Illumina Q3 2022 Earnings Call Transcript

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November 3, 2022

Key Takeaways

  • Illumina reported Q3 revenue of $1.1 billion, up 1% year-over-year (3% constant currency), with non-GAAP earnings of $0.34 per share and a GAAP net loss of $3.8 billion due to a GRAIL goodwill impairment.
  • The newly launched NovaSeq X Series has exceeded expectations, with 50 orders in hand, a 170-unit advanced pipeline, and plans to ship 40–50 units in Q1 2023 and over 300 units for the full year.
  • Sequencing consumables shipments grew across platforms: NextSeq 1 K/2 K orders rose 40% YoY, low-throughput instrument shipments increased 13%, and consumables for clinical, oncology, and genetic-disease testing climbed 5%, 9%, and 11% respectively.
  • GRAIL expanded its clinical reach through partnerships with Carum Health and John Hancock, and its PATHFINDER study demonstrated Galleri’s multi-cancer early detection test doubles cancer detection versus standard screenings with a ~40% positive predictive value.
  • Due to ongoing macroeconomic headwinds, Illumina now expects 2022 consolidated revenue to be flat to up 1%, core instrument revenue slightly down, flat consumables revenue, a consolidated non-GAAP operating margin of 9.5–10%, and EPS of $2.35–2.50.
AI Generated. May Contain Errors.
Earnings Conference Call
Illumina Q3 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the 3rd Quarter 2022 Illumina Earnings Conference Call. At this time, all participants are in a listen only mode. Half of the speakers' 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 Sallie Schwartz, Vice President of Investor Relations.

Speaker 1

Hello, everyone, and welcome to our earnings call for the Q3 of 2022. During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity, after which we will host a question and answer session. If you had not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at alumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer and Joydeep Goswami, Chief Strategy and Corporate Development Officer as well as Interim Chief Financial Officer. Frances will provide an update on the state of Illumina's business and Jordeep will review our financial results, which include GRAIL.

Speaker 1

As a reminder, pending the outcome of the European Commission's litigation into Illumina's acquisition of Grail. The commission has adopted an order requiring Illumina and Grail to be held and operated as distinct and separate entities for an interim period. Compliance with the order is monitored by an independent monitoring trustee. During this period, Illumina and GRAIL are not permitted to share confidential business information unless legally required, and Grails must be run independently, exclusively in the best interest of Grails. Commercial interactions between the two companies must be undertaken at arm's length.

Speaker 1

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.

Speaker 1

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's most recent Forms 10 Q and 10 ks. With that, I will now turn the call over to Francis.

Speaker 2

Thank you, Sally. Good afternoon, everyone. Illumina delivered revenue of $1,100,000,000 quarter, up 1% year over year and 3% on a constant currency basis and in line with our expectations Despite Deepening Macroeconomic Challenges. Looking at our Q3 performance across platforms, in high throughput, we shipped 65 NovaSeq 6000s in Q3, down from the prior year, in line with our expectations. We had a fantastic customer response to the NovaSeq X Series launch at the Illumina Genomics Forum, where we reached more than 12,000 viewers in our innovation roadmap sessions.

Speaker 2

Labs are excited by NovaSeq X's industry leading power, efficiency and cost effectiveness, and they love, in their words, its unexpected and revolutionary sustainability breakthroughs, including ambient shipping and a 90% reduction in packaging weight and waste. Customer traction for NovaSeq X is exceeding our expectations. We already have an advanced pipeline of more than 170 instruments in addition to 50 orders that we have already received. Our manufacturing scaling is proceeding well, and we expect to ship 40 to 50 NovaSeq X units in Q1 2023 and over 300 units in the year. At the Illumina Genomics Forum, we also launched the NovaSeq 6000Dx, the first ever FDA registered and CE Mark IVD high throughput sequencer.

Speaker 2

We're excited to now provide DX offerings across throughput spectrum. In mid throughput, we saw record NextSeq 1ks2ks shipments, which were up 40% year over year. This increase was driven by accelerated adoption of multiomics, primarily in cancer research and cellular and molecular biology, both by new and existing customers. And as part of our ongoing innovation roadmap, our launch of XLEAP SBS chemistry on NextSeq 1ks2ks remains on track for 2024. Finally, low throughput shipments were up 13% year over year.

Speaker 2

These instruments continue to provide a great entry point to sequencing. This continued demand for our sequencing platforms across the throughput spectrum will contribute to a larger install base and drive future consumables revenue. We're also receiving positive feedback from early access customers of Illumina Complete Long Reads and Complete Long Reads with Enrichment and we're expanding to additional customer sites. Customer appreciates Illumina's unique ability to deliver a high quality, cost effective and complete view of the genome on a single platform, enhancing utility across our installed base. Shifting to our market segments.

Speaker 2

Clinical sequencing consumables shipments were up 5% year over year, driven by continued growth in oncology testing and genetic disease testing. Sequencing run activity by our clinical customers remained robust. As expected though, lab expansion delays and consumables inventory deleveraging have persisted due to broader macro dynamics. Oncology testing consumables grew 9% year over year as our larger customers continue to shift towards high throughput applications, our decentralized clinical testing customers ramped up business and new customers came online. Our market leading TruSight Oncology TSO500 grew 17% year over year as large customers took advantage of the assay's utility, reimbursement and proficiency.

Speaker 2

TSO500 adoption continues to grow with total accounts approaching 500. Also in oncology, GRAIL continued to make good progress in Q3, delivering clinical results and signing up a broad range of customers across the healthcare ecosystem, including health systems and life insurance providers. Grail announced a first of its kind partnership with Carum Health, the 1st digital health company connecting employers and employees to centers of excellence through a value based care platform. The partnership provides Galleri as part of Caram's oncology offering to self insured employers. Also, John Hancock, the U.

Speaker 2

S. Division of Manulife with over 1,500,000 life insurance participants recently became the 1st life insurance carrier to offer Galleri. The GRAIL team expanded its clinical sales force in Q3 and is seeing test orders increase. Evidence for Galleries efficacy also continues to grow. In September at ESMO, GRAIL presented compelling final results from its PATHFINDER study.

Speaker 2

The study demonstrated that when added to standard of care screening, Galleri multi cancer early detection testing more than doubled the number of cancers detected compared to standard screening alone. In fact, Galleri detected more cancers than all U. S. Preventative Services Task Force recommended single cancer screenings combined. Engalary's positive predictive value of about 40% is significantly higher than commonly used screening tests, like the annual screen for colorectal cancer, which has a PPV of 8.7% or the biannual mammography screen with a PPV of 4.4%.

Speaker 2

Galleri is the only multi cancer early detection test available on the market. And analysis of the first 38,154 Galleri commercial test results in a real world setting shows high concordance with the PATHFINDER study results. In addition, PATHFINDER study participants' experience with the GALLERY test has also been positive, with 97.1 percent of participants reporting a high level of satisfaction with the test. In genetic disease testing, sequencing consumable shipments grew 11% year over year. National Health System Funding for rare diseases is increasing in multiple geographies, including EMEA and China, and evidence generation continues to grow.

Speaker 2

For example, in September, Genetics in Medicine published a study from Karolinska Institute indicating that genome sequencing is a sensitive first line test for neurodevelopment disorders. We're also seeing customer excitement around the potential for NovaSeq X to create efficiencies for both whole genome and whole exome sequencing. Turning to our Research and Applied Markets, sequencing consumables shipments were down 8% year over year as customers continue to manage inventory and capital spend and due to expected headwinds from COVID surveillance and the completion of the U. K. Biobank project in Q3 2021.

Speaker 2

We continue to support our customers through these dynamics and at the same time are making ongoing progress in facilitating genomic based drug discovery. As this area continues to grow, we will partner with a range of pharmaceutical companies like our recent collaboration with AstraZeneca to help accelerate genomics and find promising drug targets based on Omnic Insights. In our infectious disease and microbiology markets, we are broadening genomic opportunities across disease states. For example, we recently announced a partnership with Geno Screen to help countries impacted by tuberculosis to more effectively detect and combat multi drug resistant strains. TB claims more than 1,500,000 lives each year, and for the first time in a decade, deaths are on the rise after the pandemic.

Speaker 2

We hope that with this work, We Can Help Vulnerable Populations and Make Progress Towards Eliminating TB Worldwide. Turning now quarter. We expect the macroeconomic challenges we have previously discussed to persist into 2023 and feel that it's prudent to adjust our near term guidance accordingly. Jyadip will address our revised FY 2022 guidance shortly. Despite the near term challenging macroeconomic environment, we remain confident in our long term growth trajectory.

Speaker 2

Customers around the world continue to share their excitement our latest innovations. We're staying focused on supporting them and advancing our innovation roadmap to accelerate the genome era. I'll now turn the call over to Joydeep for more detail on the quarter and our year end outlook.

Speaker 3

Thanks, Francis. As a reminder, our Q3 financial results include the consolidated financial results for Grail. I'll start by reviewing our consolidated financial results, followed by segment results for Core Illumina and GRAIL, and then conclude with additional remarks on our current outlook for 2022. I will be discussing non GAAP results, earnings release, which include stock based compensation. I encourage you to view the GAAP reconciliation of these non GAAP measures, which can be found in today's earnings release and in supplementary data available on our website.

Speaker 3

In the Q3, consolidated revenue was $1,120,000,000 up 1% year over year or 3% on a constant currency basis, net of the effects of hedging. As expected, our core business growth was impacted by anticipated headwinds from customer supply chain issues that delayed lab expansions as well as tighter customer inventory and capital management due to the challenging macroeconomic environment, including inflation and the negative impact of FX. These dynamics have persisted and in some cases accelerated through the 3rd quarter, leading to our guidance reduction for the full year 2022, which I will address later in my remarks. For the Q3, GAAP net loss was $3,820,000,000 or a net loss of $24.26 per diluted share, which includes goodwill impairment of $3,910,000,000 related to the Grail segment, primarily due to the negative impact of current capital market conditions and higher discount rates, including a stand alone risk premium on the fair value calculation of the GRAIL segment. Non GAAP earnings were $54,000,000 or $0.34 per diluted share, including dilution from Grail's non GAAP operating loss of $148,000,000 for the quarter.

Speaker 3

Our non GAAP tax rate was 43.2%, which increased from 25.8% last quarter and 13.2% in Q3 2021, primarily due to the increased impact of R and D expense capitalization requirements implemented by the Tax Cuts and Jobs Act of 2017. Our non GAAP weighted average diluted share count for the quarter was approximately $159,000,000 Moving to segment results, I will start by discussing the financial results of core Illumina. Core aluminum revenue of $1,110,000,000 was approximately flat year over year or up 3% on a constant currency basis, net of the effects of hedging. Core Illumina sequencing consumables revenue of $725,000,000 was approximately flat year over year. As expected, growth driven by the increased installed base was muted by the year over year impact of customer inventory and cash management, headwinds from foreign exchange rates, the conclusion of the UK Biobank project quarter 3 of 2021 and the anticipated decrease in COVID surveillance revenue.

Speaker 3

Sequencing activity on our connected instruments for clinical customers remains strong, while the pace of research sequencing activity was tempered by various macroeconomic challenges Francis mentioned. Sequencing instruments revenue for Core Illumina declined 10% year over year to $162,000,000 Driven by lower NovaSeq shipments due to expected customer lab expansion delays and capital management as well as purchasing delays in advance of next year's availability of NovaSeq X. This decline was partially offset by record NextSeq 1ks2ks shipments, which grew 40% year over year as we continue to see strong adoption by new to alumina customers. During the Q3, COVID surveillance contributed approximately $28,000,000 in total revenue comprised of 23,000,000 dollars in sequencing consumables and $5,000,000 in instruments. This was in line with our expectations as COVID surveillance capacity was largely established in 2021.

Speaker 3

Core Illumina sequencing service and other revenue of $123,000,000 was up 12% year over year, driven primarily by higher instrument service contract revenue on a growing installed base and an increase in core licensing revenue. Moving to regional results for core alumina. Revenue for the Americas was $592,000,000 up 2% year over year, primarily driven by NovaSeq consumables growth due to demand from genetic testing, oncology testing and cancer research customers. As expected, growth in the region was largely offset by customer lab expansion delays and inventory and capital management as well as a decline in COVID surveillance revenue. EMEA revenue of $290,000,000 represented a 7% decrease year over year or a 2% decrease on a constant currency basis, net of the effect of hedges.

Speaker 3

Strong growth in mid throughput instrument shipments driven by clinical demand was more than offset by the conclusion of the UK Biobank program and a decline in COVID surveillance revenue. Greater China revenue of $133,000,000 represent a 9% increase year over year or a 14% quarter. Record quarterly revenue in the region was driven by a growth in sequencing consumables for routine NGS based research that resumed after the COVID restrictions that began in March this year were lifted, as well as strong sales of NovaSeq 6,000 teen policy, exchange rates and slowing GDP growth in the region. Finally, APG revenue of $95,000,000 grew 6 percent year over year or 10% on a constant currency basis, net of the effects of hedges. Growth in the region was driven by strong demand in emerging markets, notably in India, Indonesia and Thailand and continued strength in NIPT and oncology testing.

Speaker 3

Moving to the rest of core alumina P and L. Core alumina non GAAP gross margin of 68.9% decreased 240 basis points year over year, primarily due to less fixed cost leverage on lower manufacturing volumes and higher freight costs, partially offset by favorable product mix. Core alumina non GAAP operating expenses of $514,000,000 were up $36,000,000 year over year Due primarily to headcount growth and investments we are making in R and D to support the continued advancements of our innovation roadmap. Despite the year over year increase, non GAAP core alumina operating expenses were approximately $25,000,000 lower than we had originally planned. As a result of lower performance based compensation expense given our lower revenue outlook as well as cost containment initiatives focused on prioritizing hiring and discretionary spend including travel.

Speaker 3

Transitioning to the financial results for GRAIL. GRAIL revenue of $10,000,000 for the quarter consisted primarily of Galleria test fees. GRAIL non GAAP operating expenses totaled 140 $9,000,000 for the quarter and consisted primarily of expenses related to headcount and clinical trials. Moving to consolidated cash flow and balance sheet items. Cash flow used in operations was negative 52,000,000 A net outflow due to a one time payment related to the litigation settlement with BGI mentioned to you last quarter.

Speaker 3

DSO was 51 days compared to 50 days last quarter due to revenue linearity. Quarter 2022 capital expenditures were $67,000,000 and free cash flow was negative $119,000,000 we did not repurchase any common stock in the quarter. We ended the quarter with approximately $1,000,000,000 in cash, cash equivalents and short term investments. Moving now to 2022 guidance. We now expect full year 2022 consolidated revenue to be flat to up 1% year over year, including approximately flat core Illumina revenue compared to 2021 and GRAIL revenue in the range of $55,000,000 to $65,000,000 Our revised outlook for the full year reflects the more challenging expected macroeconomic headwinds we observed through October.

Speaker 3

For Core Illumina, approximately 1 third of the reduction in our 2022 guidance from our previous expectations Is primarily driven by delayed recruitment for some large research projects in the Americas and Europe and the impact of inflation on research customers in Europe. The remaining 2 thirds of this reduction is split approximately seventy-thirty across 2 higher than expected factors. One, delays in instruments and consumables purchases primarily due to the excitement around NovaSeq X and 2 negative FX impact and consumables inventory deleveraging. For the full year, we now expect core Illumina sequencing revenue to be approximately flat year over year. This continues to include intercompany sales to Grail of approximately $25,000,000 which are eliminated in consolidation.

Speaker 3

Within core Illumina sequencing revenue, we now expect instrument revenue to be down slightly year over year and consumables revenue to be approximately flat, which reflects NovaSeq pull through slightly below our guidance range of $1,100,000 to $1,200,000 per system for 2022, primarily driven by recruitment challenges at some large Research and PopGen customers. The remainder of our pull through ranges are in line with the historical guidance ranges that we have previously provided. For full year 2022, we now expect consolidated non GAAP operating margin in the range of 9.5% to 10% and core alumina non GAAP operating margin of approximately 23%, reflecting our lower revenue outlook. We expect a consolidated non GAAP tax rate of approximately 7%, which continues to assume that the R and D expense capitalization requirements earnings per diluted share in the range of $2.35 to $2.50 which includes a lower than previously expected non GAAP operating loss dilution from GRAIL of approximately $600,000,000 Lastly, we continue to expect diluted shares outstanding of approximately 159,000,000 shares for 2022. We expect the macroeconomic headwinds we are experiencing fiscal year 2019.

Speaker 3

As we noted in our last earnings call, we are proactively and prudently managing operating expenses with a continued focus on sustainable long term revenue growth. We are well positioned to seize opportunities to scale in key areas that align to customers' Future Needs and our innovation roadmap. At the same time, you'll see us gain additional scale and efficiencies from other areas. We will continue to adapt our investments and expenses to support our customers, drive further progress in the genomics industry and enable our long term growth. I will now hand the call back over to Francis for his final remarks.

Speaker 2

Thanks, Joydeep. As Joydeep shared, we will continue to identify opportunities to mitigate the near term effects of the global economic environment. At the same time, we're prioritizing our innovation roadmap and remain confident in our long term growth trajectory. As I shared earlier, we're hearing high praise for the innovations we announced at the Illumina Genomics Forum from Illumina complete long reads to our most powerful and most sustainable sequencer yet, the NovaSeq X Series. These innovations will continue to evolve the genomics industry, and we look ahead with tremendous optimism over the long term.

Speaker 2

We will help our customers through the current challenges and seize the potential of the Genome era together. I'll now invite the operator to open the line for Q and A.

Operator

In a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment. You're welcome to reenter the queue if you have additional questions. And our first question will come from Dan Brennan with Cowen.

Speaker 4

Thanks for taking the questions. I wanted to there's a lot to talk about, but I guess I'll focus on the NovaSeq X The 300 shipment guide including the 50 in 1Q, which is ahead of our model. Maybe Francis and Joining, could you speak about some color regarding customer early customer activity. Where are the orders coming from in terms of large research customers like genome centers versus more smaller customers in the clinical side. And then secondarily, with 50 orders in hand, and you mentioned 170 advance order books, you're north of 200 already.

Speaker 4

Would you characterize the 300 shipments while very attractive as possibly conservative given expected future order momentum that you would expect to get over the next 6 to 9 months?

Speaker 2

Great. Thanks for the question, Dan. So let me work through those questions. First of all, you're right, we are very, Very pleased with the very strong response we've gotten from customers around the NovaSeq X. Frankly, it's been stronger than we expected and we had high expectations going into the Illumina Genomics Forum.

Speaker 2

The customers are coming from a sort of broad swath of customer segments. We're seeing more of a mix from clinical in addition to the usual genome centers that you'd expect to be some of the early adopters. And we're seeing a mix both from U. S. Customers as well as customers from outside the U.

Speaker 2

S. So sort of a nice broad brush of early adopter customers and maybe even a little bit more on the clinical side than we saw when we first launched the NovaSeq 6000 a few years ago. As As you pointed, the initial orders we've got, as you pointed out, the 50 orders already in hand, that means that our Q1 shipments are already sold out. So we're really entering the year in a really strong position for NovaSeq X shipments and we have a very healthy pipeline of 170 customers that are down the pipeline already. So when you look at the shipments number for the year, the number that I called out, the 300 units, made clear that the shipment number is going to be more constrained by supply availability next year than it is for demand because as you point out, we're entering the year with a very strong demand book.

Speaker 2

And the way we think about it is that over the 1st couple of quarters of the year, you can expect us to have more demand than we can ship just as we continue to ramp up the manufacturing capability for NovaSeq X and we'll start to service that backlog as we get into the second half of the year.

Operator

And our next question comes from Vijay Kumar with Evercore ISI.

Speaker 5

Hey, guys. Thanks for taking my question. Francis, I had a 2 parter, if you will, just on the prior NOA Act. The constraints here are the 2 mentioned. Can you give us some color on how the cycle compares to the prior NOCA?

Speaker 5

Because I mean, we're like a month into product announcement, north of 200 orders. This looks like It could be a really big year for you guys from an order perspective next year. So maybe compare versus the prior cycle and The implied Q4 guidance here, one for Javed, I think revenues are minus 13%. If I think about Q1 of next year being in the negative territory, Maybe next year shaping out to be maybe a mid singles to high singles top line. So any color on how to think about fiscal 2020 would be helpful.

Speaker 5

Thank you.

Speaker 2

Yes, sure. Thanks for the question, Vijay. So, as I said to the last question, you're right in the sense that the customer reaction to NovaSeq X has certainly been stronger than we anticipated. And we model the reaction based on our previous launches, which have been really strong. But if we look at the number of orders we have already, the 50 orders we have, the 170 in the advanced pipeline, If I were to compare to where we were at similar time with previous launches, I'd say we are better off than we've been with some of the other previous launches.

Speaker 2

So Certainly in a very strong position going into next year. Again, the next year NovaSeq shipments number is going to be supply constrained. And we ramped up an entirely new manufacturing line because we've redone every component of this instrument, right. So entirely new chemistry, new FFNs, new flow cells, new manufacturing process for the flow cells. And so We're really happy with the way that scale up is happening.

Speaker 2

So if I compare the number I gave you for the Q1 shipments, that would be ahead. So the 40 to 50 shipments we expect in Q1. That would be more shipments than we did in the Q1 when we launched the NovaSeq 6,000. So slightly ahead of where we were before. And then the 300 units that we're expecting to ship would be ahead of where we were with the 1st year of Nova SIX6000 as well.

Speaker 2

So that's how it compares with previous launches. Maybe I'll turn it over now to Jojim.

Speaker 3

Yes. So maybe just one thing on the what's changed for NovaSeq, right? We are seeing, as Francis mentioned earlier, strong demand, early strong demand from clinical customers as well, right? And this we attribute to the trend of continued strong clinical research coming in, which is now shifting to NovaSeq X for some of these studies. So I think that's a positive trend.

Speaker 3

I think your next question was about the relationship with for Q4 and then into 2023. So a few things on Q4 as we pointed out, Right towards the end of Q3 and early into October, we have seen a deepening of some of the macroeconomic conditions we talked about, Inflation and FX, and that caused us to be prudent for the reasons I mentioned earlier to take a more conservative approach into our call for Q4, but also we now see these conditions Resist into 2023. So we're taking a look at some of those conditions and as we know some of the factors that have change to the negative. FX has definitely worsened and accelerated for us and we expect will be a continued headwind into 2023. I talked about the macroeconomic conditions.

Speaker 3

We've already mentioned that COVID surveillance is likely to decline further into 2023. So this kind of is some of the factors that moderate what we had expected earlier for and continue to see in terms of the interest in NovaSeq X. And of course some of the other technologies that we mentioned during IGF including the Illumina Complete Long Reads. Overall, Dan, I think we feel at this point and we haven't gone to guidance and budgeting yet, but at this point, I feel like we are probably expect revenue growth in 2023 to be closer to the 10% range rather than where we had guided before.

Operator

And our next question will come from Dan Arias with Stifel.

Speaker 6

Afternoon, guys. Thanks for the questions. Francis, can you just touch on the lab delay issue a little bit? It sounded like last quarter, the delays were a 2Q to 3Q Q phenomenon more than they weren't. You were in line this quarter.

Speaker 6

So the 4th quarter assumption is obviously getting adjusted here, which just seems a little bit more extended than we would think. So can you just sort of talk to what's going on there? And then when your expectations call for some of these labs actually

Speaker 2

Yes, sure. So, when we talked about the results last time on the call. We talked about the fact that we've seen some delays that we're looking to get ramped up later this year and some that we're going into next year. Quarter. And what we found is in both of those cases, they ended up being a little later than those customers had expected.

Speaker 2

And so we're seeing a push out from what was expected to come this quarter being pushed out into next year and then even the dates for next year opening have been pushed out somewhat too. So The pandemic related effects around supply chain are definitely persisting and are impacting those lab delays.

Operator

And our next question will come from Puneet Souda with SVB Securities.

Speaker 7

Hi, Francis, Jody. Thanks for taking the question. So first one, I just want to clarify that 10% growth that you mentioned for 2023 that's on the entire top line. And then just wanted to also get a little bit around the 10b and the 25b sort of flow cells. 10b is launching earlier, 25b is going to be later in next year.

Speaker 7

It appears to us that the $10,000,000,000 read flow cell could be most meaningful in your portfolio. Just given that it can turn around samples in 24 hours and still give the NovaSeq capacity that is delivered through NovaSeq 6000 today on an S-four. So maybe just walk us through how do you see the ramp for that. And what does that all mean in terms of sort of pull through into 2023? Thank you.

Speaker 2

Thank you, Puneet. So let me talk to you both. I'll start by saying that the answer we gave around the 10% wasn't intended to be a guide for next year. It was intended to just talk about how we were thinking about some of the factors that are at play Q4 going into Q1, and we'll give a specific guide as we get into next year once we've done the bottoms of budget. In terms of the flow cells, I think you're absolutely right in the sense that the first flow cell we shipped, The 10,000,000,000 reach flow cell is going to be very meaningful for customers that are looking to get familiar with the NovaSeq 6000 That is comparing it to the existing instrument they have because it's very similar in terms of footprint, in terms of output and will probably take on some of the same workloads.

Speaker 2

So customers will feel a sense of familiarity as they move to the X with that flow cell. And so you'll see customers that start with that. And then the $25,000,000,000 reflow cell is really intended to unlock the next generation of studies, the very large programs that customers have been talking to us about and have been waiting for the price points of the X that are fundamentally enabling to those studies. And so you can think about it as there'll be the first flow cell that existing NovaSeq6000 customers will view as very familiar to them in terms of output and the workloads that it does and we'll start using as sort of their entry point into the X Series. And then it's the bigger flow cell that unlocks the next wave of elasticity and demand.

Speaker 3

Yes. And Dan, maybe Puneet to add, right, we expect the transition obviously to move forward on the consumable side much faster with research customers and clinical customers because they are invalidated workflows will switch a

Speaker 2

little bit later into the cycle.

Operator

And our next question will come from Julia Quinn with JPMorgan.

Speaker 8

Hi, good afternoon. Thanks for taking the question. So, Frances, I remember you noted at the Analyst Day that enabled by NovaSeq, it could be a meaningful catalyst event for some of the Pop Seq initiatives around the world. But at the same time, I think you noted in 4Q,

Speaker 9

there will

Speaker 8

be some research project delays, including recruitment challenges for some of the PopSeq programs. So I guess in light of that, how should we think about how meaningful the PopSeq programs will be in terms of revenue contribution next year.

Speaker 2

Yes. So let me address both parts of your question. 1 is around the effects we're seeing in Q4 around some of these pop seq programs and then 2 about the X being enabling to future pop seq programs and how important that will be. In Q4 what we said is that there are some a small number of very specific ongoing population sequencing programs that are experiencing some recruiting delays associated with those programs. It's a small handful and they're experiencing delays in these existing projects.

Speaker 2

We have no doubt that these projects will continue on and complete and they will get the recruiting they did, but a little bit slower in Q4 than they were expecting to go. Now if we think about what X enables, that's sort of the next generation, if you like. So what customers have been talking to us about for a while and then in earnest over the last 5 weeks since we announced the X is the very large projects that they want to do, where the number of samples are measured sometimes in the millions. And they're talking about very large exome projects, very large genome projects Frankly, we're just not economically viable until we brought out the X. And one of the things we talked about on Investor Day that's relevant here is that Our team in some cases played an important role in enabling in making those projects.

Speaker 2

So not only and technology enabler role by putting out a scalable instrument at the price points that make these projects viable. But in many cases, we are also helpful in bringing together the parties, whether it's pharma companies or biobanks or national health systems. We are responsible for helping bring to convene those parties together to get those projects off the ground. And I can tell you that over the last few weeks, Susan and our commercial team have been very busy in high demand around health systems around the world that are interested in leveraging the power of the X to put together programs to create, for example, cohorts that are vastly more diverse than we have today or much bigger than they are today. So I think the X will be a very substantial needle mover on that front.

Operator

And our next question will come from David Westenberg with Piper Sandler.

Speaker 10

Hi. Thank you for taking the question. Sorry on a continuation of the question I asked last quarter on consumable ordering behavior. I know there's usually an expiration date on some of these consumables. I know there was a little bit you mentioned, Joydeep, I think some of that continued dynamics around burn lasting into the 4th quarter.

Speaker 10

Maybe it's a little bit maybe it's right on your expectation, but it does look like compared to my model that, that is one of the culprits that continues to happen. So how are we not interpreting this as a slowdown for sequencing or the market in general in context of a lot of your customers have budgets, they have NIH budgets flowing in. They have tests that they have to get ordered. And what I'm getting into is, if it's not this, why still a 10% in 2023, given the fact that I would think there would then be catch up from all these consumables missed in Q3 and Q4. And sorry, that was a really long question.

Speaker 3

Yes. Let me try to address it. And again, as Francis said, we are still in the process of budgets. The 10% wasn't event as a guide. It's more of a from the macroeconomic conditions we see.

Speaker 3

So I think that Maybe 2 parts, David. First, in terms of your question about, are we seeing inventory deleveraging as it Accelerator or decelerator, right. So we were actually quite on point with what we had expected in terms of inventory deleveraging, but maybe a very small part of the additional guidance we provided on Q4 actually coming from incremental inventory deleveraging. So that's part 1, right. Now in terms of Whether things have slowed up slowed down rather from what we had communicated at the end of Q2, we did see 2 specific things that we mentioned, which had been slower than we had expected, right, in terms of demand or activity.

Speaker 3

So one of them were the few key customers or handful of customers that Francis mentioned that had these large research and pop gen projects That had some issues with recruiting, right. So those are things that we expect will cut will recover over time. This is not a budget issue. This is not a mostly an inflation related not an inflation related issue. The other thing that we did see Was inflation and FX related and specifically related to research customers in Europe, right?

Speaker 3

So there we did see a slowdown happening. We expect that some of this will continue into next year as some of these headwinds persist. But again, it's not a structural change. It's a temporary change that are caused by very specific macroeconomic factors.

Operator

And our next question will come from Michael Ryskin with Bank of America.

Speaker 11

Great. Thanks for taking the question, guys. I want to try to squeeze in a couple, but they're all on the same topic. 1, For the GRAIL write down, the $3,910,000,000 could you talk through the rationale, the underlying reason for taking that this quarter? Does that have any impact on divestment discussions or sort of the puts and takes and what goes into that decision, especially if you sort of think back to a year ago, I think the deal goes right around a year ago for $8,000,000,000 And then also, did you clarify why rail was down sequentially, dollars 12,000,000 in the 2nd quarter, 10,000,000 in the 3rd, but the midpoint of the fiscal year as it seems.

Speaker 11

So is it just some lumpy orders coming through? Just what's going on there? Thanks.

Speaker 3

Yes. So let me take the first part of your question. So The reassessment of Grail's book value was really more of a accounting requirement triggered by some of the regulatory decisions coming out of Europe. Again, the primary driver of the valuation change was the higher discount rate used really as a result of the current capital and equity market conditions, right? The underlying the performance of GRAIL in terms of how it's progressing on its clinical results and signing up customers really has not changed and in fact has improved a little bit over the last few quarters.

Speaker 3

Impairment again is an accounting change. It has no impact on our pursuant to various options on the GRAIL front and those are continuing as we had described earlier on our Investor Day.

Speaker 2

I'll turn it over to Francis. Yes. And in terms of the GRAIL number, so the way the quarter played out, the 1st month of the quarter July was slow in terms of test ordering. And then the Pay30 picked up in September, partially driven by the ramp up in the sales force That's great. And we talked about that on the Q2 call.

Speaker 2

And so that's paid off in the last month of last quarter and in the 1st few weeks of this quarter. And so that's what's driving the shape of the curve. In terms of the expectations for the year, they're off to a strong start for Q4 and the midpoint of our guide remains the same. And then the other factor that's playing out in Q4 is the revenue they're getting from their pharma partnerships associated with their MRD development.

Operator

And our next question will come from Kyle Mixon with Canaccord.

Speaker 11

Hey, thanks for the question. Just a quick multipart question for me. On NovaSeq X. I was wondering what your expectations are for trade ins and bundles in the near term, just given the X is basically like the equivalent of multiple 1,000. So maybe you could talk about that in the context of the 23 shipment numbers that you provided today or maybe kind of spoke to earlier.

Speaker 11

And then on kind of separately, Brandtis, just If you can share your thoughts on the complete offering and the long read space, just give me updates from PacBio and others recently? Thanks.

Speaker 2

Yes. So let me take the first part first, which was around our expectation of trade ins. So our customers, based on their experience with us know that we have always helped keep customers whole when we launch a new platform. And so as we've always done when we've launched a new platform, we have trade in programs for customers that have recently purchased the 6,000. And we actually have programs even now that if you want to buy a 6,000 now to get going, you can trade it in.

Speaker 2

So you can buy now and traded in once we launch EX next year. And certainly there have been customers that appreciated that very much and have taking us up on that. And we expect some more to take us up on that through this quarter and going into next year. So that's a standard part of our launching a new product. In terms of our complete long reads, we've seen a really enthusiastic response from our customers around being able to use their existing installed base across the throughput sizes.

Speaker 2

So whether you're MiSeq all the way to Nova SIX6000 or the X to do both long read and short read workloads. And to do that in a way that allows them to take advantage of low sample inputs, And so we expect that to be fundamentally enabling to that space. And if you especially if you combine the existing platforms you have with the complete long reads with enrichment, You end up with the ability to do long read much, much more cost effectively than you could do on other platforms without compromising accuracy So you still get the gold standard of accuracy, and you can do it much more cost effectively. So that's really exciting. What it does is It opens up that last bit of the genome, that last few percentage genome that historically was hard to read with Chord Read Technology.

Operator

And our next question will come from Tejas Sivant with Morgan Stanley.

Speaker 9

Hey, guys. Good evening. Francis, a 2 parter for you here. So first, I want to talk about the metered ramp down for the NovaSeq 6000 consumables you alluded to at the Analyst Day because of a higher proportion of clinical users. Present.

Speaker 9

Today, you guys called out a higher clinical mix for the X. So I'm just trying to juxtapose those two dynamics as we about how the NovaSeq 6000 consumables tail off over the next couple of years here? And my second question is really around some of the pop and recruitment delays that you called out over here. If I remember right, in the last product cycle, essentially, PopSeq had to be removed from the guide because it became so unpredictable in terms of timing. Can you just call out sort of what you see is different this time around that drives your confidence that at least as far as PopSeq goes, you will continue to get that sort of elasticity of demand.

Speaker 2

Yes, great question. So let me take the first one first. So you're absolutely right in the sense that If you are running production clinical workloads today, you are going to continue to run them on the NovaSeq 6,000 for a while and then it will be a there'll be a metered transition that will be measured in quarters years before you move that entire production workload Onto the S. That continues to be what we believe that continues to be the feedback we're getting from our customers. What's really exciting though is that clinical customers are talking to us about and their purchases are really about new workloads.

Speaker 2

And so it's areas that they want to expand into that they're saying instead of starting on the 6,000, they'd like to start that development on the X with an idea then of course to ramp it up into production on the X. And so that has been more substantial than we expected. So that means that there are a bunch of our large clinical customers that are expanding into new clinical areas. And so it's an exciting development for the field. It's also an exciting development for us as well.

Speaker 2

In terms of PopSeq, What we have talked about is that when we are bringing on new PopSeq deals, new big PopSeq deals, we'll tend to binary them out of our guide, if they are big and we're still trying to figure out when they land. And as you know, that's a learning we had in terms of how these deals develop. But once they're in production, they are in the guide, right? And so there the variability isn't quite as big as whether a big deal will come on or not. It may ramp up or down in a quarter and then certainly we'll call it out for you if that happens or if we see that starting to happen, which is what we're doing for Q4.

Speaker 2

That's more that's less variability rather than the entire new deal coming on, which again will tend to be more conservative in terms of building that into our guide.

Speaker 3

And Francis, I'll just add, I think, Peder's great question about clinical side, right? I think we are seeing some of these newer tests that Francis call about going more towards NovaSeq X because these are also the higher intensity tests, which Much higher throughput requirements, which is consistent with what we mentioned regarding elasticity of demand continuing to go up with the introduction of new technologies.

Operator

And moving on to Dan Leonard with Credit Suisse.

Speaker 10

Hi. Thank you. I just want to make sure I understand the change in the 2022 guide for core alumina. It seems like you attributed half of the guidance reduction to delays associated with the X, if I'm doing the math right, 70% of the 2 thirds. You knew you were launching the X.

Speaker 10

So what evolved differently from your expectations?

Speaker 2

Yes, you're absolutely right. We knew we were launching the X and we sort of modeled the customer interest based on the previous launches we've done. Frankly, we've been really surprised in a positive way around how much interest there has been from our customers in getting to the X. And again, as I said, we fully expected our clinical customers to be a little bit slower in terms of coming on board for the X. And what we're finding is that they're not for the reasons we talked about that while they're keeping production workflows on the 6,000, They are excited about using the X for their new applications, which as Jojsev said, tend to be more sequencing intensive applications.

Speaker 2

And so that has been an upside surprise in terms of the enthusiasm for the X, but has a knock on effect and that people are saying, look, I'm going to hold on to 6,000 in Q4 and wait for the X as it starts to ship in Q1.

Operator

Thank you. And our next question will come from Patrick Donnelly with Citi.

Speaker 3

Hey, guys. Thanks for taking the questions. Francis, maybe one just on the customer base, more on the kind of clinical diagnostic side. I know the past quarter, you kind of called out there being a little more conservative with cash, particularly kind of speaking to the inventory question. Are you still seeing that piece?

Speaker 3

What are the conversations like and kind of the outlook for that market in 2023?

Speaker 2

Yes. Thanks, Patrick. So we're definitely seeing that continue to play out. We're seeing 2 things play out. 1, activity levels in terms of runs on the instruments that they have continue to be robust and generally in line with the commentary we period in Q2.

Speaker 2

At the same time, we are seeing concern around their cash position and a desire to want to manage their inventory levels more conservatively perhaps than they have historically. That's also enabled by the fact that they've seen that our supply has been very consistent and robust and stable even through the pandemic. And so we are confident saying, look, we can run at a lower inventory level for a while and still maintain the integrity of their operations capability. And so we're definitely seeing that dynamic continue to play.

Operator

And our next question will come from Luke Sirdat with Barclays.

Speaker 12

Awesome. Thanks for the question, guys. Can you give us a sense of the margin profile of XLEAP leap is going to come through. So I think it's important to think about as you ramp on the NovaSeq X next year. And as that continues to come up and you're having the higher pull through, we need to kind of figure out where the operating margin is going to come through.

Speaker 2

Yes, sure, Luke. The expectation and the design point is to maintain similar margins with the instruments that use the new XLETE chemistry as the instruments that they're replacing. So if you look at the X, for example, You should think about it over time as it scales to have a similar margin profile to the NovaSeq 6,000, both in the generally on the instrument side and certainly on the consumable side. So that's the design criteria we use. The idea is to invest in technology that fundamentally lowers the cost to make the product and then pass on those savings to our customers.

Speaker 2

So maintain the same margins and pass on the savings to our customers associated with the innovations that we're bringing like X, like the new optics, like the new flow cells and so on.

Operator

And our next question will come from Jack Nehaan with Nephron Research.

Speaker 13

Thank you. Good afternoon. I wanted to talk a little bit about the guide here for the Q4. So I think for the year, the new consumables guide is flat. By my math, and you can check me on this, a lot of earnings tonight, I think that implies down 16% in the 4th quarter.

Speaker 13

Can you just talk us through what's going on there maybe between price and volume? And it just seems like Given you're talking about it's kind of concentrated in one part of the customer base, it just feels like a big move.

Speaker 3

Yes. So overall, Jack, For the full year, you're right. It's sequencing consumables tends to be is tending to be flat. Pricing actually is not impacted, right? This is mostly volume.

Speaker 3

We track the price piece pretty carefully and it is I think the reasons for the volume reduction is what we have stated earlier, right. So there is a component of it, by the way, as you look at the revenues, there's a component of FX that has come through. And then in terms of the volumes, there are 2 components, right? So primarily on the There's an inventory deleveraging part which we had some of which most of which we had called out earlier and then there's some additional piece. And then the 2 specific pieces around large research customers and the recruitment delays and some slowdown inflation related and FX related that we have seen in Europe.

Speaker 3

So those continue to be the largest sources of a slowdown. And then one of the things that Francis had mentioned as well Is on the NovaSeq X side, right. The increased interest in NovaSeq has delayed some of the consumables purchases on NovaSeq

Operator

thank you. And that does conclude our question and answer session. I will now hand the call back over to Sallie Schwartz.

Speaker 1

Thank you for joining us today. As a reminder, a replay of this call will be available in the Investors section of our website. This concludes our call, and we look forward to our next update with you at the JPMorgan Healthcare Conference in January.

Operator

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.

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