Analyst Conference Summary

conference date: August 9, 2023 @ 2:00 PM Pacific Time
for quarter ending: July 2, 2023 (second quarter, Q2 2023)

Forward-looking statements

Overview: Flat revenue y/y. P/E assumes return to growth, but is that a good assumption?

Basic data (GAAP):

Revenue was $1.18 billion, up 8% sequentially from $1.09 billion and up 2% from $1.16 billion in the year-earlier quarter.

Net income was negative $234 million, down sequentially from $3 million, and up from negative $535 million year-earlier.

Diluted EPS was negative $1.48, up sequentially from $0.02, and up from negative $3.40 year-earlier.

Guidance:

Concerned about 2H 2023. Core Illumina revenue flat y/y for full year 2023. 2023 GAAP diluted loss per share of $2.08 to $1.93 and non-GAAP diluted earnings per share of $0.75 to $0.90. for Q3 2023 expects revenue near $1.14 billion and non-GAAP diluted earnings of $0.10 to $0.15.

Conference Highlights:

Charles Dadswell, Interim CEO, said "Illumina's second quarter consolidated revenue grew 8% sequentially from the first quarter, and we saw higher-than-anticipated NovaSeq X shipments. Despite additional placements, we expect our second half revenue to be negatively impacted by customers remaining more cautious in their purchasing, a more protracted recovery in China, and a larger-than-expected temporary decline in high throughput consumables as customers transition to the NovaSeq X. In response, we are increasing customer support for the NovaSeq X and continue to manage our expense base in a disciplined way." On July 12, 2023, the European Commission imposed a 432 million euro fine due to the completion of the GRAIL acquisition during the pendency of the European Commission's review. While expected and accrued for over the last year, Illumina believes that the fine is unlawful, inappropriate, and disproportionate, and is appealing the decision. Working on reducing expenses by $100 million per year.

Product revenue was $1.00 billion, services $175 million. Segments are now Core and Grail.

NovaSeq X Series (NovaSeq X and NovaSeq X Plus), was available as of Q1 2023, enabling the highest levels of accuracy at immense scale, with the power to sequence more than 20,000 genomes per year. Shipped 109 in Q2. 176 now installed. Expects 390 shipments in 2023.

Expects slow revenue growth in 2H 2023, due to: a decline in high throughput consumables; customer purchasing behavior is cautious; China's weak economy. In Q2 saw decreased Covid surveillance related revenue.

Grail had $22 million in revenue and a $204 million operating loss. European regulators are requiring Grail to continue to be run as a separate company for now. The merger review received a setback when the FTC ordered Illumina to divest GRAIL, but aleady appealed. If Illumina loses either its appeal in the US Court of Appeals for the Fifth Circuit, or its appeal in the European Court of Justice (ECJ), it expects to move quickly to divest GRAIL in a manner that serves the best interests of its shareholders. Should we win both appeals, we would undertake a detailed review of the GRAIL business and determine the optimal outcome for the asset.

Core segment had revenue of $1.16 billion, flat from $1.16 billion year-earlier, and an operating profit of $115 million, up from a loss of $396 million. Non-GAAP operating profit was $245 million.

Non-GAAP numbers: net income $50 million, up 285% sequentially from $13 million, and down 45% from $91 million year-earlier. Diluted EPS was $0.32, up 300% sequentially from $0.08, and down 44% from $0.57 year-earlier.

Cash, equivalents and investment balance was $1.56 billion, up sequentialy from $1.52 billion. Long term debt $1.5 billion, of which about half matures in August 2023. Cash flow from operations was $105 million. Free cash flow was $58 million. Capital expenditures were $47 million. Cash used to repurchase stock was $0 million. $0 million was used to pay down debt.

GAAP cost of revenue was $444 million, leaving gross profit of $732 million. Operating expenses were $820 million, consisting of: $358 million for research and development; $450 million for selling, general, and administrative. Leaving income from operations of negative $88 million. Other expense was $1 million. Income tax $145 million.

Q&A selective summary:

NovoSeq X challenges in field? We placed more instruments than we thought we would. But underestimated time to bring online at sites. We found some bugs and have fixes we are deploying. Some customers are fully up to speed. Has not impacted market demand.

We are not seeing any changes in elasticity of demand. The decline in earlier models was faster than expected, which makes sense given the X rapid ramp.

CEO search? Looking both internally and externally.

China expectations? We did not see the accelaration we had expected for 2H. There is also more competition in the mid and low throughput segments. The purchase cycle length is lengthening. But our win rate v. competition remains high.

We acknowledge that getting to margin goals for next year is a stretch.

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