Q2 2023 Illumina Inc Earnings Call
Please standby.
Good day, ladies and gentlemen, and welcome to the second quarter 2023 Alumina 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 conference is being recorded I would now like to hand, the conference over to Sally Schwartz.
This president of Investor Relations.
Hello, everyone and welcome to our earnings call for the second quarter of 2023.
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.
You have not had a chance to review the earnings release. It can be found in the Investor Relations section of our website at Illumina dotcom participating for Illumina today will be Charles Dads, well interim Chief Executive Officer and General Counsel.
Chuck will provide an update on the state of aluminum business.
Lloyd equal review, our financial results, which include Grill.
As a reminder, grilled must be held and operated separately and independently from alumina pursuant to the interim measures ordered by the European Commission, which prohibited our acquisition of grill under the EU merger regulation.
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 Illumina at the most recent forms 10-Q and 10-K.
With that I will now turn the call over to Chuck.
Thank you Kelly good afternoon, everyone and thank you for joining today's call as you know I assumed the role of women as interim CEO two months ago or so.
For a CEO is underway and we look forward to updating you soon our board is pleased with the outstanding candidates, they're saying.
We're going to our second quarter results I wanted to take a moment to acknowledge and thank our former CEO Francis Desouza and our former chairman of the board John Thompson for their thoughtfulness commitment wallet alumina.
I would also like to welcome our New Board members, Steven Nolan, our new chairman of the board as well as Andrew Tunnel. It's got all of them I also want to acknowledge changes in our executive leadership team, including the departures or Chief Technology Officer, Alex Arabinose interim Chief Medical Officer, Phil thorough I speak for the whole company and wishing both of them every day.
Success for the future. We're also pleased to announce Steve Bernard a 25 year alumina employee and distinguished scientists Centerfield will drive aluminum as legacy of innovation forward as our next Chief Technology Officer will be conducting a search for our next chief Medical Officer.
Turning to second quarter results and Q2 Illumina delivered revenue of approximately 1.18 billion and diluted non-GAAP EPS of <unk> 32 zones. Both ahead of guidance. We provided in Q1, we shipped 190, <unk> X instruments in the quarter and have increased our expectations for our full year supply capacity tomorrow.
Mm 390 instruments. However, as you saw from our earnings release, we are reducing our guidance and now expect core alumina full year 2023 revenue to be approximately flat with 2022.
And really as a result of three factors.
First a larger than expected temporary decline in high throughput consumables as we transition more than expected customers to the <unk> second many of our customers are remaining more cautious in their purchasing behaviors and finally in China. There was a more protracted economic recovery and an increasingly challenged competitive land.
Inscape in contrast to the Americas, and Europe , where we're still expecting year over year growth in 2023 J.
<unk> will provide additional details on our revised guidance during his remarks.
One area I'd like to touch on further is the rollout of <unk>. This has been a more challenging process than we anticipated <unk> X is the most sophisticated platform we've ever launched and includes the most comprehensive end to end software we've ever released.
So the rollout of the X has occurred at an unprecedented magnitude and pace and we've identified the issues in the field that are typical in new product releases to address these issues. We have taken actions, including a planned software update that was released in June after our first customer shipment in March.
We have deployed aluminum technical teams worldwide to work with our customers to accelerate bringing their systems online.
While the rollout of <unk> will take longer than we originally expected. The continued strong interest in commitment of capital purchasing overseas <unk> remains encouraging to date, 20% or customers, who have purchased a nova <unk> have ordered more than one instrument. This early demand for multiple instruments and capacity they represent underscore.
Our confidence in our customers are planning to increase their sequencing activity customers have clear intention to do more sequencing future. Our customers have commented that larger scale single cell and spatial analysis experiments have become more practical with nobody seek X and they are requesting funding for these applications.
Customers engaged in large population genomics initiatives have stated that they plan to run additional multifamily programs for population specific variance, which can be used to develop treatments for various demographics, there will be more effective in those populations.
And if some of you have heard several of our largest customers are using the extra accelerate the move from targeted panels axons to whole genome sequencing.
We expect these types of projects to scale and ramp in the near future and we will be closely engaged with our customers to support their needs.
We continue to consciously actively reduce our expense base and have accelerated actions with a $100 million plus annual run rate expense reduction program, we announced our last earnings call.
As you saw in her late June 8-K filing we have reduced our global head count and are downsizing our global real estate footprint. We're also optimizing our third party vendor spend and have reduced travel related and other costs for 2023. These steps are helping mitigate the impact of lower full year revenue on our operating margin looking.
Forward. These actions will continue to support our margins and create flexibility for further investment in high growth areas.
Let me give you an update on a couple of our platforms. We saw continued global interest in <unk> X series in Q2, and we exited the quarter with more than 260 orders since launch our shipments of 190, <unk> X instruments in Q2, well above our expectation of 80 for the quarter and brought our total installed base to 170.
Six instruments, we now expect to be able to ship more than 319 overseas X instruments. This year up from the 330 <unk>. We had previously expected for the year.
Mid throughput, we shipped approximately 160 <unk> units in the second quarter, an increase of 8% year over year as customers expanded their current fleets or migrated from the my seek or next week by 50.
More than 20% of next <unk> units in Q2 were placed with new to Illumina customers. We.
We continue to experience lengthened sales cycles in some cases as customers take time to raise funding or prioritize their investment dollars and in other cases as they run longer procurement processes, our win rates across the mid throughput segment outside of China increased from the first quarter. We believe there is a long runway of differentiation.
For the one K, two K, notably with ex leap SBS chemistry coming available in these instruments next year.
Moving to our markets.
In Q2 clinical represented approximately 53% of our total sequencing consumables revenue.
And oncology progress continued for next generation sequencing based testing reimbursement anthem second largest commercial payer in the U S and Blue Cross Blue Shield of Michigan with added coverage for comprehensive genomic profiling for patients with advanced cancers, adding more than 30 million additional covered lives.
We also saw coverage continued to progress in Europe , with Switzerland, now reimbursing large next generation sequencing plant panels, including comprehensive genomic profiling.
Alumina is market, leading true site oncology assay T. S. O 500 remains on track to exceed more than $100 million in 2023 revenue.
Growth continues to be driven by greater utilization and broader adoption of our assay. In Q2. We also completed our T. S. O comprehensive submission for IBD registration in the United States also in oncology Grill continues to achieve solid progress in the adoption of its gallery multi cancer early detection test in Q2.
Grill achieved a 200000 commercial and gallery test milestone and the test is now been prescribed by more than 7500 providers in the U S and ordered in more than 80 health systems.
As an update on the NHS Gallery study in Q2 grille completed second year follow up visits in which a 130000 participants returned given the trial a retention rate of 91, 3% invitations for the third and final your visits had begun and the first appointments for those visits are expected this fall.
Evidence for gallery continues to grow at the most recent annual meeting held by the American Society of clinical oncology Grill announced results from the University of Oxford sponsored simplify study reporting high specificity positive predictive value and accuracy of the cancer signal detected in the cancer signal of origin.
As well as demonstrating the feasibility of using an M said tests to assist clinicians with decisions regarding referrals from primary care physicians.
It was also making progress in its unique multi cancer minimal residual disease test at the American Association for cancer Research annual meeting Gorilla and answer Zeneca presented new data that supports the use of Grilles methylation platform to identify residual cancer and post treatment settings.
<unk> technology had a cancer detection rate of 92% in patients with relapsed or refractory disease across six hematological malignancies.
These findings demonstrate grills blood based methylation approach offers additional options to clinicians as they evaluate patients and efforts to achieve remission and improve survival.
Returning to core aluminum and reproductive health in the U S. Five state Medicaid programs in Louisiana, Michigan, North Carolina, Rhode Island in Tennessee updated their policies and are now covering noninvasive prenatal testing for all pregnancies in Europe <unk> is now available for all pregnancies.
The ones and has been approved for broader coverage in Italy.
Turning to our research and applied markets as we announced in mid July the alliance for genomic discovery launch by Illumina and Nashville Biosciences. In 2022 now includes five founding members Abbvie Amgen Astrazeneca Bayer and Merck.
<unk> represents a novel industry led collaboration to accelerate the development of therapeutics due to large scale genomics members will co fund whole genome sequencing of 250000 samples and all have access to the resulting data for use in drug discovery and therapeutic development.
The first phase in the alliance was announced in January .
All told genome sequencing for 35000 samples primarily made of DNA from individuals' of African ancestry.
Before we move to join <unk> and then go to Q&A I wanted to point out a couple of additional innovations that we recently announced in June our primate AI, <unk> and AI algorithm to predict disease, causing genetic mutations in patients with unprecedented accuracy with featured articles as the cover story of Science magazine.
<unk> G issue and.
And in July we announced the latest version of our Dragon software for analysis of next generation sequencing data Dragon for to expand award winning accuracy combined with the flexibility and scalability to enable efficient workflows and extract meaningful insights from genomic data.
It improves the identification of the causes of genetic disease and further AIDS in both drug discovery and population genomic analysis.
While the year Hasnt progressed, the way we expected we remain focused on execution innovation and supporting our customers as they ramp their <unk> X instruments, we continue to progress on margin improvement, while prioritizing investment in proprietary technology that generates differentiated products that are valued by our customers and will drive growth.
These include upcoming product launches, including the highly anticipated 25, <unk> flow cell for notice <unk>. The alumina complete long reach enrichment assay and ex leap SBS chemistry on next week <unk> U K.
As well as future offerings for emerging markets like proteomics, multi omics and spatial where we see opportunities to address researchers' needs deliver complete integrated and accessible workflows in short aluminum will continue to deliver impactful outcomes, we empower researchers and clinicians with data and technology they need.
To make life changing discoveries and decisions for patients our employees take pride in being part of Illumina as mission to improve human health by unlocking the power of the genome and we are the global engine of genomics innovation position today and in the future to maximize shareholder value.
With that I'd like to turn the call over to George to discuss additional details on our results and outlook and from there we'll go to Q&A Jody.
Thank you Chuck.
Start by reviewing our consolidated financial results followed by our segment results for core alumina and Grail, and then conclude with my remarks on our current outlook for 2023.
I will be discussing non-GAAP results, which includes stock based compensation.
I encourage you to view the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and in the supplementary data available on our website.
As Chuck noted in the second quarter consolidated revenue was $1 8 billion.
Up 8% for the first quarter of 2023 and exceeding the high end of our guidance range on stronger than expected shipments and obviously it gets consolidated revenue was up 1% year over year and up 3% on a constant currency basis non-GAAP net income was $50 million or 32 cents per diluted share which <unk>.
<unk> dilution from <unk> non-GAAP operating loss of $164 million for the quarter.
non-GAAP EPS exceeded our expectations, primarily due to continued execution of expense reduction initiatives gross margin favorability and our higher revenue for the quarter.
Our non-GAAP tax rate was 39, 3% for the quarter, which increased from 25, 8% in Q2 2022 with both quarters, reflecting the impact of R&D capitalization requirements.
Although the non-GAAP tax expense impact of R&D capitalization requirements in dollars was the same in both periods the impact of our effective tax rate in Q2, 2023 was more significant due to our lower earnings.
Moving to segment results.
Core alumina revenue of $1 $6 billion was approximately flat year over year or up 2% on a constant currency basis, which included an anticipated reduction from corporate surveillance of approximately 180 basis points corporate surveillance contributed approximately $6 million in total revenue in Q2 2023.
Compared to $27 million in Q2 of 2020 to.
Core alumina sequencing consumables revenue of $739 million was down 1% year over year mid.
Mid teens growth in clinical led by continued momentum in oncology and genetic disease testing was offset by anticipated headwinds impacting research, including an approximately 260 basis point reduction from corporate surveillance as well as sanctions in Russia. The impact of <unk> 6K, consumables as customers start to transition to but.
Before they are fully ramped up on <unk> X and constrained funding impacting many of our customers globally.
Total sequencing activity on our connected high unmet throughput instruments grew 3% from Q1, 2023, and 9% year over year research and applied was flat from Q1 and declined 1% year over year clinical sequencing of clarity growth remained strong up 6% from Q1 and 23 <unk>.
And year over year.
As a reminder, we believe this data is a useful reference that shows the general activity trends across our installed base and is directionally correlated with revenue over time, we have been providing this information on the basis of number of sequencing runs but in the future. We will disclose these metrics in terms of gigabases sequenced to better reflect.
Activity trends given the significant increase in output per run enabled by <unk> X and next week, one K two K sequencing instruments revenue for core Illumina of $193 million grew 2% year over year.
Stronger than expected shipments of an overseas X more than offset the anticipated decline in always say 6000 shipments globally and next week $5 50 placements in China.
As well as a decrease in my seat shipments as customers transitioned to <unk> <unk>.
We continue to see strong demand for <unk> <unk>, two came from new to illumina customers with shipments growing 8% year over year.
[noise] alumina sequencing service and other revenue of $134 million was up 7% year over year, driven primarily by higher instrument service contract revenue on a growing installed base, partially offset by lower contributions from co development partnerships.
Moving to regional results for core Illumina, all regions continued to be impacted by tighter funding and budget pressures that are affecting customers project planning and purchasing behaviors. Additionally, all regions faced the impact of high throughput customers transitioning to novo seek X, where we saw customers reduce obviously 6K consumables purchases.
Before they are fully ramped up activity and obviously <unk> as Chuck mentioned, although anticipated. This effect was magnified by the larger than expected number of obviously X deliveries.
Slower than expected ramp of these instruments coming online in Q2.
Continued global demand for and obviously X instruments and a stronger than anticipated supply in Q2 helped offset these factors.
Strong momentum in clinical also continued across the Americas, Europe , and EMEA with consumable shipments to clinical customers in these regions growing just under 20% year over year.
Europe also benefited from the <unk> reimbursement decision in Germany last year, and the National <unk> program in the Netherlands.
Americas revenue of $623 million was down 2% year over year, and Europe revenue of $303 million grew 11% year over year or 14% on a constant currency basis.
EMEA revenue of $118 million declined 10% year over year or 6% on a constant currency basis, which included a 14 percentage point impact from sanctions affecting our ability to conduct business in Russia.
As a reminder, these regions also continued to be impacted by the slowdown in COVID-19 surveillance year over year, Greater China revenue of $115 million represented a 3% decrease year over year or a 1% increase on a constant currency basis.
In addition to persistent macroeconomic and geopolitical challenges that are impacting this region revenue was negatively impacted by the local competitive landscape, particularly in met throughput moving to the rest of core alumina P&L.
Corn alumina and non-GAAP gross margin of 67% decreased 280 basis points year over year, primarily driven by lower instrument margins. Due to then overseeing X launch, which is typical in a launch here as well as less fixed cost leverage on lower manufacturing volumes and higher field services and installation costs.
Core illumina in non-GAAP operating expenses of $531 million were up $12 million year over year, primarily due to the full year impact of our head count growth in 2022.
non-GAAP operating expenses were lower than expected due to the acceleration of our expense reduction initiatives and lower performance based compensation.
As a result of the above core Illumina non-GAAP operating margin was 21, 2% in Q2 2023 compared to 24, 9% in Q2 2022.
Transitioning to the financial results for granite.
Royalty revenue of $22 million for the quarter grew 83% year over year, driven primarily by accelerating adoption of gallery Grail non-GAAP operating expenses totaled $174 million and increased $18 million year over year, driven primarily by continued investments to scale <unk> commercial organization.
Moving to consolidated cash flow and balance sheet items.
Cash flow provided by operations was $105 million.
Second quarter 2023 capital expenditures were $47 million and free cash flow was $58 million.
We did not repurchase any common stock in the quarter. We ended the quarter with approximately $1 $6 billion in cash cash equivalents and short term investments as Youre aware, we have $750 million in convertible debt that matures. This month. Additionally on July 12, 2023, the European Commission and post a 430.
2 million Euro fine on alumina due to the completion of the Grail acquisition during the pendency of the European Commission's review.
We plan to issue a guarantee and defer the payment of the fine pending the outcome of the appeal of the EU General courts ruling that the European Commission has the jurisdiction to review with the Grail acquisition.
Moving now to our 2023 guidance, we now expect full year 2023 consolidated revenue to grow approximately 1%, including core Illumina revenue. That's approximately flat with 2022 as a reminder, these ranges include anticipated reductions from corporate surveillance of approximately 200 basis points.
The impact on our business from sanctions on Russia of approximately 100 basis points as well as the year over year negative impact from foreign exchange rates.
Rail revenue is still expected to be in the range of 90 million to $110 million for 2023.
For fiscal 2023, we now expect core Illumina sequencing instrument revenue growth of approximately 3% year over year, reflecting our higher <unk> ex shipment expectation, partially offset by capital and cash flow constraints that have continued to impact our customers' purchasing behaviors, including in China, which also had an increase.
Impact from local competition, primarily affecting mill throughput.
We also expect core alumina sequencing consumables revenue to decline approximately 3% year over year, driven predominantly by one or.
The more persistent impact of funding issues and cautious purchasing behaviors, causing project delays.
A more meaningful decrease and nervously at 6000 and sequencing at a planned transitions to novo seek ex in part due to our higher shipment expectations for and obviously X three a delay in the expected ramp of consumables on <unk> X and for a slower than anticipated second half recovery in China.
We now expect annual pull through for and obviously 6000 of approximately $800000 to $900000 for instruments. In 2023 next week $5 50 pull through in the range of 80 to $130000 and pull through from my seek in the range of 30 to $40000. We still expect pull through for next week.
<unk> to be within the historical guidance range of 120 to $170000 and many seek pull through is still expected to be within the historical range of 20 to $25000 per instrument.
With regard to core Illumina sequencing revenue, we expect it to be approximately flat year over year. This includes intercompany sales to grail of approximately $30 million, which are eliminated in consolidation.
We now expect consolidated non-GAAP operating margin of approximately 5% and core of alumina and non-GAAP operating margin of approximately 20%.
Our revised operating margins reflect our lower revenue expectations for the year and lower gross margins given lower manufacturing volumes and fixed cost leverage. These impacts are partially offset by acceleration of our $100 million plus annual run rate expense reduction initiatives spanning head count real estate and other costs that Chuck mentioned.
Earlier.
We now expect our non-GAAP tax rate to be approximately 41% for 2023, which continues to include an approximately $75 million tax expense impact from R&D capitalization requirements.
Although the non-GAAP tax expense impact of R&D capitalization requirements in dollars Hasnt changed the impact to our effective tax rate in 2023 has increased as a result of our lower earnings.
Lastly, we now expect non-GAAP earnings per diluted share in the range of 75 to 90.
For 2023, which continues to include dilution from <unk> non-GAAP operating loss of approximately $670 million.
Before we go to Q&A I'd like to cover guidance for the third quarter of 2023.
We expect consolidated Q3, 2022 revenue to grow approximately 2% year over year to approximately 114 billion. This reflects a sequential decrease of approximately 320 basis points from Q2, 2023, primarily driven by a sequential decrease of <unk> 6000 consumables.
Customers continue to transition to <unk>.
For the third quarter, we expect non-GAAP diluted EPS of approximately 10 to 15.
Reflecting consolidated non-GAAP operating margin of approximately 4% and core Illumina non-GAAP operating margin of approximately 19%.
I will now invite the operator to open the line for Q&A. Thank you.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone. If you are joining us today use a speaker phone. Please make sure mute function is turned off to allow your signal to reach our equipment. As a reminder, please limit yourself to one question. So.
We can accommodate as many analysts as possible you are welcome to reenter the queue. If you have additional questions.
And our first question will come from Puneet <unk> with Leerink partners.
Yeah, Hi, guys. Thanks for taking the question so.
The Nova seek field challenges that you're having in the market.
Can you talk a little bit about that.
How soon can you fix the challenges what is getting this recovery and what does that mean for the installs in the third and fourth quarter and maybe even 2024 I mean my question. There is does the market sort of freezes to see if these challenges are resolved before taking on more instruments.
And then on the last days of demand clearly there is.
Significantly more higher dip this year there was a decline in sequencing consumables versus when we look at it the last product launch of note. Six 6000, you mentioned a number of factors, but just trying to understand how much.
That is due to the challenges.
That you are facing in the field and.
Look the noticed because definitely selling despite these challenges so maybe could you just update us on the CEO search as well. Thank you.
Yes. Thanks for the question I've been listening to you guys now for a long time, and it's nice to be able to be part of the conversation so as far as the Nova sneak eggs right. Some of the positives of the launch.
Of an instrument of this magnitude.
Or that we place more instruments and we thought it also has some of the biggest software placements that we've ever seen.
And its revolutionary from the ground up what we did is we underestimated the amount of time it would ultimately take to bring these instruments online, but our technical teams are working with our customers to bring them up to speed as quickly as we can.
Yeah, and maybe I'll jump in a nice to hear from you again, so a couple of things right first.
As you know with any of these launches of this magnitude as you go out into the field and as you start installing yet you'll find some bugs that you have to go results. So what we have seen in Q2 was nothing out of the ordinary.
We have actually already have fixes for the issues that we have seen and are in the process of deploying these these fixes.
To our customers. So it has meant a little bit of delay in our original expectations of when.
These instruments would be what would be fully up to speed.
But it doesn't hasn't changed any of our or our customer expectations on <unk> and I will also.
Urge you to consider that as not all customers that see this right. So some customers are fully ramped up while others you know as they are experienced these issues we are.
Really have all hands on deck to go fix.
Fixing these issues in the field.
The other thing is you talked about elasticity.
And.
In terms of volume increase in sequencing volume increase.
Look we are not seeing any fundamental change to Alaska.
And the issues that you've seen are more related to transition to the X. So what we have seen is because of the larger number of excess installed in the in the area because of that.
We moved up some of the supply of off axis we.
We have seen that the.
Decline in the 6K consumables has been faster and larger than we had expected again. This is the flip side of people really being excited about dx and our ability to deliver more axes.
What has happened in a temporary decline and we expect that you know as we ramp up fully on the on the excess that that volume will come back on in terms of X consumables about what Youre seeing now is this timing gap that we have between those two events.
You know and you said something about I think it was you know whether these challenges on the X are are continuing are they will cause a stall in the market actually they haven't caused a stall in the market. We have seen demand from the X and our late stage pipeline continued to ramp up we are as Chuck mentioned in his.
It is.
Our prepared remarks that we have seen the X actually enable experiments and <unk>.
Solutions that were not hitherto possible. So we do see continued interest in the AG and the continued interest in doing things that.
Were not possible before.
Chuck I'll turn it back over to you to for the CEO search.
Regards to the CEO search the board is actively searching for a new CEO search includes both internal and external candidates. There have been really encouraged about the outstanding quality of candidates, we're seeing but of course, you know that the detail. The board's process. On this are confidential, we'll be able to update you as soon as we can.
And our next question will come from Dan Brennan with TD Cowen.
Thanks, guys. Thanks for taking the questions.
So maybe a couple here packed into one I guess, the 25 billion flow cell is that still on track.
Will that chip given some of the issues that you've cited.
Second part, China, China actually grew in the quarter, but I know you called out some pressure there so kind of what's baked in now for China in the back half of the year.
Third part would be you referenced customer challenges throughout which I haven't seen a broader tool spaces at a really challenging second quarter, but that said the academic and government end market has actually been pretty robust outside of China. So I'm wondering if you can discuss a little bit where are you seeing these challenges and then the final point would just be on the Nova seek consumable.
Pull through cloud and you mentioned customers are switching faster over to the X I guess, how do we get comfortable that you're not seeing some either competitive impact or some dampening of utilization I guess.
Kind of what was different this time around do you think in terms of your forecasting.
Versus you didn't count management forecasted during the last cycle. Thank you.
Yes, Dan So I think first we continue to prioritize our investments they're proprietary.
Terry and we still continue to focus on.
The differentiation of products, we probably have the biggest and the best proprietary pipeline in the industry and we continue to lean on it the 20 <unk> flow cell remains on track for launch in the second half of 'twenty three we continue to push forward on the alumina.
The alumina CLR enrichment assay.
Particularly one that's particularly compelling when youre using it with the 25 year low. So we continue to move forward on the ex leap SBS chemistry for Nexium <unk> and we're gonna have future offerings for emerging markets for things like proteomics, multi omics and spatial.
Yeah, maybe I'll jump in on.
China right. So yes, we did see like other companies.
The slower than expected recovery in the second half of the year remember, we had expect to China in the first half of year to be.
Somewhat soft and recovering from the Covid challenges in than we had expected an acceleration in that recovery in the in the second half of the year, we do not currently see that happening both because of some of the.
The challenges that you've seen in the broader economy in China, but also for us.
From a increased competitive intensity that we're seeing in China in the mid throughput and low throughput.
<unk>.
I think with respect to.
I'm sorry, your second part of the question was on.
The.
Yeah, everything ex China, right. So there I'd say its a little bit of a you know I don't think the situation is.
Dire as it was in last year. It was more what we are seeing is a little bit of conservatism given the economic uncertainty.
In the.
The speed at which people are coming back online or approach. It things. So we have seen a little bit of lengthening of cycles in terms of purchasing behavior a bolt on.
Our instrument side permits Rupert and low throughput and also on on some of the consumables.
As activity as I indicated remains strong, but it's just that.
The any new newer projects or new instruments that are coming in are slower than we had expected our win rate and we track this pretty closely in terms of both mid throughput and of course on the high throughput side.
Main tie in fact that picked up slightly compared to Q1 and Q2. So again I think it's more that it's more of a lengthening out of cycles and purchasing cycles rather than any.
Anything related to competitive intensity on those fronts.
And then sorry, I just want to make sure I'm hitting our thing so customer challenges yep.
Yeah, and then on the X. The issue is not competition at all right. We as I indicated I mean, we are seeing continued strong interest and strong interest from of course are existing customers, but also.
New newer customers or people that are moving up from.
From mid throughput.
We continue to see that.
Our ability to actually deliver on the instruments as is.
No.
Continuing to continues to maintain that interest.
And then.
In terms of its Chuck mentioned right in terms of what these instruments are enabling theres a whole new set of experiments that are on a larger scale going forward again. This is a lead indicator for us obviously people have not ramped up on the ex slowly but it is a lot about transitioning to the <unk> and being able to take it.
Manager of the many capabilities that it's providing beyond just the price aspect of it right. So the the dragon onboard the faster capabilities the simplicity of the workflow.
Obviously, the AR the ambien ship reagents, so theres a lot that goes into that beyond just the focus on Oh, it's going to help us with the.
The lower priced <unk>.
And our next question will come from Dan areas with Stifel.
Good afternoon, guys. Thanks for the questions George Deep, obviously quite a few moving parts here on the top line and the Opex line.
It looks like what Youre doing in terms of cost reduction and expense management as part of a multi year effort.
Yes, given where this year is headed how are you thinking about op margins next year for the core business relative to the 25% target that you talked about last quarter.
Yeah, absolutely thanks for the question.
So a couple of things right. So one you're right. We are we started off and as we committed to in our in our Q1 earnings call.
We started off a broad look at our cost structure and are actually at the end of Q1, we proceeded with beginning a cost reset that we have executed on and actually have taken out on a run rate basis more than a $100 million annually.
Annually of cost.
Your.
During the second half of the year just given.
Some of the uncertainties in the broader economic space, we continue to keep a very close eye.
I on managing expenses and being very careful about allocating expenses to the highest return areas, including the innovation areas that are.
That Chuck talked about.
Given the challenges we were having this year, obviously, we acknowledge that.
Getting to.
Margins next year is going to seem like a stretch, but we remain very committed to the planning for and delivering on those margins and that's the way we're moving forward.
And we have a question from Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question.
I had a two part question.
Mostly on the guidance.
Here.
You're I think for third quarter, you said, 3% comps for the fourth quarter look.
Pretty easy now historically when I looked at your sequential revenue ramp from second quarter, its always been up and I looked at your second quarter trends sequentially in instruments.
Consumables are up you.
Pull through per box is up.
China was up.
So if anything incremental.
Headwinds, if we should be thinking about for the back half and why youre back half Shouldnt follow historical patterns and I think a related question here.
You mentioned 800 to 900000 pull through on the lowest 6K I think there's been some concern the pull through on a.
Noah seek ex perhaps might be lower because of that.
The lower sample <unk>.
This point, maybe can you just walk us through your assumptions around pull through for the NOAA ask could we perhaps see.
A rebound because I'm, assuming inventory levels here for customers are pretty low and they need to restock.
Well Roger good to hear from you and a that was a long multi part questions. So let me let me try to get to unpack some of that right. So first of all for the full year guidance given that it has come down the components roughly fall into three categories about 25% of the.
And guidance really comes from China, and as I mentioned earlier for China. That's a two part thing we are seeing a slower than expected recovery in the in the larger economy, including some liquidity challenges for mainly our clinical customers.
And we are seeing a higher competitive intensity that affect the mid throughput and low throughput segments. That's 25% of the other 75% is roughly equally split into two buckets. So one part is around.
Around the transition to the accident and the you know.
The gap, we are seeing in terms of.
The high throughput consumables right and this is a issue of the 6K consumables going down pretty rapidly as people are planning to transition to.
To the extent again exacerbated somewhat by the larger number of exits we are delivering and the other part is a slightly slower than expected ramp up on the full utilization of the X. The other 50% of that 75% is coming from some of the custom.
Customer conservatism that we are seeing in terms of.
Longer sales cycles, and a slower than expected recovery on.
The board right, but across beyond China.
So now in third quarter versus.
Second quarter, sorry, second quarter versus the first quarter, and then third quarter versus second quarter.
So we did see a ramp up from first quarter into second quarter across many dimensions, obviously, we shipped more excess that we saw.
Ill jump on the instrument side, we did see a healthy ramp up on our <unk>.
<unk> consumables, primarily driven by the by the.
Our clinical segment and Youre right, we did actually see a jump from Q1 to Q2 in China, but that was expected given China was really depressed for us and other companies in Q1.
Moving on to Q3, what Youre seeing in some of the.
Sequential ramp down there are two big reasons for that one the aforementioned.
<unk> consumable reduction is going to hit.
Sort of a local maxima there.
Of the larger transition expected to the X.
Shipping more xs.
That impact on the fixed get consumables is going to ramp up and we don't yet have a full ramp up on our X consumables, yet right. We expect that in Q4 and I'll come back to that and the other pieces, we do expect China to actually.
<unk> be down slightly from Q2 again because of the expectation that.
The recovery is proceeding unfortunately more slowly than we had expected and then the last piece around that is just we do expect Q4 to be up significantly in Q4 as the first quarter you actually start seeing the X consumables come in.
You see our traditional ended the year ramp up in some of the spend from company. So you are still seeing that and that's built into our guidance.
The last thing you mentioned was about pull through and put through by the way. We only we have not given you pull through on X. We as with all new instruments, we will only come out with that once the.
The instrument ramp up has stabilized so we do expect there given the interest in <unk> and the kinds of.
Co.
Cohort studies and experiments that our customers are telling us they want to do on X, we do expect that.
Our initial assumptions on pull through.
Still justified on the <unk> 6000, which is probably what you were referring to.
We are we have called down our pull through numbers were this year, but that's that is really driven by the transition to <unk> in the larger than expected impact of that transition that I've talked about.
And we'll take a question from chaos Savant with Morgan Stanley .
Hey, guys good evening.
One Chuck for you on the on the leadership changes you are.
Shall I do feel free to chime in as well.
You know Dan asked about sort of margins and your commitment to 25% and you called out sort of stretchy, but something that just certainly committed to would that sort of.
Claiming apply to your mid teens growth that you talked about at the analyst day as well for core Illumina and Chuck for you on the leadership changes I mean beer.
Sort of the CEOC, obviously, the CTO and CMO search is underway as well.
Any any color you can share there on the top process behind that.
And then on the on the base business itself on the Nova seek placement CRM for the X clearly came in I think it was 28 to 30 units above at least where we were.
But instruments sequencing instrument revenue was beat us by only about 5% to 6% rate. So the question really is are you seeing more aggressive discounting I mean is that something that loopnet is pushing through in response to the macro environment, you called out sort of BG I I'm starting to.
<unk> be sort of competitive in China, but just any color on just the pricing dynamics on the instrument side would be helpful. As well. Thank you.
Yeah. Thanks, Thanks for the question.
And on the executive team and on the process here. So I think the first thing we wanted to do is just both thank Alex and Phil for all the things that they've done for Illumina.
With Alex.
What we know is that.
He's moving onto new role he will be taking the CEO as another in another company.
I think that we should be really proud to see the kind of leadership that we grow out of Illumina. So Alex started with illuminate went over to Grail came back to Illumina and now he's going to land as the CEO and we're all looking forward to kind of where that's going to be.
We have a really deep bench in our R&D program and it's really it's really heartening to see employee number for Steve Bernard who is the first scientists the company ever hired bringing him into that role. He knows the he knows the technology. He knows the team and you will be able to seamlessly.
Pick up where Alex left off.
I'm, the Chief Medical Officer, we're going to take some time and look at that organization, we're going to evaluate where we are on the clinical side and on the medical side, our content our commitment to our clinical customers our clinical markets on our clinical programs continues and we will open up that sure.
Search after we have some time to examine exactly where that organization.
And what we need.
Yes.
Thank you are picking up on your other questions.
First of all in terms of margins and the implied.
Long term growth and mid teens.
So look the long term growth in mid teens by the way our expectations on that have not changed right and that was as you know underpinned on two things one a large and growing market that Ngls is still underpenetrated in and the ability then.
Bye.
Our innovations are addressing the core needs of that market for.
For Ngls and Illumina to take an ever growing share and that manifests itself in the sequencing volume growth along the three dimensions that I'd mentioned earlier first one ever increasing number of samples again more cohorts in things like spatial and and <unk>.
Single cell really driving more of that the increasing number of analyses per sample. So again, that's that's really being driven by <unk> being able to handle more of the multi omics side of the questions that our customers are asking and lastly, just the higher sequencing intensity rates or as you move towards larger.
Panels as you do more.
<unk> and liquid biopsy or things like MLD.
So all of those remain intact I think wire.
We are really looking for in the next.
Year or so rate is as as ex kind of comes online and enables a lot of these.
Moves into things.
We talked about how quickly does that does that ramp take place so but in the long term nothing nothing of what we had guided to.
You know really has changed in our mind and we are looking forward to it.
Seeing how the ex kind of evolves us down that path.
You had asked.
Two other questions. So.
One was around Oh, yes, the acts and and the revenue.
Growth on the instrument side, not being that that high so as.
As I mentioned right. So we are very pleased that we were able to deliver on the X and ramp up our supply much faster than expected I think that's a good thing in the long run.
What offset that higher number of Xs.
Was twofold, two things that I mentioned earlier so one.
We did see on the China side that we did have a lower.
Lower than expected number of mid throughput and high throughput.
Mid throughput and low throughput.
Instruments and in general overall.
Given some of the lengthening of these of the purchasing cycles, we did see a lower than expected mid throughput.
And low throughput instrument sales across the world now.
Unlike in as in China, where competitive intensity was a factor in the rest of the world. We actually did not see our win rate go down.
We actually saw it climb a little bit in Q2 also with respect to pricing.
We track this very closely right. So in China, Yes, we are being very surgical about when to use price and given the type of customer, but we did see a.
Price decline overall in China, and the rest of the world are price actually remains on track to where we expected it to be.
And we are proceeding along what we wanted to do with the with using price as a means to encourage.
Faster adoption of our technologies.
And that's it.
I cover all your questions, Yes, I think I covered them. Thank you.
And our next question is from sung <unk> Nam with Scotia Bank.
Alright, thanks for taking the question I'm just that.
Happy to answer your question in terms of the cautious purchasing behavior is that more for your academic customers or is it also across clinical as well and then sorry, if I missed it but kind of roughly what how much what percentage I guess of that you know.
The consumable delay in purchase it is attributable to the launch of the the higher density plenty of IP and kind of waiting for.
Better economics in terms of sequencing. Thank you.
So thanks for the question so no.
Cautious purchasing behavior again broadly ex of China is across both academic and clinical segments right. The reasons are slightly different I think you know a lot of our clinical customers.
Are not profit, making companies right. So they are managing their cash as you would expect them to and while they're they continue to.
To have sequencing at their core we have seen that there are they are purchasing.
Intensity is has come up less less quickly than we had expected it to.
In terms of your second question on how much of a delay is therefore 25 B I don't think there is a delay in 25 years. So what I was trying to articulate is after the reset in guidance for the whole year.
About 25% of that came from the impact from China. The other 75% about 50% of that 75% really came down to.
This impact on high throughput consumables due to the transition on X rates. So that that includes as I said.
More transition in the 6K faster and then a little bit of a delay given some of the issues had mentioned in Q2 that we are.
Already deploying solutions in the field there is a little bit of delay that is that is flowing through in 2023.
And we have a question from Rachel <unk> with JP Morgan.
Great. Thanks for taking the questions and good afternoon, So first up on guidance.
New growth by 750 basis points at the midpoint for the year you walked through a few of the moving pieces between more cautious Capex environment, China and then some of these lower consumables as customers are transitioning to the new platform. So can you just give us a more granular breakdown.
That was 150 basis point cut how is it really broken out across those three areas and then as a follow up I just wanted to follow up on some of the earlier comments on China.
Just mainly relating to some of the stimulus packages, we've heard that there could potentially be another tranche of stimuli for keel. So what are you hearing regarding stimulus packages I know you guys weren't keen matching that benefited <unk>, but did you see anything into Q.
How is stimulus contemplated in guidance for the back half of the year. Thank you.
Yes, so I'm going to go through I mentioned the <unk>.
Breakdowns earliest very quickly Rachel I think about 25% of that guidance reset is really coming from the impact from China off the remaining 75% approximately 50% of that 75 really was coming from the impact on high throughput consumables.
Related to the transition to the X and then the other 50%.
Yes.
Is some of the cash conservatism that we are seeing with customers.
Outside of China, right. So that's roughly how we see the math working out in China first of all there is no stimulus built into our expectations for the second half of the year. It never was in our guidance as well.
As far as we could see the stimulus in the first half of the year benefited more of the industrial segments, which we don't play in and there is no.
We didn't see any any stimulus in the second half sorry, the second quarter either rates or it's consistent we have not built it in and we hadn't initially as well.
Okay.
And our next question will come from John <unk> with UBS.
Hi, Thanks for the question here, maybe just a couple of clarifications. So appreciate confirming the long term guidance in the mid teens. It does sound, though that some of the China headwinds there could be structural with some of the competition increases there I guess just have the long term outlook for that market changed at all and then just a follow up here just on the <unk>.
<unk> long read so any color there on what you're seeing the demand for that launch.
Yes, let me take those in order right. So.
I think you're in for China in terms of.
The long term outlook in China remains.
An important market for us and we are committed to serving our customers in China. There is a.
Our brand in China actually is very positive and again we remain.
It remained committed to serving that market now again, given some of the changes we're seeing.
We will continue to kind of.
Refining our strategy in terms of how we go to market there the kinds of partners we choose.
In order to reach the relevant segments, the highest growing segments of the market.
Better and more efficiently so none of that has changed.
But we continue to observe how China is going to evolve from.
It is current.
Condition is as most other people in our space are.
In terms of the alumina complete long reads side. So the interest on that has been very high right. We have a large number of customers that are taken.
<unk> taken the current.
WGS product.
<unk>.
They are working on it I think really we had always anticipated that the real jump into this technology would come from the enrichment product, which we are.
On track to delivering but that also is coupled because of the economics involved in it.
Really coupled with the launch of the $25 flow cell right. So we are.
That is still coming through towards the end of this year and really pick up.
And two as we go into 2024.
And that concludes our Q&A session.
I will now hand, the call back over to Sally Schwartz.
Thank you again 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 seeing you at upcoming conferences and other events.
Yes.
Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Okay.
Yes.
Ooh.
Okay.
[music].
Yeah.