Q3 2022 Illumina Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the third quarter.
'twenty two.
Earnings Conference call at this time, all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Sally Schwartz Vice President of Investor Relations.
Hello, everyone and welcome to our earnings call for the third 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 had not had a chance to review the earnings release. It can be found in the Investor Relations section of our website at Illumina Dot com.
Participating for Illumina today will be Francis Desouza, President and Chief Executive Officer, and George <unk> 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 enjoy deep will review our financial results which include grill.
As a reminder, pending.
Pending the outcome of the European Commission's investigation into aluminum acquisition of Grill. The commission has adopted an order requiring illumina 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.
During this period of 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 the grille.
Commercial 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 1095.
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 Illumina is most recent forms 10-Q, and 10-K with that I will now turn the call over to Francis.
Thank you Sally.
Good afternoon, everyone Illumina delivered revenue of $1 1 billion in the third quarter up 1% year over year, and 3% on a constant currency basis and in line with our expectations. Despite deepening macroeconomic challenges.
Looking at our Q3 performance across platforms and high throughput, we shipped 65 <unk> six thousands in Q3 down from the prior year in line with our expectations.
A fantastic customer responds to the <unk> series launch at the Illumina Genomics Forum, where we reached more than 12000 viewers and our innovation roadmap sessions.
Labs are excited by Nova seek access industry, leading power efficiency and cost effectiveness and they love and their words, it's unexpected and revolutionary sustainability breakthroughs, including ambien shipping and a 90% reduction in packaging weight and waste.
Customer traction for <unk> is exceeding our expectations.
We already have an advanced pipeline of more than 170 instruments. In addition to 50 orders that we have already received.
Our manufacturing scaling is proceeding well and we expect to ship 40 to 50 <unk> units in Q1, 2023 and over 300 units in the year.
At the Illumina Genomics Forum, we also launched the <unk> 6000, Dx the first ever FDA registered and CE marked IBD high throughput sequencer.
We're excited to now provide dx offering across the throughput spectrum.
And mid throughput, we saw record <unk> shipments, which were up 40% year over year.
This increase was driven by accelerated adoption of multi omics, primarily in cancer research and cellular and molecular biology, both by new and existing customers.
And as part of our ongoing innovation roadmap our launch of ex Leap SBS chemistry on next week, one K two K remains on track for 2024.
Finally, low throughput shipments were up 13% year over year. These instruments continued to provide a great entry point to sequencing.
This continued demand for our sequencing platforms across the throughput spectrum will contribute to a larger installed base and drive future consumables revenue.
We're also receiving positive feedback from early access customers of Illumina complete long reads and complete long reads with enrichment and are expanding to additional customer sites.
Customers appreciate the Illumina has unique ability to deliver a high quality cost effective and complete view of the genome on a single platform enhancing utility across our installed base.
Shifting to our market segments clinical sequencing consumable shipments were up 5% year over year, driven by continued growth in oncology testing and genetic disease testing.
Sequencing run activity by our clinical customers remained robust.
As expected, though lab expansion delays and consumables inventory deleveraging have persisted due to broader macro dynamics.
Oncology testing consumables grew 9% year over year as our larger customers continue to shift towards high throughput applications are decentralized clinical testing customers ramped up business and new customers came online.
Our market, leading troostite oncology assay. So 500 grew 17% year over year as large customers took advantage of the assets utility reimbursement and proficiency.
DSO 500 adoption continues to grow with total accounts approaching 500.
Also in oncology Grill continued to make good progress in Q3, delivering clinical results and signing up a broad range of customers across the health care ecosystem, including health systems and life insurance providers.
<unk> announced a first of its kind partnership with <unk> health. The first digital health company connecting employers and employees to centers of excellence to a value based care platform.
Partnership provides gallery as part of <unk> oncology offering to self insured employers.
Also John Hancock, the U S division of Manulife with over $1 5 million life insurance participants recently became the first life insurance carrier to offer gallery.
The Grail team expanded its clinical sales force in Q3 and are seeing test orders increase.
Evidenced for galleries efficacy also continues to grow.
In September at ESMO Grail presented compelling final results from its pathway in this study.
The study demonstrated that when added to standard of care screening gallery multi cancer early detection testing more than doubled the number of cancers detected compared to standard screening alone and.
In fact gallery detected more cancers than all U S. Preventative services task force recommended single cancer screenings combined.
And galleries positive predictive value of about 40% is significantly higher than commonly used screening tests like the annual screen for colorectal cancer, which has a PPV of eight 7% are the biannual mammography screen with a PPV of four 4%.
<unk> is the only multi cancer early detection tests available on the market.
An analysis of the first 38154 gallery commercial test results in a real world setting shows high concordance with the Pathfinder study results.
In addition, Pathfinder study participants experienced with the gallery test has also been positive with 97, 1% of participants reporting a high level of satisfaction with the test.
And genetic disease testing sequencing consumable shipments grew 11% year over year.
National Health system funding for rare diseases is increasing in multiple geographies, including EMEA and China.
And evidence generation continues to grow.
For example in September genetics in Medicine, published a study from Karolinska Institute, indicating that genome sequencing is a sensitive first time test for neuro development disorders.
We're also seeing customer excitement around the potential for <unk> X to create efficiencies for both whole genome and whole exome sequencing.
Turning to our research and applied markets sequencing consumable shipments were down 8% year over year as customers continue to manage inventory and capital spend and due to expected headwinds from Covid surveillance and the completion of the UK Biobank project in Q3 2021, we.
We continue to support our customers through these dynamics and at the same time are making ongoing progress in facilitating genomic based drug discovery.
As this area continues to grow we will partner with a range of pharmaceutical companies like our recent collaboration with Astrazeneca to help accelerate genomics and find promising drug targets based on ohmic insights.
And our infectious disease and microbiology markets, we are broadening genomic opportunities across disease states.
For example, we recently announced a partnership with general screen to help countries impacted by tuberculosis to more effectively detect and combat multi drug resistant strains.
TB claims more than one 5 million lives each year and for the first time in a decade deaths are on the rise after the pandemic.
We hope that with this work, we can help vulnerable populations and make progress towards eliminating TB worldwide.
Turning now towards the end of 2022 and entering 2023.
We expect the macroeconomic challenges we have previously discussed to persist into 2023 and feel that it's prudent to adjust our near term guidance accordingly.
Jody will address our revised FY 'twenty two guidance shortly.
By the near term challenging macroeconomic environment, we remain confident in our long term growth trajectory customers around the world continue to share their excitement for our latest innovations, we're staying focused on supporting them and advancing our innovation roadmap to accelerate the genome era.
I'll now turn the call over to Joe <unk> for more detail on the quarter and our year end outlook.
Thanks, Francis as a reminder, our third quarter financial results include the consolidated financial results for Grill.
I'll start by reviewing our consolidated financial results followed by segment results for core Illumina and Grail.
And then conclude with additional remarks on our current outlook for 2022.
I will be discussing non-GAAP results, which include stock based compensation.
I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's earnings release and supplementary data available on our website.
In the third quarter.
Holidayed revenue was $112 billion up.
1% year over year or 3% on a constant currency basis net of the effects of hedging.
As expected our core business growth was impacted by anticipated headwinds from customer supply chain issues that delayed lab expansions as well as tighter customer inventory and capital management due to the challenging macroeconomic environment, including inflation and the negative impact of FX.
These dynamics have persisted and in some cases accelerated through the third quarter, leading to our guidance reduction for the full year 2022, which I will address later in my remarks for the third quarter GAAP net loss was $3 eight 2 billion.
From a net loss of $24 26 per diluted share, which includes goodwill impairment of $3 $91 billion related to the Grail segment, primarily due to the negative impact of current capital market conditions, and higher discount rates, including a standalone risk premium on the fair value calculation.
The rail segment non-GAAP earnings were $54 million or <unk> 34 per diluted share, including dilution from <unk> non-GAAP operating loss of $148 million for the quarter.
Our non-GAAP tax rate was 43, 2%, which increased from 25, 8% last quarter and 13, 2% in the in Q3 2021.
Primarily due to the increased impact of R&D expense capitalization requirements implemented by the tax cuts and jobs 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 core Illumina.
For alumina and revenue of $1. One 1 billion was approximately flat year over year or up 3% on a constant currency basis net of the effects of hedging.
Core Illumina sequencing consumables revenue of $725 million was approximately flat year over year.
As expected.
Growth driven by the increased installed base was muted by the year over year impact of customer inventory and cash management headwinds from foreign exchange rates. The conclusion of the UK Biobank project in quarter three of 2021, and the anticipated decrease in Covid surveillance revenue.
Sequencing activity on our connected instruments for clinical customers remained strong.
While the pace of research sequencing activity was tempered by various macroeconomic challenge as Francis mentioned.
Sequencing instrument revenue for core alumina declined 10% year over year to $162 million driven by lower <unk> shipments due to expected customer lab expansion delays in capital management as well as purchasing delays in advance of next year's availability of <unk> X.
This decline was partially offset by a record <unk> shipments, which grew 40% year over year as we continue to see strong adoption by new to Illumina customers.
During the third quarter corporate surveillance contributor at approximately $28 million in total revenue comprised of $23 million.
In sequencing consumables and $5 million in instruments.
This was in line with our expectations and down nearly 50% year over year, driven by lower testing samples and a decline in instrument shipments as COVID-19 surveillance capacity was largely established in 2021.
Core Illumina sequencing service and other revenue of $123 million was up 12% year over year, driven primarily by higher instrument service contract revenue on a growing installed base and an increase in core licensing revenue.
Moving to regional results for core aluminum <unk>.
Revenue for the Americas was $592 million up 2% year over year, primarily driven by an obviously consumables growth due to demand from genetic testing oncology testing and cancer research customers as expected growth in the region was largely offset by customer lab expansion delays and inver.
Korean capital management as well as a decline in corporate surveillance revenue.
EMEA revenue of $290 million represented a 7% decrease year over year or a 2% decrease on a constant currency basis net of the effect of hedges.
Strong growth in Metro instrument shipments driven by clinical demand was more than offset by the conclusion of the UK Biobank program and a decline in corporate surveillance revenue.
Greater China revenue of $133 million represented 9% increase year over year or a 14% increase on a constant currency basis.
Quarterly revenue in the region was driven by a growth in sequencing consumables for routine NGL space research that resumed after the COVID-19 restrictions that began in March this year were lifted.
As well as strong sales of <unk> 6000, primarily to clinical customers for oncology testing.
We continue to expect base business growth to be impacted by headwinds from the zero COVID-19 policy exchange rates and slowing GDP growth in the region.
Finally, <unk> revenue of $95 million grew 6% year over year or 10% on a constant currency basis net of the effects of hedges.
Growth in the region was driven by strong demand in emerging markets, notably in India, Indonesia, and Thailand and continued strength in <unk> in oncology testing.
Moving to the rest of the core Illumina P&L.
Core Illumina non-GAAP gross margin of 68, 9% decreased 240 basis points year over year, primarily due to less fixed cost leverage on lower manufacturing volumes and higher freight costs, partially offset by favorable product mix.
Dollars and pre cash flow was negative $119 million, we did not repurchase any common stock in the quarter. We ended the quarter with approximately $1 billion in cash cash equivalents and short term investments.
Moving now to 2022 guidance, we now expect full year 2020 to consolidated revenue to be flat to up 1% year over year, including approximately flat court aluminum revenue compared to 2021 and Grail revenue in the range of $55 million 65 million.
Our revised outlook for the full year reflects the more challenging expected macroeconomic headwinds we observed through October .
For a quarter alumina approximately one third of the reduction in 2022 guidance from our previous expectations is primarily driven by delayed recruitment for some large research projects in the Americas and Europe and.
And the impact of inflation on research customers in Europe .
The remaining two thirds of this reduction is split approximately 70 30 across to higher than expected factors.
One delays and instruments and consumables purchases, primarily due to the excitement around <unk> X.
And too negative effects impact and consumables inventory deleveraging.
For the full year, we now expect core aluminum sequencing revenue to be approximately flat year over year.
Continues to include intercompany sales to grill of approximately $25 million, which are eliminated and consolidation.
Within core aluminum sequencing revenue, we now expect instrument revenue to be down slightly year over year and consumables revenue to be approximately flat, which reflects no receipt pull through slightly below our guidance range of 1.1% to 1.2 million for system for 2022, primarily driven by <unk>.
Groupement challenges at some large research and pump sham customers.
The remainder of our pull through ranges are in line with the historical guidance ranges that we have previously provided.
For full year 2022, we now expect consolidated non-GAAP operating margin in the range of $9, 5% to 10%.
And court aluminum non-GAAP operating margin of approximately 23% reflecting are lower revenue outlook we.
We expect to consolidated non-GAAP tax rate of approximately 7%, which continues to assume that the R&D expense capitalization requirements implemented by the tax cuts in jobs Act of 2017 will be repealed in Q4.
We now expect non-GAAP earnings per diluted share in the range of $2.35 to $2 50.
Which includes a lower than previously expected non-GAAP operating loss dilution from grill of approximately $600 million.
Lastly, we continued to expect diluted shares outstanding of approximately 159 million shares for 2022.
We expect the macroeconomic headwinds we are experiencing to persist into 2023 as we noted in our lost earnings call. We are proactively and prudently managing operating expenses with a continued focus on sustainable long term revenue growth.
We are well positioned to seize opportunities to scale in key areas that are lying to customers future needs and our innovation roadmap.
At the same time, you'll see us gain additional scale and efficiencies from other areas.
We will continue to adapt our investments and expenses to support our customers drive further progress in the genomics industry and enable a longterm growth.
I will now hand, the call back over to Frances for his final remarks.
Thanks J deep.
As Joe you've shared we will continue to identify opportunities to mitigate the near term effects of the global economic environment.
At the same time, we're prioritizing our innovation roadmap and remained confident in our long term growth trajectory.
As I shared earlier, we're hearing high praise for the innovations, we announced that illuminate genomics forum from aluminum complete long leads to our most powerful and most sustainable sequencer, yet the notice Eek X to use.
These innovations will continue to evolve the genomics industry and we look ahead with tremendous optimism over the long term, we will help our customers through the current challenges and seize the potential of the genome era together.
I will now invite the operator to open the line for Q&A.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone if your joints today is a speakerphone. Please mixture new function is turned off until by your signal to reach our equipment against that will be star. One if you would like to signal with questions.
As a reminder, please limit yourself to one question. So that we can accommodate as many analyst as possible you are welcome to re enter the queue. If you have additional questions.
And our first question will come from Dan Brennan with Cowan.
Thanks for thanks for bringing the questions.
I wanted to there's a lot to talk about but I guess I'll focus on the yoga seek X.
300 treatment guide, including the 51 <unk> the head of our motto, maybe Frances and outdated could you speak about some color regarding customer early customer activity.
Where are the orders coming from in terms of large research customers like genome centers versus more smaller customers in the clinical side and then secondarily with 50 orders in hand, and you mentioned 170 advance order books here North of 200 already would you characterize the 300 shipments while very attractive as possibly conservative given expected future order momentum that.
You would expect to get over the next six to nine months.
Great. Thanks for the question Dan So let me work through those questions first of all you are right. We are very very pleased with the very strong response, we have gotten from customers around the Nova seek out because frankly, it's been stronger than we expected and we had high expectations going into the alumina genomics Forum.
Customers that are coming from a.
Broad swath of of customer segments, we're seeing more of a mixed from clinical in addition to the usual genome centers that you would expect to be some of the early adopters and we're seeing a mix of both from U S customers as well as customers from outside the U S. So instead of a nice broad brush us earlier.
To our customers and maybe even a little bit more on the clinical side. Then we saw when we first launched in overseeing 6000, a few years ago.
As you plant the initial orders we've got.
50 or is already in hand that means that our Q1 shipments are already sold out. So we're really entering the urinary strong position for Nova sic X shipments and move a very healthy pipeline of 870 customers that are down the pipeline already so when you look at the shipments number for the year.
The number that I call that the 300 units made clear that the shipments similar is going to be more constrained by supply availability next year than it is for demand because as you point out we're entering the year with a very strong demand book and the way. We think about it is that you know over the first couple of quarters of the year you can.
<unk> has to have more demand and we can ship just as we continue to ramp up the manufacturing capability for Nova <unk> and will start to service that backlog as we get into the second half of the year.
Mmm.
And our next question will come from Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question Frances.
I had a coupon or if you will just not not the prior Noah Noah Heck.
The constraints here are the two mentioned can you give us some color on how the cycle confessed with a prior Nancy.
Because I mean, we're like a month into product announcements north of 200 orders.
This looks like it.
It could be a really big your for you guys from an order for spectrum next year. So.
So maybe compare versus the prior cycle and the implied queue for guidance here, one for <unk>, I think revenues or minus 13%.
If I if I think about first two one of next year being in the negative territory, maybe next year shipping out to be maybe a mid signals to high singles top line to any color on I would think <unk> would be helpful. Thank you.
Yeah sure. Thanks for the question VJ so.
As as I said from the last question you are right in the sense that the customer reaction to notice eek access certain even stronger than we anticipated and we model the reaction based on our previous launches which have been really strong.
But if we look at the number of orders we have already to 50 orders we have the 170 in the advanced pipeline.
If I were to compared to where we were similar time with previous launches I'd say, we are better off than we've been in some of the other previous launches. So certainly in a very strong position going into next year.
Again, the next year <unk> shipments number is going to be a supply.
Apply constrained and.
We've ramped up an entirely new manufacturing line because we've redone every component of this instrument right. So entirely new chemistry in U F. F N inflow selves, new manufacturing process for the flow cells and so we're really happy with the way that scale up is happening if I compare the number I gave you for the Q1 shipments that would be a head so.
The 40 to 50 shipments we expect in Q1 that would be more shipments than we did in the first quarter. When we launched in Nova C. 6000. So slightly ahead of where we were before and then the 300 units that were expecting to ship would be ahead of where we were with the first year of notice.
6000, as well so that's how it compares with previous launches maybe I'll turn it over now to Jodie.
Yeah. So maybe just one thing on the what's change or <unk>. Greg. We are seeing is Francis mentioned earlier.
Strong demand early strong demand from clinical customers as well right in this reactor beer too.
The trend of continued strong clinical research coming in which is which is now shifting to an oversee X.
X for some of these study so I think that's a positive trend.
I think your next question was about.
The relationship with four Q4, and then interviewed two.
<unk> 2023, so a few things on on.
Q for as we as we pointed out right towards the end of Q3 and early into October we have seen a deepening of some of the macroeconomic conditions, we talked about including inflation and effects.
And that caused us to be prudent for the reasons I mentioned earlier to take a more conservative approach into into our call for four Q4, but also re now see these conditions persist into 2023.
So we're taking a look at some of those conditions and.
We know some of the factors that have changed to the negative effects is definitely worse, an accelerated for us and we expect will be a continuing to headwind into into 2023.
Talked about the macroeconomic conditions, we've already mentioned that Covid surveillance is likely to.
Declined further into into 2023, so this kind of.
Is some other factors that moderate what we had expected earlier for.
And continue to see in terms of the interest in.
In noticing X and of course some of the other technologies that we that we mentioned during IGF, including the aluminum completed long reads.
Overall down I think we feel at this point and we haven't gone to guidance and budgeting yet but at this point I feel like we are <unk>.
Probably expect revenue growth in 2023 to be closer to the 10% range.
Rather than where where we are guided before.
And our next question will come from Dan areas with Stifel.
[noise] afternoon, guys. Thanks for the questions. Francis can you just touch on the lab delay issue a little bit it it sounded like last quarter.
Delays were <unk> phenomenon more than they weren't you were in line. This quarter. So the fourth quarter assumption is obviously getting adjusted to your.
Just seems a little bit more extended than we would think so can you just sort of talk to what's going on there and then when your expectations call for some of these labs actually getting going and being where they need to be.
Yeah sure so.
When we talked.
Talk about the results last time on the call we talked about the fact that we've seen some delays that we're looking to get ramped up later this year and some that were going into next year and what we found is in both of those cases ended up being a little later than those customers had expected and so we're seeing a push out from what was expected to come this quarter being pushed out.
And to next year and then even the data for next year opening has been pushed out somewhat too so.
The pandemic related effects around supply chain are definitely persisting in our impacting those lap delays.
And our next question will come from.
With SBB Securities.
Yeah, Hi, Francis surgery, Thanks for taking the questions. So first of all I just wanted to clarify that 10% growth that you mentioned for 2000 twenty-three that's on the entire top line and then just.
Just wanted to also get a little bit.
Around the 10, B and the 25 be sort of slow sales tenby is launching earlier 25, b is going to be later.
And next year it appears to us that the.
$10 billion <unk>, so it could be most meaningful in in in in your portfolio just given that it can turnaround samples in 24 hours and still give the Nova sic Pasadena.
<unk> that is a deliberate delivered through noticing 6000 today on an S. Four so maybe just walk us through you know you know how do you see the ramp for that and what does that all mean in terms of you know sort.
Sort of pulled through into 2000 2002 2023. Thank you.
Thank you Penny So let me talk to both I'll start by saying that.
The the answer we gave around the 10% wasn't intended to be a guide for next year was intended to just talk about how we were thinking about some of the factors that are at play Q for going into Q1, and we will give a specific guide as we get into next year. Once we've done the bottoms of budget in terms of the flow cells I think you're absolutely right in the sense that the.
The first slow sale, we ship the 10 $10 billion <unk> is going to be very meaningful for our customers that are looking to get familiar with the Nova seek 6000.
Comparing it to the existing instrument they have because it's very similar in terms of footprint in terms of output and will probably take on some of the same workloads and so customers will feel well.
You will feel a sense of familiarity as they move to the X with that flow cell.
And so.
You'll see customers would start with that and then the 25 billion would be closed cell is really intended to unlock the next generation of studies the very large programs.
Customers have been talking to us about and have been waiting for the price points of the acts that are fundamentally enabling to those studies and so you can think about it as there'll be the the the first it'll sell that existing noticing 6000 customers will do is very familiar to them in terms of output in the workloads that it does.
And it will start using as a sort of their entry point into the X series and then it's the bigger flow so that unlocks the next wave of elasticity in demand.
And then maybe plenty to add right. We expect the translation obviously to move forward on the consumables side much faster with research customers in clinical customers because they are invalidated workflows was switch a little bit later into the cycle.
And our next question will come from Julia Quinn with J P. Morgan.
Hi, good afternoon. Thanks for taking my question. So fantastic I remember you noted at the end of the day that.
Enable vanilla shake.
Meaningful catalyst advantage by some of the pop seek initiatives around the world and at the same time I think he noted enquire queue I hope there will be some research project, including the equivalent challenges for some of the pop C program. So I guess in light of that how long should we think about you know.
How meaningful to pop each program will be in terms of that revenue contribution next year.
Yeah. So let me address both parts of your question one is around the the effects were seeing in queue for around some of these policy programs and then too about the acts being enabling to future policy programs and how.
How important that will be in queue forward. We said is that there are some a small number of very specific.
Ongoing population sequencing programs that are experiencing some recruiting delays associated with those programs. It's a small handful and they are experiencing delays in these existing projects.
Have no doubt that these projects will continue on and complete and they will give the recruiting they did but a little bit slower in queue for them. They were expecting to go [laughter].
Now if we think about what X enables that's sort of the next generation. If you like so so well with customers have been talking to us about for awhile and then in earnest over the last five weeks since we announced yes is a very large projects that they wanted to do.
Where the number of samples are measured sometimes in the millions.
And they were talking about very large excellent projects very large genome project projects that frankly, we're just not economically viable until we brought out the X.
And one of the things we talked about an investor day that that's relevant here is that.
Sure how our team in some cases plays an important role in enabling them and making those projects so not only and a technology enabled enabler roll by putting out scalable instrument at the price points that make these projects viable but in many cases. We are also helpful in bringing together the parties whether it's.
Pharma companies.
War Biobanks or National Health systems, we are responsible for helping bring to convene those parties together to get those projects off the ground and I can tell you that over the last few weeks Susan in our commercial team have been very busy in high demand around health systems around the world that are interested in.
Leveraging the power of the <unk> to put together a program to create for example, cohorts that are vastly more diverse than we have today are much bigger than they are today and so I think the <unk> will be a very substantial needle mover on that front.
And our next question will come from David Western Burke with Piper Sandler.
Hi, Thank you for taking the question. It started on a continuation of of a question I asked last quarter on consumable ordering behavior I I know, there's a usually an expiration date on some of these consumables I know there was a little bit you you mentioned in Georgia by taking some that continue dynamics around burned down.
Lasting into the fourth quarter.
Maybe it's a little bit maybe it's right on your expectation, but it does look like a compared to my model that that is.
Is one of the culprits that continues to happen. So so you know how are we not interpreting nurses is a slow down for sequencing or or the market in general in context of you know a lot of your <unk> your customers have budgets they have NIH budgets flowing in they have.
Can they have passed that they have to get ordered and what I'm getting into is if it's not that's why why I still a 10% in 2023, given the fact that I would think there would then be catch up from all these consumables missed in Q3, and Q4 and sorry, if that was a really long question.
Yeah, Let me, let me try to address it and began to notice Francis said, we are still in the process of budget. So the 10% wasn't meant as a guide it's more of a from macroeconomic conditions receipt.
So I think that maybe two parts first in terms of your.
Good question about.
Seeing inventory deleveraging that has an accelerator decelerated right.
So we we were actually quite on point with with what we had expected in terms of inventory deleveraging with maybe a very small part of the.
The additional guidance, we provided on queue for actually coming from incremental inventory deleveraging. So that's that's part one right now in terms of whether things have slowed up slowed down rather from what we have communicated at the end of Q true.
We did see two specific things that we mentioned, which had been slower than we had expected right in terms of demand or activity. So one of them with a few key customers are a handful of customers that Francis mentioned that had these large research and pump term projects that had some issues with recruiting alright. So those are.
Things that we you know we expect will cut.
Recover over time this is not a budget issue. This is not a <unk>.
Mostly in inflation related and not an inflation related issue. The other thing that we did see was inflation and effects related and specifically related to research customers in Europe right. So there we did see her.
Ah slowdown happening we expect that some of this will continue into next year.
As some of these headwinds persist, but again, it's not a structural change. It's a temporary change that are caused by very specific macroeconomic factors.
And our next question will come from Michael Rice skin with Bank of America.
Great. Thanks for taking my question got I want to try to squeeze in a couple but they're all on the same topic one for.
For the Grill right down the 319 1 billion and could you talk to the the rationale the underlying reason for taking out this quarter.
Does that have any impact on divestment discussions or sort of putting it takes them more goes into that decision, especially if you sort of think back to a year ago.
I think the deal goes thrown around a year ago for $8 billion.
And then also.
Clarify like rail with down sequentially $12 million in the second quarter $10 million in the third but the midpoint of the things that are just some lumpy orders coming through which is what's going on there.
Yeah. So let me let me take the the first part of your question. So the reassessment of <unk> book value was really more of a accounting requirement triggered by.
Some of the regulatory decisions coming out of your again the primary driver of the valuation change was the higher discount rate.
Used really as a result of the current capital and equity market conditions, where it's the underlying.
You know the the performance of Grill in terms of how it's progressing on its clinical results and and signing up customers really has not changed in fact has has improved a little bit over the last few quarters.
Impairment again as as as an accounting change it has no impact on our Ah you know in our present in pursuance of various options.
Options on the Grail front and those are continuing as we have described earlier in our on our Investor Day, I'll turn it over to France, and then in terms of the grill number so the way the quarter played out the first month of the quarter July was slow in terms of a test ordering and and then the Patriot He picked up in September <unk>.
Have you driven by the ramp up in the sales force that Grail has brought onboard and.
And we talked about that on the queue to call in so that's paid off.
In the last month of last quarter and in the first few weeks of this quarter and so that's what's driving the the the shape of the curve in terms of the expectations for the year. They are off to a strong start for Q4 and the mid point of personal guide remains the same.
And then the other factor that's playing out in queue for is the revenue they are getting from their former partnerships associated with their and market development.
And our next question will come from Kyle mixing with Canaccord.
Hey, Thanks for the questions just a quick multipart question for me on never seek X was wondering what your expectations are portrayed ends in bundles in the near term just given the X is basically like.
The equivalent of multiple thousands and maybe you could talk about that in the context of the the twenty-three shipment number that you provided today or maybe cause I spoke to earlier and then I'm kinda separately Brands's. Just wondering if you could share your thoughts on complete offering of the longer it's spacious give me updates from back by what others recently thanks.
Yeah. So let me take the first spark first which was around our expectation of tradings. So our customers based on their experience with us know that we.
Have always helped keep customers hold when we launch a new platform and so as we've always done when we launched a new platform we have trade.
Trade in programs for customers that have recently purchased a 6000 and we actually have programs even know that if you want to buy a 6000 now to get going.
Can trade it in so you can buy now and traded in once we launched the X next year and certainly there have been customers that appreciated that very much and have taken us up on that and we expect some more to take us up on that.
Through this quarter and going into next year. So that's a standard.
Part of our launching a new product.
In terms of our complete long reads.
We've seen a really <unk> response from our customers around being able to use their existing installed base across the throughput sizes. So are the <unk> all the way to.
Noticed <unk> the X.
To do both long Reed and short read workloads.
And to do that in a way that allows them to take advantage of.
<unk> sample inputs lower than they can perhaps on other platforms.
And so we expect that to be fundamentally enabling to that space and if you, especially if you combine the.
The existing platforms, you have with the complete laundry to the enrichment you ended up with the ability to do long lead much much more cost effectively than you could do.
On other platforms without compromising accuracy in any way so you still get the gold standard of accuracy.
And you can do it.
Much more cost effectively so that's really exciting what it does is it opens up that last bit of the genome. The last few percentage genome that historically with hard to read.
With children technology.
And our next question will come from Chaos Savant with Morgan Stanley .
Hey, guys good evening.
Yes, a two part are for New York. So first I wanted to talk about the the meter Graham down for the noticed seek 6000 consumables you alluded to at the analysts say it because it's a higher proportion of clinical users, but then today.
Guys called out a higher clinical mix for the X. So I'm just trying to juxtapose those two dynamics as we think about how the <unk> 6000 consumables tail off over the next couple of years here and my second question is really around some of the pop Jen recruitment delays that you called out over here if I remember right you know in the last part of the cycle Sn.
<unk> <unk> had to be removed from the guide because it became so unpredictable in terms of timing can you just call out sort of what you see is different this time around that drives your confidence that at least as far as <unk> goes you will continue to get that sort of you know elasticity of demand.
Yeah, a great question. So let me take the first one first so.
You are absolutely right in the sense that if you were running production clinical works workloads today.
You are going to continue to run them on the Nova six 6000 for Awhile and then it will be a there'll be a metered transition that'll be measured in quarters and years before you move that entire production workload on to the <unk> continues to be what we believe that continues to be the feedback we're getting from our customers.
Really exciting though is that clinical customers are talking to us about in their purchases are really about new workloads.
And so it's.
Areas that they want to expand into that they're saying instead of starting on the 6000 they'd like to start that development on the X with an idea then of course to wrap it up into production on the eggs and so that has been more substantial than we expected. So that that means that there are a bunch of.
Of our large clinical customers that are expanding into new clinical areas and so it's an exciting development for the field. That's also an exciting development for as as well.
In terms of pop seek.
The what we have talked about is that when we are bringing on new pop seek deals new big pop seek deals will tend to binary them out of our of our.
Our guide if they're big and you know, we're still trying to figure out when they land and as you know that's a learning we had in terms of how these videos develop but once they're in production. They are in the guide right and so they're the variability isn't quite as big as whether a big deal will come on or not it may ramp up or down and a quarter and then.
Certainly we'll call it out for you if that happened with it if we see that starting to happen, which is what we're doing for Q4, but that's more.
That's more or.
The last variable he'd rather than an entirely new deal coming on which again will tend to be more conservative in terms of building that into our guide.
And Francis I'll, just add I think fitness.
This is a great question about clinical side right.
We are seeing some of these newer tests that frances called outgoing.
More towards Nova seek expert because these are also the higher intensity tests, which have much higher throughput requirements, which is consistent with what we mentioned regarding elasticity of demand continuing to go up with the introduction of new technologies.
And moving on to Dan Leonard with Credit Suisse.
Hi, Thank you I just wanted to make sure I understand the change in the 20th 22 guide for core alumina.
It seems like you attributed half of the guidance reduction to delays associated with the axe, if I'm doing the math right, 70% of the two thirds.
You knew you were launching the axe, so what what evolved differently from your expectations.
Yeah, you're absolutely right. We knew we were launching the accident he sort of modeled the customer interest based on previous launches we've done.
Frankly, we've been really surprised in a positive way around how much interest there has been from our customers in getting to the X.
And again as I said, we fully expected are clinical customers to be a little bit slower in terms of coming on board for the X and what we're finding that.
They're not for the reasons, we talked about that while they're keeping production workflows on the 6000. They are excited about using the X for their new applications, which is <unk> said tend to be more sequencing intensive applications and so that has been an upside surprise in terms of the enthusiasm for the act, but has a knock on effects.
That people are saying look I'm gonna hold on the 6000 in Q4 and wait for the accident starts to ship in Q1.
Thank you and our next question will come from Patrick Donnelly with city.
Hey, guys. Thanks for taking the questions Princess maybe warns us on the customer base more on the kind of clinical diagnostics that I know.
The past quarter, you kind of cold out there being a little more conservative with cash.
Particularly kind of speaking to the inventory question are you still seeing that piece, what what are the conversation like the outlook for that cause that market and 23.
Yeah, Thanks, Patrick so.
We are definitely seeing that continue to plan I think two things glad one activity levels in terms of runs on the instruments that they have continued to be robust and generally in line with the commentary Lee shared in Q2.
At the same time, we are seeing concern around you know their cash position and a desire to want to manage their inventory levels more conservatively, perhaps than they have historically. That's also enabled by the fact that they seem that our supply has been very consistent and robust and stable even through the pandemic into their confidence.
Look we can run at a lower inventory level for awhile and still maintain the integrity of their operations capability and so we are definitely seeing that dynamic continue to play.
And our next question will come from Luke's or not.
With Barclays.
Awesome. Thanks for the question guys can you give us a sense of.
The margin profiled were actually F X leap is going to come through.
It's important to think about as you ramp.
On the Nova sic acts next year and is that continues to come up in your.
And the higher pull through we need to kind of figure out where the operating margin is gonna come through.
Yeah sure the the expectation and the design just to maintain similar margins with the instruments that use the new exit chemistry as the instruments of their replacing so if you look at the X. For example, you should think about it over time as it skills to have a <unk>.
Similar margin profile to the Novaseq 6000, Bolton B.
Generally on the instruments items are in the consumable side and so that's the design criteria, we use the ideas too.
Invest in technology that fundamentally lowers the cost to make the product and then pass on those savings to our customers. So I maintain the same margins and pass on the savings to our customers associated with the innovations that were being like X like the new optics like the new flow sales and so on.
And our next question will come from Jack.
With no <unk> research.
Thank you have good afternoon.
I wanted to talk a little bit about the guide here for the fourth quarter. So I think for the year of the new consumables guide is flat.
By my math and you can check me on this lot of earnings Tonight.
Implies down 16% in the fourth quarter.
Can you just.
Talk us through what's going on there may be between price and volume and it just seemed like giving you were talking about it's kind of concentrated in one part of the customer base. It just feels like a big move.
Yeah, So overall Jack the.
For the full year you're right.
It's a sequencing conveyor millstones Katie is getting to be flat.
Pricing actually has not impacted right. This is mostly volume.
Track the price be pretty carefully and it is in line with what we have seen in previous quarters I think the reasons for the volume.
Reduction is is what we have stated earlier right. So there there is the <unk>.
Component of it by the way you look at the revenues as a component of FX that has gone through and then in terms of the volumes.
There is there are two components right. So primarily on the there's an inventory deleveraging pod, which we have some of which most rich rich called out earlier and then there's some additional peace and then the the two specific pieces around large research customers in the recruitment delays and.
Some ah slowdown inflation related and effects related to that we have seen in Europe . So those continued to be the largest sources of of you know a <unk>.
Slow down and then one of the things that Francis had mentioned as well is on the Nova sic X side rugby increased interest in Nova C has delayed some of the consumables purchases <unk> as well so that that is a component there.
Thank you and that does conclude our question and answer session.
Now and 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 car and we look forward to our next step date with you at the J P. Morgan healthcare confidence in January .
Thank you and that does conclude today's conference with you. Thank you for your participation have an excellent day.
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