Analyst Conference Summary

conference date: November 03, 2022 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2022 (third quarter, Q3 2022)

Forward-looking statements

Overview: Low growth rate. Large goodwill impairment charge.

Basic data (GAAP):

Revenue was $1.12 billion, down 4% sequentially from $1.16 billion and up 1% from $1.11 million in the year-earlier quarter.

Net income was negative $3,816 million, down sequentially from negative $535 million, and down from $317 million year-earlier.

Diluted EPS was negative $24.26, down sequentially from negative $3.40, and down from $2.08 year-earlier.

Guidance:

For full year 2022 revenue flat to 1% higher than 2021. GAAP EPS negative $26.56 to $26.41. Non-GAAP EPS $2.35 to $2.50. Lowered because of delayed purchases for reasons including inflation, FX and waiting for NovaSeq X.

Conference Highlights:

Francis deSouza, President and CEO, said "Our third-quarter results were in line with our expectations, with traction across our portfolio offset by challenging macroeconomic dynamics that we expect will continue into 2023. Customer response to our latest innovations has been very positive; we already have 50 NovaSeq X orders globally. As we close out 2022 and look toward 2023, we are focused on helping customers navigate the current environment and delivering these technologies to help customers reimagine what is possible with genomics." FX had a negative impact on revenue. Revenue was up 3% y/y on a constant-currency basis.

In Q3 2022 Illumina recognized $3.91 billion in goodwill impairment related to the Grail segment, primarily due to the negative impact of current capital market conditions and higher discount rates, including a standalone risk premium, on the fair value calculation of the Grail segment. That is the main reason for the difference between GAAP and non-GAAP numbers.

Product revenue was $0.96 billion, services $152 million. Sequencing instrument revenue was $162 million, down 10% y/y. Consumable revenue was $725 million, flat y/y. Oncology testing led consumable sales, up 9% y/y.

NovaSeq X Series (NovaSeq X and NovaSeq X Plus), will become available in Q1 2023, enabling the highest levels of accuracy at immense scale, with the power to sequence more than 20,000 genomes per year. In Q3 2022 Illumina partnered with GenoScreen to expand global access to genomic testing for multi-drug resistant tuberculosis (TB) by combining Illumina sequencing products and the GenoScreen Deeplex Myc-TB assay.

Grail had $10 million in revenue and a $4.1 billion operating loss, mostly from the goodwill impairment, adding to the y/y decline in net income and EPS. Announced strategic collaboration with AstraZeneca to develop companion diagnostic tests and identify patients with high-risk, early-stage disease. European regulators are requiring Grail to continue to be run as a separate company for now. The merger review is ongoing.

In Q3 Grail expanded access to Galleri across the U.S. through partnerships with Carrum Health, John Hancock Insurance, and with Henry Ford Health.

Non-GAAP numbers: net income $54 million, down 41% sequentially from $91 million, and down 76% from $221 million year-earlier. Diluted EPS was $0.34, down 40% sequentially from $0.57, and down 77% from $1.45 year-earlier.

Cash, equivalents and investment balance was $1/04 billion, down sequentialy from $1.29 billion. Long term debt $ billion. Cash flow from operations was negative $52 million. Free cash flow was negative $119 million. Capital expenditures were $67 million. Cash used to repurchase stock was $0 million.

GAAP cost of revenue was $398 million, leaving gross profit of $717 million. Operating expenses were $4.37 billion, consisting of: $325 million for research and development; $146 million for selling, general, and administrative. Leaving income from operations of negative $3.66 million. Other expense was $15 million. Income tax $144 million.

Q&A selective summary:

NovaSeq X customer color? Pleased with stronger than expected response. Multiple segments. Seeing clinical, plus genome centers, US and ex-US. Q1 shipments sold out. About 170 customers in pipeline. Believes will be supply constrained, demand stronger than supply. We estimate shipping 300 units in 2023.

We expect FX and macroeconomic condidtions to be headwinds in 2023. Also expect a decline in sales releated to Covid surveillance. Not guidance but revenue could grow about 10% in 2023.

Flow cell releases in 2023? The 10B will appeal to NovaSeq 6000 customers. 25B is meant to unlock next generation, large programs.

Consumables missed in Q3 and Q4? Inventory deleveraging as expected, just a little expected in Q4. Two issues were slower than expected in Q3: recruiting for large projects; research customers in Europe being hit by economics.

Grail writedown, divestment, lower revenue? Book value reassement was an accounting decision largely driven by the change in the discount rate and current capital and equity market conditions. Grail is doing better at signing up new customers. Test ordering was slow in July, but accelerated in September. Q4 is off to a strong start.

We have a trade in program for customers of the NovaSeq X. We don't have numbers yet.

We believe the introduction of new tech like NovaSeq X will result in increased demand because of elasticity. For clinical customers they are buying the X for more sequencing intensive applications than the ones they already have in place.

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