Illumina, Inc.

Ladies and gentlemen, and welcome to the second 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 second 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 a 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 Charles Dadswell, Interim Chief Executive Officer and General Counsel, and Joydeep Goswami, Chief Financial Officer and Chief Strategy and Corporate Development Officer. Chuck 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 will now turn the call over to Chuck.

Thank you, Sally. Good afternoon, everyone, and thank you for joining today's call. As you know, I assumed the role of Illumina's interim CEO two months ago. Our search for a CEO is underway, and we look forward to updating you soon. Our board is pleased with the outstanding candidates they're seeing. Before going to our second quarter results, I wanted to take a moment to acknowledge and thank our former CEO, Francis D'Souza, and our former chairman of the board, John Thompson, for their thoughtfulness and commitment while at Illumina. I would also like to welcome our new board members, Stephen McMillan, our new chairman of the board, as well as Andrew Tenno and Scott Ullum. I also want to acknowledge changes in our executive leadership team, including the departures of our chief technology officer, Alex Aravenas, and our chief medical officer, Phil Febo. I speak for the whole company in wishing both of them every success for the future. We're also pleased to announce that Steve Bernard, a 25-year Illumina employee and distinguished scientist in our field, will drive Illumina's legacy of innovation forward as our next Chief Technology Officer. We'll be conducting a search for our next Chief Medical Officer. Turning to second quarter results, in Q2, Illumina delivered revenue of approximately $1.18 billion and diluted non-gap EPS of 32 cents. both ahead of guidance we provided in Q1. We shipped 109 NovaSeq X instruments in the quarter and have increased our expectations for our full year supply capacity to more than 390 instruments. However, as you saw from our earnings release, we are reducing our guidance and now expect Core Illumina full year 2023 revenue to be approximately flat with 2022, primarily as a result of three factors. First, a larger than expected temporary decline in high throughput consumables as we transition more than expected customers to the NovaSeq X. Second, many of our customers are remaining more cautious in their purchasing behaviors. And finally, in China, there's a more protracted economic recovery and an increasingly challenged competitive landscape, in contrast to the Americas and Europe, where we're still expecting year-over-year growth in 2023. Joy Deep will provide additional details on our revised guidance during his remarks. One area I'd like to touch on further is the rollout of NovaSeqX. This has been a more challenging process than we anticipated. NovaSeqX is the most sophisticated platform we have ever launched and includes the most comprehensive end-to-end software we have ever released. Also, the rollout of the X has occurred at an unprecedented magnitude and pace, and we have identified issues in the field that are typical in new product releases. To address these issues, we have taken actions, including a planned software update that was released in June after our first customer shipment in March. We have deployed Illumina technical teams worldwide to work with our customers to accelerate bringing their systems online. While the rollout of NovaSeq X will take longer than we originally expected, the continued strong interest and commitment of capital to purchase NovaSeq Xs remains encouraging. To date, 20% of customers who have purchased a NovaSeq X have ordered more than one instrument. This early demand for multiple instruments and the capacity they represent underscores our confidence that customers are planning to increase their sequencing activity. Customers have clear intentions to do more sequencing in the future. Our customers have commented that larger-scale single-cell and spatial analysis experiments have become more practical with Novaseq-X, and they are requesting funding for these applications. Customers engaged in large population genomics initiatives have stated they plan to run additional multi-omic programs for population-specific variants, which can be used to develop treatments for various demographics that will be more effective in those populations. And, as some of you have heard, several of our largest customers are using the X to accelerate the move from targeted panels and exomes to whole genome sequencing. We expect these types of projects to scale and ramp in the near future, and we'll be closely engaged with our customers to support their needs. We continue to consciously and actively reduce our expense base and have accelerated actions with $100 million-plus annual run rate expense reduction program we announced at our last earnings call. As you saw in our late June 8K filing, we have reduced our global headcount and are downsizing our global real estate footprint. We're also optimizing our third-party vendor spend and have reduced travel-related and other costs. For 2023, these steps are helping mitigate the impact of lower full-year revenue on our operating margin. Looking forward, these actions will continue to support our margins and create flexibility for further investment in high-growth areas. Let me give you an update on a couple of our platforms. We saw continued global interest in the NovaSeq X series in Q2, and we exited the quarter with more than 260 orders since launch. Our shipments of 109 NovaSeq X instruments in Q2 were above our expectation of 80 for the quarter and brought our total install base to 176 instruments. We now expect to be able to ship more than 390 NovaSeq X instruments this year, up from the 330 we had previously expected for the year. In mid-throughput, we shipped approximately 160 NexSeq 1K-2K units in the second quarter. an increase of 8% year-over-year as customers expanded their current fleets or migrated from the MySeq or NextSeq 550. More than 20% of NextSeq 1K, 2K units in Q2 were placed with new to Illumina customers. We continue to experience lengthened sales cycles, in some cases as customers take time to raise funding or prioritize their investment dollars, and in other cases as they run longer procurement processes. Our win rate across the mid-throughput segment outside of China increased from the first quarter. We believe there is a long runway of differentiation for the 1K2K, notably with XLEAP SBS chemistry coming available on these instruments next year. Moving to our markets. In Q2, clinical represented approximately 53% of our total sequencing consumables revenue. In oncology, progress continued for next-generation sequencing-based testing reimbursement. Anthem, the second largest commercial payer in the U.S., and Blue Cross Blue Shield of Michigan both added coverage for comprehensive genomic profiling for patients with advanced cancers, adding more than 30 million additional covered lives. We also saw coverage continue to progress in Europe, with Switzerland now reimbursing large next-generation sequencing panels, including comprehensive genomic profiling. Illumina's market-leading TruSight oncology assay TSO 500, remains on track to exceed more than $100 million in 2023 revenue. Growth continues to be driven by greater utilization and broader adoption of our assay. In Q2, we also completed our TSO comprehensive submission for IVD registration in the United States. Also in oncology, Grail continues to achieve solid progress in the adoption of its Gallery Multicancer Early Detection Test. In Q2, GRAIL achieved its 100,000th commercial gallery test milestone, and the test has now been prescribed by more than 7,500 providers in the U.S. and ordered in more than 80 health systems. As an update, on the NHS gallery study, in Q2, GRAIL completed second-year follow-up visits in which 130,000 participants returned, giving the trial a retention rate of 91.3%. Invitations for the third and final year visits have begun, And the first appointments for those visits are expected this fall. Evidence for gallery continues to grow. At the most recent annual meeting held by the American Society of Clinical Oncology, Grail announced results from the University of Oxford-sponsored SIMPLIFY study. Reporting high specificity, positive predictive value, and accuracy of the cancer signal detected and the cancer signal of origin prediction, as well as demonstrating the feasibility of using an MSED test to assist clinicians with decisions regarding referrals from primary care physicians. GRAIL is also making progress on its unique multi-cancer minimal residual disease test. At the American Association for Cancer Research annual meeting, GRAIL and AstraZeneca presented new data that supports the use of GRAIL's methylation platform to identify residual cancer in post-treatment settings. Grail's technology had a cancer detection rate of 92% in patients with relapsed or refractory disease across six hematological malignancies. These findings demonstrate that Grail's blood-based methylation approach offers additional options to clinicians as they evaluate patients in efforts to achieve remission and improve survival. Returning to cor alumina, in reproductive health in the U.S., five state Medicaid programs in Louisiana, Michigan, North Carolina, Rhode Island, and Tennessee updated their policies and are now covering non-invasive prenatal testing for all pregnancies. In Europe, NIPT is now available for all pregnancies in the Netherlands and has been approved for broader coverage in Italy. Turning to our research and applied markets, as we announced in mid-July, the Alliance for Genomic Discovery launched by Illumina and National Biosciences in 2022 now includes five founding members, AbbVie, Amgen, AstraZeneca, Bayer, and Merck. It now represents a novel industry-led collaboration to accelerate the development of therapeutics through the large-scale genomics. Members will co-fund whole genome sequencing of 250,000 samples and all have access to the resulting data for use in drug discovery and therapeutic development. The first phase in the alliance was announced in January and it involved whole genome sequencing for 35,000 samples. primarily made of DNA from individuals of African ancestry. Before we move to Joy Deep and then go to Q&A, I wanted to point out a couple of additional innovations that we recently announced. In June, our Primate AI 3D, an AI algorithm that predicts disease-causing genetic mutations in patients with unprecedented accuracy, was featured in articles as the cover story of Science Magazine's June issue. And in July, we announced the latest version of our Dragon software for analysis of next-generation sequencing data. Dragon 4.2 expands award-winning accuracy combined with the flexibility and scalability to enable efficient workflows and extract meaningful insights from genomic data. It improves identification of the causes of genetic disease and further aids in both drug discovery and population genomic analysis. While the year hasn't progressed the way we expected, We remain focused on execution, innovation, and supporting our customers as they ramp their NovaSeq X instruments. We continue to progress on margin improvement while prioritizing investment in proprietary technology that generates differentiated products that are valued by our customers and will drive growth. These include upcoming product launches, including the highly anticipated 25B flow cell for NovaSeq X, the Illumina Complete Long Reach enrichment assay, and ExLeap SBS Chemistry on NextSeq 1K2K, as well as future offerings for emerging markets like proteomics, multiomics, and spatial, where we see opportunities to address researchers' needs, deliver complete, integrated, and accessible workflows. In short, Illumina will continue to deliver impactful outcomes. We empower researchers and clinicians with the data and technology they need to make life-changing discoveries and decisions for patients. Our employees take pride in being part of Illumina's mission to improve human health by unlocking the power of the genome. And we are the global engine of genomics innovation, positioning us today and in the future to maximize shareholder value. With that, I'd like to turn the call over to Joy Deep to discuss additional details on our results and outlook. And from there, we'll go to Q&A. Joy Deep?