Illumina, Inc Q2 2023 Earnings Conference Call Insights

Key highlights from Illumina, Inc (ILMN) Q2 2023 Earnings Concall

Management Update:

• [00:07:42] ILMN now expects to ship more than 390 NovaSeq X instruments this year, up from the 330 it had previously expected for the year.

• [00:09:22] ILMN’s said its TruSight Oncology assay, TSO 500, is on track to exceed more than $100 million in 2023 revenue.

Q&A Highlights:

• [00:28:47] Puneet Souda with Leerink Partners asked about NovaSeq field challenges that are impacting the market, and how it will affect installs in 3Q and 4Q of 2023 and beyond. Charles Dadswell Interim CEO said that ILMN has placed more NovaSeq X instruments than expected, but it has taken longer than expected to bring them online. ILMN’s technical teams are working with customers to bring the instruments up to speed as quickly as possible.

• [00:29:44] Puneet Souda of Leerink Partners also asked about the status of the CEO search. Charles Dadswell Interim CEO answered that the board is actively searching for a new CEO, both internally and externally. The company is encouraged by the quality of candidates it have seen so far.

• [00:33:57] Dan Brennan at TD Cowen asked if the $25 billion flow cell is still on track to ship, given some issues that have been cited. Charles Dadswell Interim CEO replied that ILMN is continuing to invest in its proprietary pipeline, with a focus on differentiation and innovation. The company is on track to launch a flow cell in 2H23, and is also developing new assays and chemistries for NovaSeq 1K/2K and emerging markets.

• [00:34:10] Dan Brennan at TD Cowen enquired about the prospects for China’s economic growth in 2H, given that the economy grew in 1Q but is facing some headwinds. Joydeep Goswami CFO said that the company’s revenue in China has been slower than expected in 2H23, due to both macroeconomic factors and increased competition.

• [00:34:51] Dan Arias of Stifel asked that given the challenges facing the company this year, how does mgmt. see operating margins for the core business next year vs. the 25% target set last quarter. Joydeep Goswami CFO replied that the company is facing challenges this year, but is taking steps to reduce costs and manage expenses. Management remains committed to reaching 25% operating margins next year, but acknowledges that this will be a challenge.

• [00:41:34] Vijay Kumar at Evercore ISI enquired that given the company’s strong 2Q results, what are the potential headwinds that could impact revenue growth in 2H23? Joydeep Goswami CFO said that ILMN lowered its full-year guidance due to a combination of factors, including a slower-than-expected recovery in China, the transition to the X platform, and customer conservatism. The company expects to see revenue growth in 4Q, as the X platform ramps up and customers resume spending.

• [00:42:00] Vijay Kumar at Evercore ISI also asked to clarify ILMN’s assumptions around pull-through for the NovaSeq X, and whether a rebound could be seen in pull-through due to low inventory levels. Joydeep Goswami CFO replied that ILMN has not yet released pull-through numbers for the NovaSeq X, but expects that they will be in line with initial assumptions. Pull-through numbers for the NovaSeq 6000 have been lowered due to the transition to the X.

• [00:47:10] Tejas Savant from Morgan Stanley enquired if the company still view its commitment to mid-teens growth for Core Illumina as a stretch goal, as it did with its commitment to 25% operating margins? Joydeep Goswami CFO answered that ILMN’s long-term growth expectations of mid-teens are underpinned by two factors: a large and growing market for NGS, and the company’s ability to innovate and address the core needs of that market.

• [00:53:49] Sung Ji Nam with Scotia Bank asked if the cautious purchasing behavior is more for academic customers or also across clinical customers.  Joydeep Goswami CFO said that the cautious purchasing behavior seen by ILMN is across both academic and clinical segments, with clinical customers managing their cash more conservatively than expected.

• [00:54:02] Sung Ji Nam at Scotia Bank also enquired what percentage of the delay in consumable purchases is attributable to the launch of the higher density 25B and waiting for better sequencing economics.  Joydeep Goswami CFO replied that the delay in guidance for the whole year was caused by the impact from China, the transition to X, and some issues with consumables. There is no delay in the 25B platform.

• [00:56:01] Rachel Vatnsdal with JPMorgan asked for a granular breakdown of the 750 bp cut in revenue growth for the year, which was caused by a more cautious capex environment in China and lower consumables as customers transition to the new platform. Joydeep Goswami CFO said that about 25% of the guidance reset is due to the impact from China, 50% is due to the impact on high throughput consumables related to the transition to the X, and the remaining 25% is due to cash conservatism from customers outside of China.

• [00:56:27] Rachel Vatnsdal of JPMorgan asked about the potential for another tranche of stimulus in 4Q in China, whether the company saw any benefit from stimulus packages in 2Q, and how stimulus is contemplated in guidance for 2H23. Joydeep Goswami CFO replied that the company has not built any stimulus into its expectations for 2H23 in China because the stimulus packages announced so far have not benefited the segments that ILMN plays in.

• [00:58:10]  John Sourbeer with UBS asked if the long-term outlook for the China market has changed due to structural headwinds and increased competition, and for any color on the demand for the Complete Long Reads launch. Joydeep Goswami CFO answered that ILMN is refining its strategy in China due to market changes while remaining committed to serving its customers, and expects a jump in demand for its Complete Long Reads platform from the enrichment product launching later this year.