Q3 2023 Illumina Inc Earnings Call
Please standby.
Good day, ladies and gentlemen, and welcome to the third 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, Vice President of Investor Relations.
Hello, everyone and welcome to our earnings call for the third quarter of 2023 during the call today, We will review the financial results. We released after the close of the market and offer commentary on our commercial and regulatory activity after which we will host a question and answer session.
Our earnings release can be found in the Investor Relations section of our website at Illumina Dot com.
Participating for Illumina today will be Jacob Tyson, Chief Executive Officer, and Jody <unk>, Chief Financial Officer, and Chief strategy and corporate development Officer.
Jacob will provide an update on the state of aluminum business.
Jodi will review our financial results, which include Grill.
As a reminder, grail must be held and operated separately and independently from Illumina pursuant to the transitional 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 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. Its most recent Form 10-Q and 10-K.
With that I'll now turn the call over to Jacob.
Thank you Sally.
Good day, everyone and thank you for joining today's call.
As you know I assumed the role as CEO, a little over six weeks ago.
It is an honor to lead this company.
Hi joined Illumina after more than a decade at excellent where I ran both the diagnostic and genomics group and more recently accidents largest business the life science and applied markets group.
I have long admired illumina for its role in building the genomics market and I'm incredibly excited to be here.
During my first weeks I prioritize getting to know our employees and meeting with several of our customers Illumina has a highly capable team and I have been impressed with their level of passion and commitment to our work.
Both our employees and our customers are driven to move genomics forward.
Like our team I'm passionate about genomics and the role that this feel can play in health care and personalized medicine, particularly in the oncology space.
This is a massive opportunity and illumina will remain the key player even as others into the markets.
Illumina is infrastructure that we've built over two decades now.
Compelling offerings that sets the global standard and our deep commitment to innovation for the future. We'll continue to drive the use of genomics and multi omics around the world.
Turning to our third quarter results.
In Q3, Illumina delivered revenue of approximately $1 2 billion.
Flat year over year or up 1% on a constant currency basis. This was a disappointing result, the macroeconomic environment remains challenging for our industry and for our customers with customers increasingly cautious and constrained in their purchasing decisions.
Despite a lower gross margin year over year tight management of our operating expenses allowed us to deliver diluted non-GAAP EPS of <unk> 33.
Also approximately flat year over year.
While we cannot control external environment Illumina as a management team and I remain focused on supporting our customers and our own operational execution.
Part of my comprehensive review of the business includes reexamining, our strategic initiatives and our targets for long term revenue growth and operating margins, we will lay out our new targets for you later next year.
A key priority for me is to get clarity on the grade situation. Therefore, I have requested and the board has established a special committee to expedite decisions on Grail.
Furthermore, we have retained advisors and are preparing for sale and capital markets transactions, we expect to file a form 10 on a confidential basis with the SEC.
Hereafter, we would contact third parties as investment capital sources, all as potential purchases as our appeals are ongoing.
I know there have been questions regarding our appeals.
<unk> Appeals are not just about grade they provide illumina with flexibility for any divesture grill and also for future transactions.
The appeals will not impact our ability to move swiftly make no mistake I'm here to focus on the core business, which I will talk more about after <unk> remarks.
<unk>.
Thank you Jacob I'll start by reviewing our consolidated financial results followed by segment results for core Illumina 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 review 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 Jacob noted in the third quarter consolidated revenue of $1. One 2 billion was flat year over year and up 1% on a constant currency basis.
Holidayed revenue was down 5% from the second quarter of 2023.
Though we correctly anticipated a sequential decrease in high throughput consumables revenue due to the <unk> X transition, we placed fewer <unk> X instruments than we expected in the quarter as customers purchase constraints led to lengthened sales cycles.
non-GAAP net income was $52 million or <unk> 33 per diluted share, which included dilution from <unk> non-GAAP operating loss of $155 million for the quarter.
Despite our lower revenue non-GAAP EPS exceeded our expectations, primarily due to continued execution of expense reduction initiatives and a higher gross margin than we forecast.
GAAP net loss was $754 million or $4 77 per diluted share, which included goodwill and intangible impairments of $821 million related to the Grail segment.
These impairments were primarily the result of a decrease in alumina as consolidated market capitalization and a higher discount rate used for the fair value calculation of the rail segment.
Our non-GAAP tax rate was 39, 7% for the quarter, which decreased from 43, 2% in Q3 2022 with both quarters, reflecting the impact of R&D capitalization requirements.
The year over year decrease was primarily due to a decrease in our non-GAAP tax expense impact of R&D capitalization requirements, given increased amortization of capitalized R&D expenses.
Our non-GAAP weighted average diluted share count for the quarter was approximately $158 million.
Moving to segment results.
Core Illumina revenue of $1. One 1 billion was flat year over year on both the reported and constant currency basis and included anticipated reductions of approximately seven percentage points from two primary categories. One the decrease in Covid surveillance and the effect of sanctions in Russia.
That together represent approximately three five percentage points.
And to the year over year reduction in China revenue that also is approximately three five percentage points.
Corporate surveillance contributed approximately $4 million in total revenue in Q3, 2023 compared to $28 million in Q3 2022.
Core alumina sequencing consumables revenue of $695 million was down 4% year over year.
The decrease was primarily driven by a 12% decline in sales to research customers.
These customers were impacted by the Nova seek X transition and are reducing nervously at 6000 consumables purchases before they are fully ramped up activity on <unk> X.
Total sequencing consumables revenue was also impacted by the Covid, Russia, and China factor as I noted previously as well as the impact of macroeconomic conditions on customers' purchasing power and project planning.
Lengthened sales to clinical customers, partially offset the decline in research with clinical sequencing consumables growing 10% year over year led by continued momentum in oncology and genetic disease testing.
Turning to sequencing activity.
Total sequencing gigabases output connected high and mid throughput instruments grew 5% from Q2, 2023, and 29% year over year.
We are encouraged by the trends, we're seeing across both research and clinical high throughput customers that have in overseas X installed.
As expected these customers show higher overall growth in sequencing output than high throughput customers that have not yet adopted then obviously ex both on a quarter over quarter and a year over year basis.
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.
Sequencing instrument revenue for core Illumina.
$179 million grew 10% year over year.
Driven primarily by novo seek ex which more than offset the decline in obviously 6000 shipments.
Roque and high throughput instruments was partially offset by the expected decline in mid throughput due to increasing capital purchase and cash flow constraints that continue to impact our customers' purchasing behaviors globally as well as by local competition in China.
<unk> X, we exited Q3 with more than 310 orders since launch.
Shipments of 97, <unk> X instruments in Q3 brought our total installed base to 273 instruments.
Core Illumina sequencing service and other revenue of $142 million was up 15% year over year, driven primarily by higher instrument service contract revenue on a growing installed base as well as an increase in lab services revenue.
Moving to regional results for core Illumina.
All regions continued to be impacted by two key issues.
One tighter funding and budget pressures that are impacting customer purchasing power and project planning.
And to the impact of high throughput customers transitioning to <unk> X as customers continue to reduce nervously at 6000 consumables purchases before they are fully ramped up activity on <unk> X.
America's revenue of $650 million grew 10% year over year attributed to <unk> X placements as well as clinical testing volume driving greater consumables revenue.
Clinical sequencing consumable shipments grew more than 20% year over year.
Europe revenue of $260 million was flat year over year or up 1% on a constant currency basis.
Growth in sequencing consumables was driven by mid teens growth in clinical and strength and mid throughput consumables offset by the decline in covert surveillance and the negative impact of exchange rates.
We're sequencing instruments growth in high throughput due to an overseas X placements was more than offset by a decline in mid throughput instruments.
EMEA revenue of $98 million declined 22% year over year or 19% on a constant currency basis, which included an 11 percentage point impact from sanctions in Russia. The year over year decrease was also driven by softness in Japan due to the macroeconomic factors I mentioned earlier as well.
As the expected slowdown and covert surveillance.
Greater China revenue of $98 million represented a 26% decrease year over year or 25% on a constant currency basis, reflecting continued macroeconomic and geopolitical challenges as well as local competition and mid throughput.
Moving to the rest of the core Illumina our P&L.
Core Illumina non-GAAP gross margin of 66% decreased 290 basis points year over year, primarily driven by product mix and less fixed cost leverage on lower manufacturing volumes as well as lower instrument margins and higher field service and installation cost due to the <unk> X launch, which is typical in a law.
Sure.
Core Illumina non-GAAP operating expenses of $481 million were down $33 million year.
Year over year and were lower than expected primarily due to continued expense reduction initiatives.
As a result of these factors core illumina on non-GAAP operating margin was 22, 5% in Q3 2023 compared to 22, 6% in Q3 2022.
Despite a lower gross margin operating margin was approximately flat year over year due to our proactive cost management initiatives.
Transitioning to financial results for <unk>.
Rail revenue of $21 million for the quarter grew 110% year over year, driven primarily by adoption of gallery.
<unk> non-GAAP operating expenses totaled $161 million and increased $12 million year over year, driven primarily by efforts to scale <unk> commercial and R&D organizations.
Moving to consolidated cash flow and balance sheet items.
Cash flow provided by operations was $139 million third quarter 2023 capital expenditures were $45 million and free cash flow was $94 million.
We did not repurchase any common stock in the quarter.
We ended the quarter with approximately $933 million in cash cash equivalents and short term investments during the third quarter of 2023, the company used $750 million in cash to repay the outstanding principal of convertible notes that mature in August 2023.
Moving now to 2023 guidance.
We now expect full year 2023, consolidated revenue to decline, 2% to 3% from 2022, including.
Core alumina revenue that is down 3% to 4% year over year.
As a reminder, these ranges include anticipated reductions from Covid surveillance of approximately 200 basis points.
The impact on our business from sanctions in Russia of approximately 100 basis points reductions in our business in China as well as a year over year negative impact from foreign exchange rates.
Rail revenue is now expected to be at the low end of the range of 90 million to $110 million for 2023.
For fiscal 2023, we now expect.
Core illumina sequencing instrument revenue to decline, 5% to 6% year over year, driven by capital and cash flow constraints that have continued to impact our customers' purchasing behaviors globally as well as the decline in our business in China.
The decrease from our prior guidance is primarily driven by a lower <unk> ex shipment expectations for 2023.
We now expect to ship between 330 to 340, <unk> X instruments for the year as customers' purchasing constraints lead to lengthened sales cycles.
We also now expect Korlym and our sequencing consumables revenue to decline, 5% to 6% year over year, driven primarily by the decrease in <unk> 6000, consumables as customers transition to <unk> X.
The impact of macroeconomic conditions on customer project planning and budgets the effective sanctions in Russia, the slowdown in corporate surveillance and the decline in our business in China with.
The decrease from our prior guidance, primarily reflects a slower ramp in <unk> X consumables in part due to our lower placement expectations as well as the increasing impacts of macroeconomic constraints.
We now expect core alumina total sequencing revenue declined 3% to 4% year over year.
This continues to include intercompany sales to grill of approximately $30 million, which are eliminated in consolidation.
We now expect consolidated non-GAAP operating margin of 4% to four 5% and core Illumina in non-GAAP operating margin of 19% to 19, 5%.
Our revised operating margins reflect our lower revenue expectations for the year, partially offset by continued expense reduction initiatives. We now expect our non-GAAP tax rate to be approximately 39% for 2023 due to discrete tax benefit recognized in Q3 2023 related to prior year return.
Adjustments.
Lastly, we now expect non-GAAP earnings per diluted share in the range of 60 to 70 for 2023, reflecting non-GAAP diluted shares outstanding of approximately 159 million shares.
Dilution from <unk> non-GAAP operating loss is not expected to be approximately $660 million as Grail continues to manage its expense base in line of its latest revenue outlook.
I will now turn it back over to Jacob for his closing remarks. Thank you.
Before we go to Q&A I wanted to reiterate Illumina is commitment to supporting our customers in this difficult macroeconomic environment.
While we cannot control external factors, we can optimize our own actions to successfully navigate through this period and positioned the company for a return to accelerated growth on the auto side.
I know you're interested to hear our views for 2024.
With the caveat that we haven't finished 2023, we still look at our budget for 2024 hour initial views is that 2024 results will look very similar to 2023.
We don't expect near term improvement to the macroeconomic environment and geopolitical issues have been persistent.
We are encouraged with the early signs we are seeing for <unk> X utilization and the continued rollout of the ex position us very well for the ramp in consumables and overall growth with the market conditions improve.
This is clearly a dynamic situation and we want to be able to develop our views and depth there.
Therefore for 2024, we will not provide guidance before our Q4 earnings call in February.
The main reason that I joined Illumina with my strong conviction about the future of the core Illumina business.
While over the coming months.
<unk> to listen and learn I would also be focused on several key priorities.
First we need to drive our topline as smart as possible in this environment. This means continued placements of the <unk> X and all of our instruments laying the groundwork for increased consumables demand.
Continue working closely with our customers around the world, whether they are integrating new instruments into the workflows, starting new projects or building new test our assays.
We need to keep driving innovation that is highly focused on our customers with choices.
These innovations include automation and sample to answer solutions.
To strengthen our leadership position around the world at the same time, we need to manage our R&D investments with discipline and rigor.
We most recently launched our 25 B rating kit. This was highly anticipated by our customers and unleash the full power of the <unk>.
Third we need to focus our own operational excellence across geographies functions and processes.
Earlier this year, we announced a plan to reduce our annualized run rate expenses.
Our team has executed well and has been able to reduce annualized run rate expenses by approximately $175 million.
Head of our original projection of more than $100 million.
These savings will continue to support flexibility and further investment in high growth areas and our margins.
I'm committed to executing against all of these priorities with a strong sense of urgency we.
We are focused on delivering tangible improvements that support profitable long term growth from illumina and for our shareholders.
I will now invite the operator to open the line of Q&A.
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. Your mute function is turned off to allow your signal to reach our equipment. As a reminder, please limit yourself to one question. So that we can accommodate as many.
Analysts as possible you are welcome to re enter the queue. If you have additional questions again that is star one if you would like to signal with questions and our first question comes from Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question and welcome to alumina.
Mike maybe one question is on the grille, maybe a two parter here.
I think the <unk> divestiture order asked for two five years, if not cash out there what does it mean given.
Given the current Opex spend is like $1 75 billion of cash out clear and I think relates to the debt.
Saw you announced a special committee.
Who is on the special Committee.
It is.
The focus for this community is there any more details on it sounded something different.
Just wanted to understand what is different what ashish.
Yeah, Vijay Thank you very much.
I'm really excited to be here at Illumina and let me start with your second question and then I'll have Joe deeper step and then also on talking about the.
But those two and a half yes means thought.
<unk> discussed here coming into the company I felt it was very important to get clarity on Grail and and it was very important for me to have the support for the border and can make swift decisions to move forward in that pie.
Excited we started a special committee with three of the board members, including and then.
<unk> me that is the sharing of the committees of our three board members and Trust me that will work with the management team and to really walk through all the elements around the divestiture order to make sure. We can make some path decisions, we need to make decisions, which possibly going to follow it is going to be a trade sale or the spin split without without a sponsor and of course there is a lot.
Durations related to that so that's really what the what the special Committee is helping me and the rest of the management team to do.
Yes, Hi, Joe Hey.
So on the <unk>.
Two five years of.
Cash support or Grail, we're still working with the European Commission on exactly what that means in terms of.
Numerical numbers, so im not at Liberty to disclose those details we will come back with that once we have alignment.
But I think as Jacob alluded to right. This is not something that we have to.
Provide all on our own or we have several options now that we've worked with the EC.
Come up with a to have a divestiture order that is in.
In line with our expectation for flexibility.
To use even in the case of a spin or a split decision we can get in a sponsor that can.
<unk>, all or a part of the of the requirement for the drawn out <unk> passport or we can go to the markets and raise that money as well so stay tuned on that one.
And our next question will come from Dan Brennan with TD Cowen.
Hey, thanks, Thanks for taking the questions here Jacob welcome.
Maybe just a last one obviously until we have but maybe a couple of partner so maybe Jacob.
Obviously, you left great job at adjuvant before coming here and certainly we'll be interested to get your view on the growth rate outlook for aluminum when you're ready to give that.
But if you answer to get your view on kind of the overall NGL market and taking the job like thoughts on what type of growth characteristics. You think are reasonable and that market just given the price cut. So just a lot of question on demand elasticity. So I guess first one is on the <unk> overall market for you to view there and then I just had a question on the <unk> specifically.
<unk>.
I understand obviously, there is a lowering the placement number given customer can change, but can you give any color on the orders of the backlog that you have as of right now.
And then the final part would just be on guidance eliminates had a series of kind of guidance reductions a lot of peers are facing the same issues, but you guys have had.
Elongated period of this I'm, just wondering kind of what changes can be made in order to hopefully better set guidance for that.
The risk of these reductions is element going forward. Thanks.
Thanks, Dan I think I would have a judge <unk> also jumping in on some of those elements here, but let me just start by coming here into alumina and my observation both from when I was outside alumina, but also coming in I think that the core business has a tremendous opportunity I think.
That's a lot of of of opportunities in <unk> markets and.
And I think we are definitely through a tough period right now I think the whole life science tools industry is seeing at end and certainly here at Illumina, we not immune for that but the growth rates, even though I will I will spend time here over the next period of time still learning the business and really understand the organization.
So at this point of time I don't have a final opinion about what the what I think is the right growth rate for the business and Bobby committing too, but I would certainly come back later in 'twenty fall and share all of that with you and I'm ready for it but in the meantime.
I think that the overall market is very healthy and that would be a lot of growth opportunities for illumina going forward and then say that some of the findings coming into the company and really digging deep into our innovation engine and what our roadmap look like I'm I'm very excited for the future of this company I think we will.
To pioneer in this area so.
I think on guidance and then Jody.
Joining that he also but we wanted to make sure we will be seeking will also form, especially 24 here that that at this point, we want to be prudent in how we set our it's not our guidance yet but at least how we view 2004 and as we simply don't see any change short term changes in the economic environment and therefore, we felt it was important.
Golf now at <unk> and share our observations, but <unk> do you want to.
Jacob that's why you know on the guidance piece look we made a commitment to you to to come back to you with any read on the macroeconomics, we see and I think.
After that commitment we may have been a little bit.
A canary in the coal mine signaling some of this earlier to Europe, especially this year than others right.
One of the things of course, you did bring up with the elongated.
Lack of growth or reduce growth that we've had.
That is true.
Part of what hit US at the same time as the macroeconomic slowing down of the transition major.
A major transition on our platform, which has hit us.
As customers move from the 6000 through the.
To the expert gap between one eight.
Run down some of their inventory on the <unk>.
Wait to fully ramp up on the on.
<unk>, So you will see that.
Balance out over time, we don't have any doubts on that and then on the.
On the <unk> I want to reemphasize and I think you will have seen this from your channel checks as well.
Demand and interest in the innovation and the capabilities that <unk> brings remains strong I think we are.
We're very excited about the launch of the 25 and I think those of you who attended ASI achieved would have seen our customers' interest in that and the.
The data that's coming out of the other 25 and the improvements that we continue to make on the software really resonate with our customers. So we remain very interested in that.
Yes.
And our next question will come from Puneet <unk> with Leerink partners.
Yes, Hi, Jacob.
Good to have you on board here.
So.
If I could.
Two part question.
The 25 be launch.
Can you talk a little bit about how.
And maybe George you can chime in and talk about.
The transformation is going to be sort of lower over the next couple of months.
You, obviously get a price uptick with the 25, b, but not all customers are going to be able to.
Essentially fill up that flow. So so there is going to be a bit of an ebb and flow. So maybe if you could talk a little bit about that at least.
Qualitatively in the near term and then a bigger competition question Jacob you've seen.
CMS business into other businesses in China.
What do you imagine for China.
So our alumina.
One of the bigger competitors over there how do you see alumina position in China longer term.
And if I may just ask on again on competition why don't you one of your diagnostic customers in <unk> customer pointed out that theyre validating different platform. So.
Again.
What's your view on competition. Thank you.
No. Thank you very much puneet and again I'm very pleased to be here, Let me, let me start with the with the China question, Yes, you're right I have certainly some experience of running businesses in China are very familiar with the Chinese.
China itself and how to operate businesses. There. So what is of course more unique for for Illumina than some of our some of the other life science tools.
Companies is that Illumina has.
At Chinese competitor that had at least good enough secrets and capabilities here, but but China continues to be an extremely important.
Country for Us and.
We are right now working through and in China for China strategy to really be much better positioned in China going forward.
Committing to China, and I think we can actually do really well in China. Many of our customers in China prefer to work with Illumina for what we stand for both quality, but also that we are the number one brand out them.
We will continue to be very strong in China.
Speaking on competition, yes, you're right I mean, the our competition out there as you also know im very familiar with being in a very competitive environment.
And I think that that.
With what Illumina has which I think will serve us extremely well is that we have that very strong brand. We have a very strong installed base.
Almost all payments coming out is based on.
On our technology.
And also of course, what I see internally with the roadmap we have for the pipeline of new products coming out of our innovation capabilities will continue to position us very extremely competitive in this environment, but of course.
I understand and are fully aware that we will be in a very competitive situation forward and and.
I think that just keeps us really focused on our customers and we'll do our best for customers. So.
Im here Im ready to fight for it.
Yes, maybe I'll tag on there, let me start with the competition, we obviously as Jacobs had taken seriously, but also monitor it vary.
Very carefully across the globe through.
What we're seeing out in the field, so I will say outside of China.
Have we seen the competition.
And sure have been what we had expected and obviously with new market entrants here, we'll see a little bit of.
The decline in share but.
It has been.
Outside of China, very much according to expectations.
On the 25 bps.
So let me start by saying.
What we have seen and this is early indicators that when we look at sequencing activity growth measured by Giga base. We are seeing that customers, who have adopted the <unk> have seen a faster growth rate in output and sequencing alpha and customers who have not adopted the X rates. So this is an encouraging sign that <unk> is actually spur.
More sequencing activity at these customers and again, it's still very early days there ramping up.
Theyre validating fully on their on their particular.
Workflows.
But 25, B I think youre right.
It will spur even more capacity and experiments we have heard customers that want to run very large single cell experiments. For example will be very excited about this 25, b and the capabilities that it brings.
So we expect that to play out I think when you get into the dynamics of whether youre running full flow cells are not.
There is a very complex interaction of things that will lead to higher prices per gigabit until we are fully loading of flow cells. So we can get into that offline, but we do expect those dynamics to be very similar to what you saw when you brought on in over 66000, and then some of the other reservoir flow cells et cetera, but I think also Joe deep on just to finish.
On the opportunity that we have seen at least the customers have I've met here and also in the clinical space are very excited with the with the new flow sellers. At this this opens up a new assays new products offering that they havent had before so while it will take them a little while of course to validate and get up and running.
We see many of them right now rushing tool to be first to market with us.
And our next question will come from Dan Arias with Stifel.
Yeah, Hi, guys. Thanks for the question here Jacob just to follow up on the Special Committee that will look at Grail, What's the general timeline that they expect it to be on with respect to reaching a decision and then can you update us on when the Grail team is expecting to see a readout for the NHS Gallery study at this point.
Yes, so I can tell you that we are working as quickly as we can under the framework to look at the options here and I can tell you the IMS.
I'm as frustrated as all of you.
Look forward to get this behind us. So we are looking on very working on very tight timelines at this point I don't want to commit to anything because I want to make sure that I can deliver on my commitment on any timeline yeah. So by the way I also want to share with you that this morning, we got the feedback from the ECJ that they have now put in a date for the hearing.
Our hearing which would be mid December so it's good news and the way that things now are moving forward.
And just on that debt.
That the appeals are important to us obviously for the reason of Grail, but probably as important for ensuring that we have the flexibility for future transactions that we would look into.
So and obviously also we can get rid of the line and so on so that's why.
<unk> continues to be important.
<unk> Grill readout timing I think.
<unk>.
<unk> stated before that.
The final expectation on that at some point in 2024 and they will have.
Early read out as well.
Ordinary readout for that.
And we have a question from Michael <unk> with Bank of America.
Great. Thanks for taking the question.
Welcome aboard.
I guess I wanted to follow up on the earlier question about sort of underlying demand in the market and what gives you confidence in some of the longer term view and I guess I'll phrase. It in terms of your update to the guide here in the third quarter, I mean, youre, citing some of the same macro headwinds that others are in terms of what's going on in <unk>.
China in terms of broader.
Funding concerns and budget tightness.
And you're seeing that sort of weighing on consumables purchases.
<unk>.
But at the same time youre not getting the switchover to the Novo <unk>, because if youre looking at the.
At the order book.
Orders are barely grown between Q3 can you went from $2 60 to 310. So orders were up 50 units in the quarter and you placed 97. So it sounds like there is a ton of demand growing for another ax and yet the number 6000 consumables seems to be really slowing so I'm just trying to reconcile.
All of that I mean, if people arent sequencing on the nearly 6000 because their gear.
Gearing up for the Nova <unk> and you would always see those orders grow so.
How can you confidently state that.
Some of this is that transition between instruments and not just less underlying demand in the market.
Yes, So let me just start again address that.
That we do see the demand in the market space. We also mentioned this overall that we see more gigabases growth rates. So we see definitely there's a lot of activities out there.
Again.
There is no doubt that the.
A long term perspective in this market is very healthy I think what youre seeing is <unk> running through and in a very challenging environment that everybody else is seeing and I think everybody.
Also last year when they were providing guidance they were probably optimistic that things will swing back in the second half an eye everybody got surprised or at least.
But it didn't so therefore, we are we are right now did more prudent in how we how we look out in the future. So I think that's that's one element to it but if you look into the specifics I think Jody can provide little more insight.
I think the there's a couple of things when we look at.
Why is it.
Sure.
Further the slowdown is further impacted by the transition right. So definitely Michael there is an element of the overall macro slowdown.
Two things I will tell you about the transition right. So we look very carefully at high throughput customers that.
Have purchased Dx versus those that have not purchased <unk> and we see definitely that the the.
6K consumables slowdown is much more pronounced these customers that have bought Dx right. So that gives us a very good control mechanism.
Isolating the impact of transition versus the broader macroeconomic trends.
And again, you know realize that they are still ramping up with the with the <unk> and the 25 be really four for many of these customers that are early adopters there really the higher.
Users the higher.
Output users for.
For the <unk> right. So you will see that transition coming the ramp up on the.
On the X consumables coming, especially after the launch of the 25, but it will take them a few months to get up to full capacity once they have validated the their workflows.
And our next question will come from harsh Kumar with Morgan Stanley.
Hey, guys, good evening and Jacob welcome to Illumina.
I had a couple of questions for you you're starting on the on the grille side of things look.
It looks like Youre expecting this ECJ decision in mid 'twenty four.
Can you just walk us through the implications of that in terms of what the committee can really do ahead of that timeframe.
And then beyond the ongoing sort of court cases, and figuring out how to divest is asset how are you thinking about monetizing the data value that is embedded within Grail is that an active discussion thats being had at the board level within this committee as well.
And the final part of my question really is a broader one on core illumina.
Where are you in terms of the key leadership roles are those do you feel like you have a settled scheme, yet or could we see some sort of significant changes in the months ahead. Thank you.
Yes, So let me let me start by it.
Great situation and I think I've mentioned before and that's why I put the permits in place all speculating places debt that we have the European divestiture order and obviously with <unk>.
Still one of the Appeals, we will do everything within the framework to move as quickly as possible is also mentioned in my model.
In my remarks is that as soon as we have filed the.
Form 10, we will go out there and start to talk to a potential acquirer and so on so we're also looking for the spin and so on so we are moving as quick as we can within that framework.
And we.
Yeah again, we remove as much as we can here. So there's really nothing that holds us back from them.
The appeals really wants in parallel so there's nothing that prevents us from moving as quick as we can within that.
So I think that.
That's if you look at the monetization of grade on Ono Jody do you have any thinking about that.
I think mostly it's you're talking about rail data here. So this is one of the options that obviously the committee will consider and we will consider as a team but it also really depends on the divestiture option is chosen and what we.
What we agree going back and forth with the European Commission.
So it is one of the one of the things that is absolutely in consideration of the various options that.
Jacob mentioned that the committee is going to bring out yeah. Yeah and then the last question I think was on the leadership team and I will I will put it more broadly, saying that I will be performing.
Comprehensive business review over the next period of time as again I've been have 40 days and I'm really impressed with the team and the talented people we have in the organization, but out of course keep you updated on what my thinking is why we move forward here in 'twenty four.
And we have a question from Dan Leonard with UBS.
Thank you and Hello Jacob.
I don't know.
Yeah.
Now that Youre.
Sort of transitioning to maybe a bit more of a.
I'll hand to mouth demand cycle for the <unk> given that you don't have much backlog left I was hoping you could elaborate on what the pipeline looks like any metrics you can offer and is it possible you could quantify.
How much is the sales cycle lengthening is it double what it used to be some different multiple just any anything you can help us contextualize that.
I think that and again I would like to invite Joe Steven to provide more insights on where we are but I can say generally speaking the sales side of things.
S is extend that are quite a lot from what we used to not not only because it takes time to make the decision. But also you know to get us through all the levels that there is much more scrutiny on all levels in the decision making.
And we've seen that I mean, do you see that in alumina, but I think thats a general.
The thing that is happening in the industry right now, but J D. Do you want to go down.
Want to corroborate Jacob what you said right, we see strong interest in <unk> and obviously with the launch of the 25 that has perked up even more.
The pipeline continues to have one hundreds of opportunities there right. So we're not we're not suffering decline in the pipeline we continue to.
To add opportunities with the pipeline what has been because of the macroeconomic situation.
A bit more challenging for us is converting those.
That pipeline into orders as quickly as we had imagined right. So that is the the lengthening of the sales cycle that.
You talked about and we expect that that will continue.
For us and for others for a little bit of time into the future here right, Joe macroeconomic conditions return, but.
There's no doubt that they are not it's not the demand is shifting to some other technology or some other instrument. It is still very much centered on the X and we still continue to have conversations with our customers to get them there and once they have bought it to really ramp them up and get them ramped.
A ramped up as quickly as possible so that he can pull through.
The consumables as quickly as possible, yes, and again I mean.
J D was saying we have a healthy pipeline and just ask on evidence that this is moving we just here over the last few days. We've received in that 10 10 order 10 pieces over say 10 instrument order on Alf X.
So from one of our biggest customers. So we are definitely seeing that.
Yeah.
Really customers, we like the <unk> and can really see that it can be utilized very nicely now Jacobs. That's a good point, that's a fleet expansion order. So they have had experience would be accurately doubling down right. So.
And we have a question from Sanjay <unk>.
With Scotia Bank.
Hi, Thanks for taking the questions.
And welcome to take up just a quick one on Grail kind of what's the key driver of the guidance updated guidance being at the low end at the higher range. Thanks.
Yeah, I can handle let's say so again, it's mostly two things for me.
They did have.
Particularly or some.
Challenges with their pdx revenue. This is the pharma services revenue and then gallery sales are while they are growing nicely have been lower than their their initial expectations rates in both of those have impacted it.
But still a healthy growth so very healthy ROI are you seeing that at a 100% ish.
And our next question comes from Kyle Nixon with Canaccord.
Hey, Thanks Welcome Jacob two part question first of all on growth second encore on grid off funding in conjunction with the divestiture. If it is a capital market transaction company is going to need to and it appears cash I think that was touched on earlier you could provide that would be an equity raise or debt issuance could you just walk through what you are in fact options are to produce a capital if you don't do that.
That offering and then on the core business you guys mentioned the initial view on 2024 as I Didnt look similar to 212 or three does that mean that revenue is going to be flat year over year for the third year in a row and then maybe you could just comment on orders and placements for next year that could could placements grow in 'twenty four thank you.
Yes, So let me let me start by the second question here and again, we will come out with full guidance in our Q4 hundred 23 call in February but I am just Yang you with the initiatives we have on 'twenty four right now and due to the macroeconomic environment, we wanted to and we don't see that change right now.
If it changes during 'twenty four obviously, we will see more momentum in the business, but I felt it was important to share with all of you right now is on how we see.
Yes.
More details behind it but we still working through the rest of this year and we're still finalizing the 2000 and of course 24, but it also so it's too early for me to share details about that.
Here, but what I can tell you as we said before is that we still have a strong pipeline on X, particularly end and we expect.
And we just seeing that the sales cycle is taking longer than we expected, but you should actually see that the.
That the consumables is starting to pick up in 24 hours.
And on the grille I think I've mentioned this earlier look there are several options now on the table that.
We could we could.
Help.
Pay for or.
For the two five years of.
Funding requirements right. So for example.
If you went for a spin there are options around a sponsored spin where a sponsor correct.
Put in a fair chunk of the money on fair all of some or all of the.
The money that is required for that funding. The other one which is more of a capital markets transaction, which is more of a split kind of option, where you could go and raise.
Money and capital markets for <unk> and IPO market for Grill. So we're looking through and working through those various options. They are of course dependent on.
Specific market conditions and interest in <unk> from private private placement. So we'll keep you posted on that as we go out.
To the market and consider those options.
And we'll take a question from Catherine Schulte with Baird.
Hey, guys. Thanks for the questions and welcome Jason.
I guess just on your comments on 24, when you say results might look similar to <unk> 23.
In that case, I guess, how do you view core Illumina op margins with those also look similar to the 23 year given some of the cost reductions you guys have talked about keeping cash room for improvement there.
Yes, thanks for that so I think right now that Illumina have a wonderful model actually I think we have really strong operating.
Gross margins. So obviously with growth we can really fueled that to the bottom also but in a flat environment.
And with of course.
We are seeing that more challenging right now we are we expecting to be flat both on top line and on the bottom line.
Yes.
I think youre right, we do expect to see an improvement in gross margins next year, obviously with more durables mixed in there.
Of the cost.
Cost reductions that we have made this year I just want to remind you that some of that.
Substantial portion of that has already been recognized this year, so there won't be incremental.
Through next year as we go through.
And then offsetting those two positives as we do expect that.
The variable compensation.
Yes.
<unk>.
Sort of.
Our rationalization and year on year comp on that will be.
We will eat away into that goodness.
<unk> had and coupled with merit increases in inflation rate, so and again, we did not pay executives the stock based compensation and.
Variable compensation this year as our performance has not been up to par. So we do expect that that will come back.
Into next year as we correct some of that but I think on that I think.
<unk>.
Everything I see as I mentioned also the gross margins are strong in the company, but there's a lot. We can do to continue to improve that so I don't see anything that is for me. It is coming in here see there's any difference in the thesis about illumina going back to what it's been historically historical margins and we will work on that I think historically.
We have been the.
<unk> has been this will come through growth and clearly we need growth to drive some of that but we would also really focus on operational excellence to to build that going forward.
And our next question comes from Conor Mcnamara with RBC capital markets.
Hi, guys. Thanks for taking the question and Jacob welcome to San Diego.
And just if I look at kind of what your what you've said about 2024.
From pre pandemic levels through 2019 to 2024 that would imply.
An annual growth rate on the core business of about 5%, which is roughly in line with the overall life science tools market. Despite the fact that you guys have consistently spent about 20% of sales in R&D. So if I'm, an investor looking at Illumina issue and I think this is a.
And EBIT margin expansion story from here, where you bring R&D down in line with peers or do you think that.
You guys can't you can drive the return to growth above historic life Science tools Brook levels.
Yeah, I mean again I want to be careful on coming with too. Many comments right now 40 days into my work here. It's my job here, but I think I still believe that Illumina has a better growth opportunity than many of the other life science tools company and I will come back and give you more insights when I'm ready for it in the later in <unk>.
<unk> 24, but I don't think that illuminate isn't a place where it's a it's in the level of many of the other companies right now, but it's too early for me to give you a clear guidance, but.
So wait and see.
And our next question will come from Rachel sandstone with J P. Morgan.
Great. Thanks for taking the questions and welcome to Illumina Jacob.
So first up I, just wanted to ask on corner aluminum margins.
To the earlier question, specifically it looks like that implies <unk> margin step down for core alumina, but also given the lower placement embraer mix should be more skewed towards consumables and kept upon <unk>. So is there anything else that we should look at the one time perspective or anything else on the puts and takes on that margin implied for <unk>.
Sandeep you want I'll take that yes, so Richard a couple of things right. So you will see margins and operating margins decline. We are seeing a step down in revenue from Q3 into Q4. So that's one element of that the second element is gross margins are impacted for several reasons right. One that we do see every.
You see a reduction in volume you have less absorption of fixed costs, you have that flowing into it.
Pieces around.
Yes, we are seeing some shift from instruments and the consumables, but we are seeing a reduction because of the transition effects of <unk>.
<unk> 6000 consumables.
Which are highly profitable and so youre seeing a little bit of margin gross margin.
Decline because of that and then the third is we have some components of strategic deal revenue that we have coming in in Q4 versus Q3 and that is also pulling down our gross margin. So those three components are really whats what are impacting.
The.
Gross margin component and then the operating margin side I think we obviously are getting some of the benefits of.
Of the cost action that we saw but we did have some movement of.
R&D specific timing investments that moved from Q3 into Q4, so that is taking down or not.
Our Q4 operating expense.
A little bit compared to what we had in Q3.
Thank you and that does conclude our question and answer session I will now hand, the call back over to Jacob Tyson for closing remarks.
Thank you everyone. As we finished the year and move into 2024 I want to reiterate the great Foundation that we have here both in the infrastructure to be built and into significant markets that we serve it is clear to me that there is a tremendous opportunity to create value for our customers and our partners worldwide.
And of course for our shareholders. Thank you again, we're looking forward to see you at upcoming conferences and other events. Thank you.
Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Okay.
Yeah.