Chief Strategy & Corporate Development Officer at Illumina
Thanks, Francis. Thanks for the kind introduction. I'm excited to step into the role on a permanent basis and continue to work with all of you. I'll start by reviewing our consolidated financial results followed by segment results for core Illumina and GRAIL, then conclude with additional remarks on our current outlook for 2023. I will be discussing non-GAAP results, which include stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures which can be found in today's release and in supplementary data available on our website.
In the fourth-quarter, consolidated revenue was $1.08 billion, down 10% year-over-year, or down 7% on a constant-currency basis net of the effects of hedging. Non-GAAP earnings were $22 million or $0.14 per diluted share including dilution from GRAIL's non-GAAP operating loss of $159 million for the quarter. Non-GAAP earnings per share were lower than expected due to approximately $87 million in incremental tax expense from the R&D capitalization requirements that were not repealed in Q4 2022 despite broad bipartisan support. The incremental tax expense includes approximately $80 million recorded in Q1 through Q3 that was ultimately not reversed in Q4. Our non-GAAP tax rate was 29.3% for the quarter and 26% for the full-year 2022, which increased from 15.6% in Q4 2021 and 17.3% in fiscal year 2021, primarily due to the impact of R&D capitalization requirements. Our non-GAAP weighted-average diluted share count for the quarter was approximately $158 million.
Moving to segment results. I'll start by discussing the financial results of Core Illumina. Core Illumina revenue was $1.07 billion, down 11% year-over-year, or down 8% on a constant-currency basis, net of the effects of hedging. For Illumina, sequencing consumables revenue of $687 million was down 13% year-over-year. As expected, growth driven by pull-through on the increased installed-base was offset by delayed recruitment for some large research projects in the Americas and Europe, the ongoing impact of COVID disruptions in China, the year-over-year impact of customer inventory management, the anticipated decrease in COVID surveillance revenue, and headwinds from foreign-exchange rates. Sequencing instruments revenue for Core Illumina declined 24% year-over-year to $146 million, driven primarily by the lower NovaSeq 6,000 shipments in advance of the availability of NovaSeq X. The decline was partially offset by another quarter of record NextSeq 1K, NextSeq 2K shipments, which grew 31% year-over-year as we continue to see strong adoption by new to Illumina customers and demand for our new 2 by 300 kits that bring longer lead capabilities to our mid-throughput platform for the first time.
During the fourth-quarter, COVID surveillance contributed approximately $20 million in total revenue comprised of $19 million in sequencing consumables and $1 million in sequencing instruments. This was in-line with our expectations and down $30 million year-over-year, driven primarily by lower sample volumes. Core Illumina sequencing service and other revenue of $131 million was up 24% year-over-year, driven primarily by higher instrument service contract revenue on a growing installed-base as well as an increase in oncology and IVD partnership revenue.
Moving to regional results for Core Illumina. Revenue for the Americas was $577 million, down 7% year-over-year and EMEA revenue of $301 million represented a 14% decrease year-over-year, or a 10% decrease on a constant-currency basis. As expected, the base business in both regions was impacted by an anticipation for NovaSeq X and the slowdown in COVID surveillance and research I mentioned earlier. We continue to see strong demand for NextSeq 1K, NextSeq 2K with record shipments in the Americas up nearly 50% year-over-year, driven by strength across both research and clinical. In addition, NovaSeq Dx shipments exceeded expectations in the first-quarter of launch with strong early demand by clinical customers in Europe. Greater channel revenue of $94 million represented a 22% decrease year-over-year, or a 14% decrease on a constant-currency basis. The region continued to be impacted by COVID lockdowns that resulted in lower sample volumes year-over-year. We continue to expect our business in China to be impacted by headwinds from COVID related disruptions, exchange rates, and slowing GDP growth in the region at least through the first-half of 2023. Finally, APJ revenue of $93 million declined 10% year-over-year, or 4% on a constant-currency basis, net of the effects of hedges. Strong growth across clinical markets was more than offset by the conclusion of a large research project in Japan and delayed high-throughput instrument purchases due to the introduction of NovaSeq X.
Moving to the rest of Core Illumina P&L. Core Illumina non-GAAP gross margin of 67.3% decreased 430 basis-points year-over-year, primarily due to less fixed-cost leverage on lower manufacturing volumes. Core Illumina non-GAAP operating expenses of $528 million were down $52 million year-over-year, primarily due to cost-containment initiatives, lower performance-based compensation expense and a onetime partnership related expense in Q4 2021.
Transitioning to the financial results for GRAIL. GRAIL revenue of $23 million for the quarter grew 130% year-over-year driven primarily by accelerating adoption of Galleri, as well as higher contributions from MRD pharma partnerships due to a milestone payment in Q4 2002 that GRAIL does not expect to repeat in Q1 2023. GRAIL non-GAAP operating expenses totaled $166 million and increased $35 million year-over-year, driven primarily by continued investments in clinical trials and to scale GRAIL's commercial organization.
Moving to consolidated cash-flow and balance sheet items. Cash flow provided by operations was $147 million. Fourth-quarter 2022 capital expenditures were $88 million and free cash flow was $59 million. We did not repurchase any common stock in the quarter. We ended the quarter with approximately $2 billion in cash, cash equivalents and short-term investments. Cash as of the close of the quarter included $991 million in net proceeds from the term notes issued on December 13, 2022 which will be used to repay upcoming debt maturities in 2023.
Moving now to 2023 guidance. We expect full-year consolidated revenue to grow 7% to 10% to approximately $4.9 billion to $5.03 billion. We expect full-year 2023 Core Illumina revenue to grow 6% to 9% to approximately $4.83 billion to $4.96 billion. These ranges include an anticipated headwind from COVID surveillance of approximately 200 basis-points as well as a year-over-year headwind from foreign-exchange rates. We expect quarterly revenue to ramp sequentially through 2023 with linearity trends similar to what we saw in 2017 when we launched the NovaSeq 6,000. GRAIL is expected to deliver revenue in the range of $90 million to $110 million for 2023 reflecting year-over-year growth of 82% at the midpoint, driven by accelerating adoption of the Galleri test. For fiscal 2023 at the midpoint of our revenue guidance range, we expect Core Illumina sequencing revenue to grow approximately 8% year-over-year. This includes intercompany sales to GRAIL of approximately $35 million which are eliminated in consolidation. We expect Core Illumina sequencing instrument growth of approximately 9% year-over-year, driven by the NovaSeq X upgrade cycle and continued momentum in mid-throughput. We expect Core Illumina sequencing consumables growth of approximately 8% year-over-year, primarily driven by the NovaSeq X launch as customers build consumables inventory and ramp utilization, as well as continued growth in our mid throughput consumables due to the growing installed-base. This growth will be partially offset by further reduced COVID surveillance revenue. We expect annual pull-through for NovaSeq 6,000 of approximately $900,000 to $1 million per system in 2023 as customers transition to NovaSeq X. We expect pull-through for NextSeq 1K, NextSeq 2K in the range of $120,000 to a $170,000 per system in 2023 as the record instrument placements in '22 and continued strong placements in 2023 are brought fully online. We expect the remainder of our pull-through ranges to be in-line with historical guidance. We also expect revenue from COVID surveillance of approximately $30 million in 2023, which reflects a year-over-year headwind of $105 million or approximately two percentage points. We expect consolidated non-GAAP operating margin of approximately 8% and Core Illumina non-GAAP operating margin of approximately 22% for 2023. These margins reflect one, an increase in core Illumina operating expenses from 2022, primarily driven by normalization of our performance-based compensation; two, a temporary decrease in gross margins as we launched the NovaSeq X, consistent with what we saw in 2017 when we launched NovaSeq 6,000; and three, an increase in GRAIL operating expenses due to the ongoing investments to support the FDA application NHS trial and to continue to scale GRAIL's commercial organization.
We also expect a consolidated non-GAAP tax rate of approximately 36%, which includes an approximately $75 million impact from the R&D capitalization requirements. If these requirements are repealed in 2023, we expect our 2023 non-GAAP tax rate to be approximately 15%. We expect consolidated non-GAAP earnings per diluted share in the range of $1.25 to $1.50, which includes dilution from GRAIL's non-GAAP operating loss of approximately $670 million. And finally, we expect non-GAAP diluted shares outstanding for fiscal 2023 to be approximately 160 million shares.
For the first quarter of 2023, we expect consolidated revenue in the range of $1.05 billion to $1.07 billion for Q1 2023, reflecting a sequential decrease of 212 basis points from Q4 2022 at the midpoint, primarily driven by historical seasonality of our core business due to year-end budget flushes not repeating in the first quarter, partially offset by an increase in high-throughput instrument shipments due to the launch of NovaSeq X in Q1; and a decrease in GRAIL revenue of approximately $5 million due to a milestone payment in Q4 2022. We expect quarterly revenue to grow sequentially through 2023, driven by a ramp in NovaSeq X shipments and utilization, recovery from COVID disruptions in China, accelerating adoption of Galleri, and an expected mitigation of macroeconomic headwinds in the second half of 2023.
For the first quarter, we expect consolidated non-GAAP operating margin of approximately 1% and Core Illumina non-GAAP operating margin of approximately 17%. We expect operating margins to improve throughout 2023 as revenue ramps and we scale our production of NovaSeq X and leverage the fixed cost of the manufacturing base. We expect net other expense of approximately $9 million, primarily due to the interest expense on our new bond issuances. Lastly, we expect non-GAAP diluted shares outstanding of approximately 160 million shares, in line with fiscal 2023. I'll now hand the call back over to Francis for his final remarks.