Illumina, Inc.

Good day, ladies and gentlemen, and welcome to the first quarter 2023 Illumina 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 first quarter of 2023. 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 have not had the chance to review the earnings release, it can be found in the investor relations section of our website at Illumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer, and Joydeep Goswami, Chief Financial Officer and Chief Strategy and Corporate Development Officer. Francis will provide an update on the state of Illumina's business, and Joydeep will review our financial results, which include GRAIL. As a reminder, GRAIL must be held and operated separately and independently from Illumina. pursuant to the interim measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation. This call is being recorded, and the audio portion will be archived in the investor 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. 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 10Q and 10K. With that, I'll now turn the call over to Francis.

Thank you, Sally. Good afternoon, everyone. Illumina delivered revenue of approximately $1.09 billion and diluted non-GAAP EPS of 8 cents in Q1, both ahead of the guidance we provided at the beginning of the year, but down year over year as expected. Jodip will take you through more detail later in the call. Our focus for the rest of the year is to deliver sequential growth primarily by scaling the production and distribution of NovaSeq X, driving elasticity on the back of its increased capabilities, and improving margins. We will share more on each. We achieved key product milestones in Q1, including shipping the first NovaSeq X systems. We also launched Illumina Complete Long Read technology and Illumina Connected Insights, a cloud-based tertiary analysis tool that addresses a key barrier to adoption and will enable more labs to perform comprehensive genomic profiling for advanced tumors. Turning to our performance across platforms, beginning with high throughput. The NovaSeq X launch further strengthened Illumina's competitive position in high-throughput sequencing. The strong global interest for the NovaSeq X series continued in Q1. and we exited the quarter with over 200 orders received from more than 30 countries. Clinical demand continued to be stronger than expected, generating approximately 40% of orders, with some customers planning to leverage the NovaSeq X to launch new clinical offerings. About 15% of orders are from new to high-throughput customers, like the clinical genomics lab that is leveraging NovaSeq X's ease of use and cost benefits to perform high-throughput whole genome single cell, and RNA sequencing. Our manufacturing capabilities for NovaSeq X instruments and consumables are scaling nicely. We shipped 67 NovaSeq X instruments in Q1, above initial expectations of 40 to 50, and now expect to deliver more than 330 NovaSeq X instruments this year, up from 300. Customers' initial runs are showing robust data output and sequencing quality, with some customers reporting outputs greater than 7 terabases and more than 95% of bases above Q30, well ahead of published specifications. As customers take delivery of their NovaSeq Xs and plan their deployments, they're sharing examples of how NovaSeq X will unlock demand elasticity in the sequencing market. Customers are planning to leverage the X's greater output and lower price per sample to sequence more samples. perform more analyses per sample, and obtain more data per analysis. For example, a leading European life science research institute will use Novaseq-X to scale up its data-intensive research programs, specifically in multiomics, spatial, and single-cell, enabling them to deliver Atlas-scale projects. Within our clinical base, Customers are using the greater output and cost savings of Novaseq X to launch new sequencing-intensive offerings. Some customers are planning to move from targeted panels to exomes and genomes to achieve higher diagnostic yield and healthcare efficiency. An oncology customer is planning to use the X to launch liquid biopsy testing, which requires 12 to 15 times more sequencing than solid tumor testing. Some customers are using the cost and turnaround time benefits to enter deeper sequencing applications, like Minimal Residual Disease, or MRD, to build datasets at scale. We also saw continued demand for NovaSeq 6000, primarily for fleet expansions of existing workflows, and we shipped 17 NovaSeq 6000s in Q1. More than 80% of NovaSeq 6000 shipments were to clinical customers and approximately 25% of shipments to oncology testing. In mid-throughput, NexSeq 1K, 2K unit shipments increased 6% year over year as customers expand their existing fleets or continue to shift projects from the MySeq and NexSeq 550. More than 20% of NexSeq 1K, 2K units in Q1 were placed with new to Illumina customers. Our win rate in the mid throughput segment remains strong, but we're seeing some sales cycles lengthen. Our low throughput platforms continue to provide an entry point to sequencing. Approximately 30% of these shipments in the first quarter were to new to Illumina customers, further increasing our installed base and enabling adoption of sequencing across a broad customer network. Looking now at our clinical markets. Q1 marked an important milestone for Illumina, with clinical sequencing consumables revenue representing 50% of our total sequencing consumables revenue for the first time. In Q1, oncology testing consumables declined 3% year over year, but increased 21% sequentially, driven by growing clinical testing volumes and increased product development in areas like liquid biopsy and MRD. Some customers in this segment are facing pressures to improve profitability, which may in turn slow down their ability to develop new tests and scale. Revenue from our market-leading TruSight oncology assay, TSO500, was greater than $25 million in the quarter, up 26% year-over-year across more than 540 accounts, driven by increased utilization and pull-through, particularly in Europe. In March, we announced the expansion of our partnership with Myriad Genetics to broaden access to homologous recombination deficiency, or HRD testing. HRD is an important biomarker identifying tumors with a specific type of DNA damage, like those in ovarian, breast, prostate, and pancreatic cancers. Our TSO500 HRD, a research-use-only test, is now available in the U.S., with early customers like Florida Cancer Specialists and Research Institute, one of the largest independent medical oncology and hematological practices in the United States. The expanded partnership also establishes a unique alliance to develop HRD as a companion diagnostic for novel agents targeting these tumors. There was significant progress for NGS-based oncology testing reimbursement this quarter in Europe, expanding the accessible market. Seven regions in Italy committed 10 million euros for next-generation sequencing in lung cancer. In Germany, health insurers commenced reimbursement for whole genome sequencing in pediatric cancer patients with relapse. And in the Czech Republic, funding for comprehensive genomic profiling was added to the national fee schedule effective January 1st. Also in oncology, Grail saw accelerating demand in Q1, for its Gallery multi-cancer early detection blood test and delivered revenue of $20 million, exceeding plan and representing 100% growth year-over-year. GRAIL non-GAAP operating expenses increased to $173 million, driven primarily by investments in clinical trials and scaling GRAIL's commercial organization. Since launch, GRAIL has received more than 85,000 Gallery test orders. with about 20,000 delivered in Q1 alone. The 140,000 participant NHS Gallery trial, which completed enrollment in July 2022 in just over 10 months, is progressing well, with more than half of study participants having returned for their second annual blood draw. The trial recently achieved its halfway point and is currently on track to meet retention targets. GRAIL continued to expand its partner relationships. Following a successful pilot last year, John Hancock, one of the largest life insurance companies in the U.S. and a unit of Manulife, announced that it would expand access to Gallery to eligible life insurance customers. And Providence, a health system serving the Western U.S., expanded its partnership with Grail to offer Gallery to eligible individuals across its 52 hospitals and 900 clinics across seven states. In reproductive health, consumable shipments declined 4% year-over-year, primarily due to effects, but increased 14% sequentially due to continued coverage progress. In the U.S., Virginia and Michigan initiated state Medicaid coverage for NIPT in all pregnancies, adding about 4.3 million additional covered lives and more than 70,000 pregnancies per year. Genetic disease testing, or GDT, had a record quarter. In Q1, GDT consumable shipments grew 7% year-over-year and 6% sequentially. Coverage continues to grow for whole genome sequencing in patients with rare and undiagnosed genetic diseases. During the quarter, one of the largest U.S. health insurance companies updated their policy to include managed Medicaid lives in 16 states, adding another approximately 3.8 million covered lives for whole genome sequencing. Also in GDT, earlier this month we announced a partnership with Henry Ford Health, a healthcare organization in the Detroit metro area and a leading U.S. academic medical center to assess how whole genome sequencing can improve cardiovascular disease management with a particular interest in diverse and underserved populations. Turning to our research and applied markets, sequencing consumable shipments were down 19% year-over-year primarily due to the slowdown in COVID surveillance. Looking at the whole year, we are on track to deliver on our financial commitments for 2023, as well as some important releases in the coming quarters. Specifically, we will ship the ICLR enrichment assay, an affordable high-throughput targeted long-read solution in Q3, and XLEAP SBS chemistry on NEXLEAP 1K-2K in the first half of 2024, delivering step change cost speed, and sustainability benefits on that platform. Finally, as we navigate through this dynamic environment, we are focused on delivering durable success for our shareholders through a balance of investing in breakthrough innovations for future growth while delivering operating leverage through disciplined expense management across the organization. To that end, we announced earlier today our commitment to deliver core Illumina non-gap operating margins of 25% in 2024 and 27% in 2025, while maintaining investment in the key elements of our innovation roadmap. Building on the cost reduction actions announced last November, we're taking additional steps to reduce our annualized run rate expenses by more than $100 million beginning later in 2023. This will accelerate progress towards higher margins as well as free up capital to increase investment in high growth areas. I'll now turn the call over to Joydeep to discuss additional details on our results and outlook, as well as provide more detail on the steps we are taking to deliver on the cost reduction I mentioned. Joydeep?