has occurred at a more rapid pace than we previously forecasted.
As we navigate the macroeconomic factors, we've mentioned, we're implementing multiple strategies, including prioritizing key innovation investments and critical hires while pausing investments that can be made at later times.
We've retained all critical investments in our innovation roadmap, including overseas Dx chemistry, ex our infinity long read technology, and our <unk> portfolio.
We now expect consolidated non-GAAP operating margin in the range of 11, 5% to 12% and core Illumina non-GAAP operating margin in the range of 24, 5% to 25%.
We expect our consolidated non-GAAP tax rate of approximately 14%, which continues to assume that the R&D expense capitalization requirements implemented by the tax cuts and jobs Act of 2017 will be repealed or deferred in Q4.
And we now expect non-GAAP earnings per diluted share in the range of $2 75 to.
$2 90.
Which includes dilution from Grail non-GAAP operating loss of approximately $610 million in line with previous expectations.
Lastly, we continue to expect diluted shares outstanding of approximately 159 million shares for 2022.
For the third quarter of 2022, we expect consolidated revenue to be flat to 1% higher year over year from the third quarter of 2021.
We expect consolidated non-GAAP operating margin to be approximately 5%.
We expect core Illumina non-GAAP operating margin to be approximately 20%.
We expect consolidated non-GAAP tax rate to be approximately 22%, which continues to reflect the negative impact from the R&D capitalization requirements.
We expect will be repealed or deferred in the fourth quarter of this year.
And lastly, we expect diluted shares outstanding to be in line with our full year 2022 guidance of approximately 159 million shares.
I will now hand, the call back over to Francis for his final remarks.
Thanks J D.
Turning to our innovation roadmap, we have significant opportunities to re imagine the power and potential of genomics.
Development and registration activities for <unk> Dx, the first ever high throughput clinical sequencer are progressing as planned and on track for a Q4 launch.
We continue to get good feedback from initial customers on our Infinity long read technology with many thing it has the potential to replace on market long reads for a broad range of applications, including human rare diseases.
<unk> is on track to be available later this year for early access customers.
And multi omics, our partnership at Soma logic to accelerate and GSM to proteomics is progressing and we expect to deliver our ultra high throughput Ultra high Plex assay in 2024.
Turning now to chemistry ex our next generation breakthrough SBS chemistry, we've.
We've made fantastic progress over the last quarter.
We're now producing flow cells, using our new manufacturing process based on 300 millimeter wafers, we successfully tested chemistry acts of the new flow cells and the results exceed our expectations for quality cost and speed.
We're excited to showcase these breakthroughs and reveal how they come to life at the alumina genomics Forum.
We look forward to hosting you at our Investor Day on October 3rd we will discuss these technologies in our long term growth strategies.
If you haven't already registered please be sure to do so soon.
I'll now invite the operator to open the line for Q&A.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to let your signal to reach our equipment.
Again, Please press star one to ask a question.
As a reminder, please limit yourself to one question. So that we can accommodate as many analysts as possible.
Youre welcome to reenter the queue. If you have additional questions.
Our one for questions, we'll pause for just a moment.
Yeah.
We will take our first question from Dan.
Excuse me from Derek.
Ron Bank of America. Please go ahead.
Hi, good afternoon, so France some of bit perplexed on the lab expansion comments, our channel checks and discussions at <unk> in June didn't suggest that this was happening. So is this more of an issue with your clinical customers not expanding.
And how do you know it wasn't.
The impact of potential them evaluating competing products and just exactly how much.
Super Bowl inventory is there is still in the channel. Thank you.
Hi, Derik.
In terms of the lab expansion, what we saw happen in Q2 was a few of our customers that had planned to launch new labs or expanded labs experienced some delays on their own because of their own supply chain issues equipped.
Equipment that they were expecting to get for those expanded labs. It didn't come in as they expected and so we saw a few lab expansion plans delayed some into Q2 into Q3, and then went into Q4 of next year.
As you can imagine we are very close to our customers. So we know the specifics of those lab expansions.
And to be clear those that expansions are delayed but still still progressing and so that's what's driving the the number we talked about both in Q2 and for the rest of the year in terms of inventory whats playing out is you know some of our customers that are looking to.
To manage their capital more closely are holding less inventory on their site. They have a lot of confidence in the resilience of our supply chain and so theyre looking to trim back the inventory levels that they hold on their own site and so from our perspective as we expect that to play out started to play out in Q2, it'll play out a little bit in three and four.
As well, but in the end there demand or activity levels are going to match. What we are seeing from the some of the data that we get from monitoring their instruments and there the activity and therefore demand continues to be very robust as we said in Q2 the activity levels that we're monitoring on the high and mid throughput instruments are reflected.
A growth rate and term and runs that are greater than 15% and so as we work through these transitory impacts we fully expect both demand and therefore orders to more closely match the activity levels that we're seeing.
We will take our next question from Dan Brennan with Cowen. Please go ahead.
Great. Thanks for taking the questions maybe just a follow up to Doug's question and then a related one so just the magnitude of the second half decline in France and so.
The guidance the new updated guidance for core Illumina growth suggests kind of flat growth in the back half of the year versus kind of the high teens.
You were initially guiding to so just the magnitude from a few customers. Maybe you can just speak a little bit more to just any more color on that front just kind of is there a is there a healthy amount of conservatism that you're baking in here.
Or just kind of how do you how do we reconcile the magnitude caught with a few customers kind of holding back and then kind of related question to derek's point like are you seeing any delay whether it be ahead of chemistry X launching two customers might be pausing or any impact from some of the competitive noise. That's out there, which I think could be more palatable I think sort of cut if it was like a pause.
You know as were waiting to evaluate new products. Thank you.
Yeah. Thanks for that question, Dan and maybe I'll start with the second half and then I'll turn it over to J D to sort of size the magnitude of the factors that we talked about.
What we are seeing and what we are hearing from our customers B b.
The challenges that our customers addressing are around their lab expansion delays as I said related to dealing with their own supply chain for the expansion of their labs, and again tighter management of their inventory levels and that really was one of the big drivers of the change in addition to a little bit of foreign exchange and so on and so what they're telling us.
This isn't really related to chemistry acts or any competitive issues. In fact, theyre excited to hear about chemistry X and they are looking forward to learning more about it at the illuminate genomics for them, but really what's driving the change or the factors that we talked about maybe I'll turn it over to you J D.
Shed some more color on the size of them yeah. Thanks, Francis So I think first of all are down you asked about.
The forecast for the second half Conservative we believe based on trends, we are seeing that it's actually a balanced forecast, where theres always upsides and downsides there are.
Factors that we saw in the second quarter. We believe will continue into the next of the to the rest of this year.
Besides them up approximately 25% of the.
Climbed from our forecast.
It really is coming from factors such as FX.
The faster than expected acceleration on the corporate side.
And some of the declines we've seen in China, which are really more GDP related.
Next on the research side of our business in China.
The others are 75% or so are related to the factors that Francis referred to which are really around lab expansion delays due to broader supply chain constraints that are impacting the construction of labs that are our customers and then <unk>.
New assays in instruments.
And then the the impacts we're seeing from the macroeconomic headwinds on our customers that are causing a temporary reduction in inventory levels and also a some capital push outs.
We will take our next question from Dan <unk> with Stifel. Please go ahead.
Good afternoon, guys. Thanks, Francis maybe just back on the consumable side, you've talked a lot about the fact that the outlook for sequencing. There is good because that work essentially has to be done in order to support patient assessment.
So no.
Whats slamming the brakes on purchasing so abruptly as it more development on the commercial side related to things like liquid biopsy work or are you actually seeing lower spending.
Patient facing.
<unk> clinical oncology institutions et cetera, and then just a follow up why no pre announcement when Sam left.
Only three weeks left in the quarter. So it seems like an mis is well on its way at that point. Thanks.
Yeah also let me take both parts of the question Dan So let me start by.
Addressing the consumables end demand point, you're right. We ended up because we serve clinical customers a lot of our customers.
Continue to see robust demand, they're targeting for example cancer patients that need their tissues.
Biopsy to them sequenced or Cte DNA test and that is reflected in the activity levels that we saw in Q2 that even as customers were looking to manage inventories more tightly they continue to run their machines hard right. So we said overall.
If you look at the run activity on the mid and high throughput instruments that we monitor.
Across our customer base that we monitor the runs grew 15% year over year, but in the clinical markets that was actually higher for exactly the reasons you talked about that you know our customers in the clinical markets, especially in areas like.
Oncology therapy selection testing, which represents the largest segment that we serve that they continued to see robust demand and that was reflected in their activity levels. Now as we said you know our customers are looking to manage their cash more conservatively. So they trimmed back the amount of inventory that they're holding on their sites. So that they can do.
That is a one time sort of rebalancing down, but ultimately they're ordering levels will will match the activity levels that they have on their instruments and so that's why the effect. We expect this impact to play out a little bit in Q2, a little bit in the coming quarters, but then you know order rates will match, we believe the actual activity that we're seeing.
You know on their on their machines.
Let me talk a little bit about the standpoint, so when sand left.
Lee.
As we said you know he left because personal reasons and he needed to be on the east coast.
That's what we said when and when he left obviously.
From our perspective, you know our quarters tend to be more backend loaded.
So the the impacts that I talked about it became more clear at the end of the quarter and so hence there was no. There was no color commentary at the time the time left.
Yeah.
We'll take our next question from David Westenburg with Piper Sandler. Please go ahead.
Hi, Thank you for taking the question again, I'm, sorry, I'm going to go back kind of a quantification of the of the guidance here.
But you back at the guidance it looks like $400 million FX got worse.
I don't know if you want to quantify that Covid surveillance.
What that number is I know Grail was $20 million in lab expansion I mean is there anything in addition to those.
In addition to those fat.
Factors that may be you can point out and then I'm going to go back to like the instrument.
The backlog here.
You guys felt really good about the backlog exiting the quarter.
It seems like maybe that Didnt those orders Didnt go as expected or fill out are expected to work or what what's going on with that thank you.
Yes, so Dave Thanks for the question I'll, Let me reiterate what I said earlier right. So two broad buckets about 25% or so of that of.
The message was really around.
Which included FX, the faster than expected decline in corporate surveillance.
China and some of the effects of the <unk>.
So economic effects that we're seeing in the second half of the year, which are not related directly to the locked down by the slower than expected GDP growth.
They're having right and then the other bucket there 75% really was.
The two factors that lab expansion delays, which again, we expect to see coming back in 2023. These are these are the comments that we've heard directly from our customers and then the second piece was around the slower than expected.
Accumulation of restocking of inventory.
And some capital push outs from.
A broader set of customers again as Francis mentioned, we expect these to be to.
To be transitory.
I think in terms of the backlog.
I will say that the backlog that we were exiting Q2 with a strong backlog of $1 $1 billion. This is in line with what we have seen in the previous six quarters again backlog does move around a little bit from quarter to quarter. As you would expect but this again is very much in line with what we have seen in the past six quarters.
Which as you will remember we were pretty strong.
We'll take our next question from Julia Quinn with J P. Morgan. Please go ahead.
Hi, Thanks for taking the question just two specific follow ups on the guidance on <unk> and noticed you took down a poker guidance to one 1% to $1 2 million.
You noted there.
Still pretty strong volume utilization either pricing factors at play we updated guidance and then I'm glad you took it down by $20 million. So could you give him. The NHS is progressing well could you explain what the factors at play ball. Thank you.
So thanks Julia for the question. So let me take the <unk>.
And obviously.
Pull through question first so no first of all let me address I mean, there. This is not about pricing pressures, what we as you know.
The.
Pull through is really an output.
A number of factors right so shipments in the quarter divided by.
Number of instruments that we expect to have a <unk>.
Activate it at a certain point in time now both of these factors played out this quarter in a in a way that.
Are transitory and we had not expected so first although the as Francis mentioned right. The number of runs on our instruments was strong due to the inventory deleveraging.
Number of shipments, which is the numerator of that calculation was slightly low also because we had.
Customers that bought a large number of <unk> in previous quarters and because of some of the lab expansion delays that you heard about some of these instruments didn't come online right. So the denominator because of the way we calculate pull through was inflated. So we do see this this pull through b number being lower in this quarter as a result of those.
Two factors however, as we look forward given the strong number of runs growth that our instruments are seeing across a broad range of our high throughput customers and given the strong market factors that are very intensive the sequencing like M D.
A lot of like oncology testing and things like spatial and proteomics, we do expect that in the long run. This number will continue to grow.
And then I think you had a second question which was.
Oh, the Grail factors so.
So a couple of things right as Francis mentioned Grill.
It's already proven itself to be a very well adopted testing is the fastest revenue growth first year after launch of any screening test on the market ever so while grail.
The numbers have been somewhat lower than expected.
From the earlier guidance. It is nonetheless, a very strong test and we see a really strong adoption in multiple hospital systems across the country. So we believe that the test ordering from these systems that are already committed to grill will pick up but for the time being I think we remain very optimistic.
About the quality of the test and its potential.
Okay.
We will take our next question from Chaos Savant with Morgan Stanley . Please go ahead.
Hey, guys.
Good evening, just just a quick follow up Bob to kick things off there on the pricing, but from more forward looking perspective. Your process you mentioned some customers thinking harder about capex. Some of them are even undergoing restructuring so as we've seen this quarter.
I was curious as to how youre thinking about this weighing on growth in 'twenty, three and perhaps more importantly in the near term.
How if at all does this change how you're thinking about pricing for chemistry acts backward compatibility options for chemistry acts and so on.
Sure.
So.
In terms of helping our customers that they're working through the macro challenges. Obviously, we remain close to them. The reality is we are.
Core to their business and their revenue generation and we have a very important supplier to these customers and so you know why.
While we can help them in the sense that because of the strength and the resilience of our supply chain.
They're more confident in maintaining less inventory on site that obviously helps them with cash outlays.
The reality is they need to continue to service the demand that we're getting because thats what drives their revenues and their growth and their long term success and so we're not seeing a pullback in terms of activity levels from those customers again, because we are core to their revenue generation and their success and in real estate, we're staying close to them.
So very staying close to the lab expansion plans and making sure we were on top of when they expect to get equipment.
Sure.
For the labs as they come online.
In terms of pricing from our perspective, our thesis continues to believe that there is a huge opportunity to expand the genomics market by continuing to drive the price for high quality sequencing highly accurate sequencing down that thesis continues to hold certainly in the research markets, but also in terms of opening up new <unk>.
Clinical markets, we're seeing promising work for example happening in areas like cardiovascular disease, and neurological disease and those will require both very large experiments from a research perspective, but also maybe different price points from a clinical perspective, and so we continue to March forward with the idea that part of our <unk>.
<unk> is to make genomics more accessible by driving costs down in terms of chemistry and the instruments you know the way we are thinking about it is.
You know.
Certainly, we're certainly capable from a technology perspective, we're making chemistry X available on instruments that are already on the market. So that is a lever available to us.
And as we look at the market you know we want to we want to be sensitive to the fact that if customers have bought.
An instrument that we launched fairly recently that they may not have gone through there.
Their depreciation cycle and so we will think more.
I think more about making chemistry X available on those kinds of platforms, but if it's been an instrument that's been on the market for a while and they've gone through a depreciation cycle and then there is an opportunity for us to to help that market upgraded not just take advantages of the innovations in chemistry acts, but take advantage of the innovations across all the other technology components whether.
It's optics for example of data pads and really deliver transformative new instruments and that's how we're thinking about it.
Yeah.
We will take our next question from peanut soda with S. VP Securities. Please go ahead.
Yeah, Hi, Francis.
Thanks for taking the questions. So first one is really.
Could you talk a little bit about at a high level.
About who these customers are just trying to understand in terms of.
Are these customers more COVID-19 customers or oncology customers or genome center customers.
And and.
Their lab expansion plans, because I think that's where the challenge is because when we look at the life and life science tools companies. The peer group that you have.
So those companies have delivered very strong growth they had supply chain challenges in the first quarter in fact supply chain challenges were even more pronounced and and these labs have taken delivery of a lot of these instruments. That's why peer group companies have delivered strongly so just wondering what is different here.
Lumina.
Instruments.
A unique about these customers and then on Grill I mean Europe .
Pointing out as the fastest adopted test, but at the same time, you're lowering your guide.
Just trying to understand is there anything any unique dynamic with certain customers. There. Thank you.
Yeah, So, let's let's take both in terms of the labs and I think youre asking what the labs that are delaying their expansion plans, who are they and you're saying look some of the other life science tools companies Havent Havent seen that so you know.
Got them a little bit for you. It's first of all it's a few customers seconds. They are they're actually genomics focused customers. They run genomic slabs and so you may not see that in the general life Sciences tools.
Market, but youll certainly seen that in the sequencing market. They tend to be customers that are growing. These are the ones that have expansion plans for their successful customers, they're experiencing robust growth and in fact, they are serving market like oncology for example, where they see.
Significant increased demand coming and are expecting too.
And our building significant labs and so these are companies a large customers. They are growing customers and their customers that are facing significantly increased demand and are looking to expand their labs now their genomics labs and they are primarily there pretty much illumina customers and so obviously, we're the ones that that.
That ride that cycle with them and that's why you'd see it with us and that's why you'll see that those lots come on line. That's why you'll see the benefit accrue to illumina. So that's the characteristics of the customers. We're talking about in terms of Grail. It really has been just quite remarkable to see the fantastic growth they've had in their first year. If you look at there.
First 12 months of June and this June they just lapsed their first 12 months.
They are.
Just you know revenue growth of any cancer screening test in history now that's quite remarkable right. They're also doing a fantastic job in terms of signing up health systems and employers.
And I'll give you. Another example of just how fast things are moving so in the last quarter. They fully recruited the 140000 person childhood theyre running for the NHS not typically a trial like that would take years to fully enroll and the NHS working the grille was able to do that in 10 and a half months that gives you some sense of.
The acceptance of the hunger in the market the demand in the market for just such a breakthrough test right. The fact that you can identify 50 cancers across all stages and people are starting to get a sense of the results that they were making it into the market now.
What we're looking at now even with that torrid growth basis, we're looking at the rest of the year and we're looking at the ramp up that's happening in some of the.
And some of the health systems that have signed up until the employers.
The Grail team that's tuned back some of their estimates for the rest of the year that doesn't take away again. This is the fastest growing cancer screening says we've ever seen in history.
We'll take our next question from Kyle Nixon with.
With Canaccord. Please go ahead.
Hey, Thanks for taking the questions just a few on the on the guidance. So I was just curious about components of instrument revenue growth for 'twenty, 215% year over year, maybe George can you talk about expectations for placements versus orders versus pricing, maybe pricing is locked in or not locked in at this point.
Just given the backlog commentary it was a very strong kind of entered like entering the year and recently just how is that trending recently and going forward.
Kind of Relatedly do year over year decline in mid throughput for shipments in Q I mean, I hear you on China and the other factors, but any chance that's partially due to the.
The platform evaluation process as these new vendors into the market or at least make some noise. Because obviously these large clinical labs are already test driving these products. So it just worth asking thanks.
Yeah. Thanks, Kyle So let me, let me start with the Q2 <unk>.
On the mid throughput right.
So as I mentioned right there.
The orders for mid throughput.
Really we're very strong right so.
We saw a continued interest in strong orders for <unk> <unk> is our latest platform on that.
Pick up considerably and while there was a temporary supply chain issue at our end, which prevented us from delivering these orders in Q2 Q. They have subsequently been delivered already and in this quarter. So.
We are very optimistic and we see very very strong demand.
And interest in our mid throughput platform, both are on our research and clinical customers.
On the full year, so a couple of things right. So.
You start with <unk> first right. So we've had a strong first half of the year.
Our orders for the first part first half of the year were up 30% year over year.
And you know.
As we mentioned 23% growth in the second quarter now this is for a platform that has.
Now six years from launch rates, so we see extremely strong unprecedented demand.
Even on the back of a very strong 2021, and we're excited about that remember also that these instruments are.
Most of these instruments that now been deployed we expect now that the pull through on consumables on these instruments.
We'll come and we'll we'll continue to accelerate in subsequent quarters and years. So we feel very good about our portfolio of Bolton.
The high throughput and the mill mid throughput segment.
We'll take our next question from Patrick Donnelly with Citi. Please go ahead.
Hey, guys. Thanks for taking my questions.
For instance, maybe one for you just in terms of kind of the operational spend that you guys are doing.
If you could kind of talk about the op margin pull down in the back half can you talk about how you're balancing some of the growth investments with also being mindful kind of insulating the margin protecting the bottom line, obviously had chemistry accident cannot be coming up soon.
Assume you'd want to invest in kind of the launches. There. So maybe just talk about again kind of that balance of investing for growth and at the same time kind of realizing with things slowing you need to protect the bottom line a bit where you are pulling back and where you're pushing forward.
Yeah sure Patrick So obviously with the with the revised revenue outlook for the year. We are taking a look at our spend and exactly as you said doing that balance on the one hand, we're looking for for areas, where we can contain costs that means you are pulling back on discretionary items for example, like <unk>.
<unk> and other discretionary spend and we're also prioritizing the hiring that we're doing and so there are some hires that we will put off because we don't think it's essential to do right. Now. So the team is absolutely doing that look having said that we're also protecting our innovation roadmap as well as essential hires in other parts of the company as we scale the business.
We have very ambitious product plans as you know and we're going to continue to protect that roadmap because thats what drives the success of our customers and our long term success and that's what creates long term shareholder value in the company. So so that's the balance we're doing we're protecting the innovation road maps, we're protecting activities.
That drive that long long term shareholder growth, including things like <unk>.
Capacity expansions IBD capabilities commercial expansions in targeted markets.
It's sort of maintaining that balance.
Yeah I would also add we continue to have productivity improvements on our.
Gross margin side as well right. So that's that's of course despite the.
The reduced volume that we have seen this year some of those improvements are contributing to increased gross and operating margin as well.
Okay.
Yeah.
We will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question Francis maybe.
Two part question for you your guidance for the back half it implies one person gorilla you just did 3% in Vietnam into Q4.
<unk> is the guide assuming.
Things to worsen from <unk> levels, because if I understood you. Some of these are temporal factors if I look at your.
Inventory on hand, I don't think your customers stock up to 12 months.
So shouldn't some of these factors worse, how conservative is this guidance for the back half.
And on chemistry exit thing.
A 30% price cut 20, 30% somewhere in that ballpark does it have any implications to our revenue growth for fiscal 'twenty three thank you.
Yeah. So thank you Jay let me start with the first part of the question, which is you know.
Q2, Q3 guidance sort of what's driving that number.
And so I'll talk about some of the factors that are driving that number.
If you and if you normalize the impact I'm talking about the growth is higher and I'll come back to that as well. So some of the factors that are driving it or.
The headwinds that I talked about there is a headwind around COVID-19 surveillance demand pulling back that's playing out in Q3 as well as obviously, a foreign exchange headwind and the tough compare with the UK Biobank that concludes in Q3. So that's another factor playing out in <unk>.
Q3, we also expect the.
Continued slower GDP growth in China growth and that'll play out on it and then the two factors I talked about sort of inventory management and the lab expansion today. So those are some of the factors that we factored in and given the guide for Q3, and obviously if you normalize for those factors then youre looking at a significantly higher growth.
Rates in Q3.
We will take our last question from Jack Meehan with Nephron. Please go ahead.
Thank you good afternoon.
Francis I have a two part question for you on Grail.
So the first is just given the prolonged regulatory uncertainty here is there a point, where you can choose to walk away. What's your conviction level on getting this done.
And then second off that obviously now isn't the most accommodative environment for capital markets activity.
So in the scenario, where you might have to spin grill out how would you fund the ongoing operations I look at your balance sheet.
For the <unk> payment.
The fine you have earmarked to European Commission, you have roughly $550 million of unrestricted cash. So just talk about if you got to that how would you finance spin if it ends up there.
Yeah. So I'll start by saying that you know our focus is going to be continually to to focus on and think about the things that create the most long term shareholder value and as we embarked on this process. As you said, we clearly felt that combining gorilla in the room and that creates the most long term shareholder value.
I'll give you an example, right so even on their own largely the Grail team was able to achieve the fastest to 12 month ramp of any cancer screening test in history, as we said and I imagine would that could have been.
Alumina behind it and if we think forward what could we do if we were able to take that test into markets like Europe , and Asia and Africa beyond the plans that drill could happen. So that's sort of what drove our thinking having said that we're going to continually assess as we work through this process what are the right next steps and.
There obviously are a set of nodes on the decision tree that would lead us to to either spinning out grill, because the regulatory process doesn't go our way or contemplate other forms of exits so their dividend back or.
And so we're going to continue to assess that as we work through the regulatory process.
In terms of your question around funding the operations, that's absolutely going to be a consideration as we contemplate knee the options and how we'd have to spend very loud right. So the idea is that what you would want to do is make sure that you protected the asset value to allow <unk> to continue to execute on its mission.
And so that means making sure that it's capitalized that can continue to be successful as well as it has access to future capital that will need for its on expansion plans and that's going to be a combination of alumina, but other shareholders to potentially and other people who with jet capital both maybe at the time of divestiture.
Then over time as well and so you know those are some of the considerations as we think about what a divestment would look like how do we how would we set it up to be successful and what is it what's the path for it to continue to be successful. Obviously those are not decisions that we're making today, but those are some of the considerations that would go into it.
Yeah.
Ladies and gentlemen, this concludes our Q&A session I will now turn the call back over to Sally Schwartz.
Thank you for joining us today as a reminder, a replay of this call will be available in the investors section of our website. This concludes our call and we look forward to our next step date with you at Investor Day on October 3rd.
Ladies and gentlemen. This does concludes today's conference. We appreciate your participation you may now disconnect.
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