Good day, ladies and gentlemen and welcome to the Third Quarter 2022 Illumina Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Salli Schwartz, Vice President of Investor Relations.

Hello, everyone and welcome to our earnings call for the third quarter of 2022. 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 had 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 Francis deSouza, President and Chief Executive Officer; and Joydeep Goswami, Chief Strategy and Corporate Development Officer, as well as Interim Chief Financial 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, pending the outcome of the European Commission's investigation into Illumina's acquisition of GRAIL, the commission has adopted an order requiring Illumina and GRAIL to be held and operated as distinct and separate entities for an interim period. Compliance with the order is monitored by an independent monitoring trustee. During this period, Illumina and GRAIL are not permitted to share confidential business information unless legally required and GRAIL must be run independently exclusively in the best interest of GRAIL. Commercial interactions between the two companies must be undertaken at arm's length. This call is being recorded and the audio portion will be archived in the Investors 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 10-Q and 10-K. With that, I will now turn the call over to Francis.

Thank you, Sally. Good afternoon, everyone. Illumina delivered revenue of $1.1 billion in the third quarter, up 1% year-over-year and 3% on a constant currency basis and in line with our expectations despite deepening macroeconomic challenges. Looking at our Q3 performance across platforms, in high throughput, we shipped 65 NovaSeq 6000 in Q3, down from the prior year, in line with our expectations. We had a fantastic customer response to the NovaSeq X Series launch at the Illumina Genomics Forum, where we reached more than 12,000 viewers in our innovation roadmap sessions. Labs are excited by NovaSeq X's industry-leading power, efficiency and cost-effectiveness. They loved, in their words, its unexpected and revolutionary sustainability breakthroughs including ambient shipping and a 90% reduction in packaging, weight and waste. Customer traction for NovaSeq X is exceeding our expectations. We already have an advanced pipeline of more than 170 instruments in addition to 50 orders that we have already received. Our manufacturing scaling is proceeding well and we expect to ship 40 to 50 NovaSeq X units in Q1 2023 and over 300 units in the year. At the Illumina Genomics Forum, we also launched the NovaSeq 6000 DX, the first-ever FDA registered and CE-marked IVD high-throughput sequencer. We're excited to now provide DX offerings across the throughput spectrum. In mid-throughput, we saw record NextSeq 1K, 2K shipments, which were up 40% year-over-year. This increase was driven by accelerated adoption of multiomics primarily in cancer research and cellular and molecular biology, both by new and existing customers. As part of our ongoing innovation roadmap, our launch of X leap SBS chemistry on NextSeq 1K, 2K remains on track for 2024. Finally, low throughput shipments were up 13% year-over-year. These instruments continue to provide a great entry point to sequencing. This continued demand for our sequencing platforms across the throughput spectrum will contribute to a larger installed base and drive future consumables revenue. We're also receiving positive feedback from early access customers of Illumina complete long reads and complete long reads with enrichment and are expanding to additional customer sites. Customers appreciate Illumina's unique ability to deliver a high-quality, cost-effective and complete view of the genome on a single platform, enhancing utility across our installed base. Shifting to our market segments, clinical sequencing consumable shipments were up 5% year-over-year, driven by continued growth in oncology testing and genetic disease testing. Sequencing run activity by our clinical customers remains strong. As expected, though lab expansion delays and consumables inventory deleveraging have persisted due to broader macro dynamics. Oncology testing consumables grew 9% year-over-year as our larger customers continue to shift towards high-throughput applications and our decentralized clinical testing customers ramped up business with new customers coming online. Our market-leading TruSight Oncology assay, TSO 500, grew 17% year-over-year as large customers took advantage of the assay's utility, reimbursement, and proficiency. TSO 500 adoption continues to grow, with total accounts approaching $500 million. Also in oncology, GRAIL continued to make good progress in Q3, delivering clinical results and signing up a broad range of customers across the healthcare ecosystem, including health systems and life insurance providers. GRAIL announced a first-of-its-kind partnership with Karim Health, the first digital health company connecting employers and employees to centers of excellence through a value-based care platform. The partnership provides Galleri as part of Karim's oncology offering to self-insured employers. Also, John Hancock, the U.S. division of Manulife with over 1.5 million life insurance participants recently became the first life insurance carrier to offer Galleri. The GRAIL team expanded its clinical sales force in Q3 and has seen test orders increase. Evidence for Galleri's efficacy also continues to grow. In September at ESMO, GRAIL presented compelling final results from its PATHFINDER study. The study demonstrated that when added to standard of care screening, Galleri multi-cancer early detection testing more than doubled the number of cancers detected compared to standard screening alone. In fact, Galleri detected more cancers than all U.S. Preventative Services Task Force recommended single cancer screenings combined. And Galleri's positive predictive value of about 40% is significantly higher than commonly used screening tests like the annual screen for colorectal cancer which has a PPV of 8.7% and the biennial mammography screen with a PPV of 4.4%. Galleri is the only multi-cancer detection test available on the market. An analysis of the first 38,154 Galleri commercial test results in a real-world setting shows high concordance with the PATHFINDER study results. In addition, PATINA study participants' experience with the Galleri test has also been positive, with 97.1% of participants reporting a high level of satisfaction with the test. In genetic disease testing, sequencing consumable shipments grew 11% year-over-year. National health system funding for rare diseases is increasing in multiple geographies, including EMEA and China, and evidence generation continues to grow. For example, in September, Genetics in Medicine published a study from Karolinska Institute indicating that genome sequencing is a sensitive first-line test for neurodevelopment disorders. We're also seeing customer excitement around the potential for NovaSeq X to create efficiencies for both whole genome and whole exome sequencing. Turning to our research and applied markets, sequencing consumable shipments were down 8% year-over-year as customers continue to manage inventory and capital spend and due to expected headwinds from COVID surveillance and the completion of the UK Biobank project in Q3 2021. We continue to support our customers through these dynamics. At the same time, we are making ongoing progress in facilitating genomic-based drug discovery. As this area continues to grow, we will partner with a range of pharmaceutical companies like our recent collaboration with AstraZeneca to help accelerate genomics and find promising drug targets based on OMIC insights. In our infectious disease and microbiology markets, we are broadening genomic opportunities across disease states. For example, we recently announced a partnership with General Screen to help countries impacted by tuberculosis to more effectively detect and combat multidrug-resistant strains. TB claims more than 1.5 million lives each year and for the first time in a decade, deaths are on the rise after the pandemic. We hope that with this work, we can help vulnerable populations and make progress towards eliminating TB worldwide. Turning now towards the end of 2022 and entering 2023. We expect the macroeconomic challenges we have previously discussed to persist into 2023 and feel that it's prudent to adjust our near-term guidance accordingly. Joydeep will address our revised FY '22 guidance shortly. Despite the near-term challenging macroeconomic environment, we remain confident in our long-term growth trajectory. Customers around the world continue to share their excitement for our latest innovations. We're staying focused on supporting them and advancing our innovation roadmap to accelerate the genome era. I'll now turn the call over to Joydeep for more detail on the quarter and our year-end outlook.

Thanks, Francis. As a reminder, our third quarter financial results include the consolidated financial results for GRAIL. I'll start by reviewing our consolidated financial results, followed by segment results for core Illumina and GRAIL and then conclude with additional remarks on our current outlook for 2022. I will be discussing results which include stock-based compensation. I encourage you to view the GAAP reconciliation of these non-GAAP measures which can be found in today's earnings release and in supplementary data available on our website. In the third quarter, consolidated revenue was $1.12 billion, up 1% year-over-year or 3% on a constant currency basis, net of the effects of hedging. As expected, our core business growth was impacted by anticipated headwinds from customer supply chain issues that delayed lab expansions as well as tighter customer inventory and capital as inflation and the negative impact of FX. These dynamics have persisted and, in some cases, accelerated through the third quarter leading to our guidance reduction for the full year 2022 which I will address later in my remarks. For the third quarter, GAAP net loss was $3.82 billion, or a net loss of $24.26 per diluted share which includes goodwill impairment of $3.91 billion related to the GRAIL segment, primarily due to the negative impact of current capital market conditions and higher discount rates, including a stand-alone risk premium on the fair value calculation of the GRAIL segment. Non-GAAP earnings were $54 million or $0.34 per diluted share, including dilution from GRAIL's non-GAAP operating loss of $148 million for the quarter. Our non-GAAP tax rate was 43.2% which increased from 25.8% last quarter and 13.2% in Q3 2021, primarily due to the increased impact of R&D expense capitalization requirements implemented by the Tax Cuts and Jobs Act of 2017. Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million. Moving to segment results, I will start by discussing the financial results of Core Illumina. Core Illumina revenue of $1.1 billion was approximately flat year-over-year or up 3% on a constant currency basis, net of the effects of hedging. Core Illumina sequencing consumables revenue of $725 million was approximately flat year-over-year. As expected, growth driven by the increased installed base was muted by the year-over-year impact of customer inventory and cash management, headwinds from foreign exchange rates, the conclusion of the U.K. Biobank project in quarter 3 of 2021 and the anticipated decrease in COVID surveillance revenue. Sequencing activity on our connected instruments for clinical customers remains strong. While the pace of research sequencing activity was tempered by various macroeconomic challenges, Francis mentioned. Sequencing instruments revenue for Core Illumina declined 10% year-over-year to $162 million driven by lower NovaSeq shipments due to expected customer lab expansion delays and capital management as well as purchasing DLAs in advance of next year's availability of NovaSeq X. This decline was partially offset by record NextSeq 1K, 2K shipments which grew 40% year-over-year as we continue to see strong adoption by new Illumina customers. During the third quarter, COVID surveillance contributed approximately $28 million in total revenue comprised of $23 million in sequencing consumables and $5 million in instruments. This was in line with our expectations and down nearly 50% year-over-year, driven by lower testing samples and a decline in instrument shipments as COVID surveillance capacity was largely established in 2021. Core Illumina sequencing service and other revenue of $123 million was up 12% year-over-year, driven primarily by higher instrument service contract revenue on a growing installed base and an increase in core licensing revenue. Moving to regional results for Core Illumina. Revenue for the Americas was $592 million, up 2% year-over-year primarily driven by NovaSeq consumables growth due to demand from genetic testing, oncology testing, and cancer research customers. As expected, growth in the region was largely offset by customer lab expansion delays and inventory and capital management as well as a decline in COVID surveillance revenue. EMEA revenue of $290 million represented a 7% decrease year-over-year or a 2% decrease on a constant currency basis, net of the effect of hedges. Strong growth in mid-throughput instrument shipments driven by clinical demand was more than offset by the conclusion of the U.K. Biobank program and a decline in COVID surveillance revenue. Greater channel revenue of $133 million represents a 9% increase year-over-year or a 14% increase on a constant currency basis. Record quarterly revenue in the region was driven by growth in sequencing consumables for routine NGS-based research that resumed after the COVID restrictions that began in March this year were lifted as well as strong sales of NovaSeq 6000 primarily to clinical customers for oncology testing. We continue to expect base business growth to be impacted by headwinds from the zero COVID-19 policy, exchange rates, and slowing GDP growth in the region. Finally, APG revenue of $95 million grew 6% year-over-year or 10% on a constant currency basis, net of the effects of hedges. Growth in the region was driven by strong demand in emerging markets, notably in India, Indonesia, and Thailand, and continued strength in NIPT and oncology testing. Moving to the rest of Core Illumina P&L. Core Illumina non-GAAP gross margin of 68.9% decreased 240 basis points year-over-year, primarily due to less fixed cost leverage on lower manufacturing volumes and higher freight costs, partially offset by favorable product mix. Core Illumina non-GAAP operating expenses of $514 million were up $36 million year-over-year due primarily to headcount growth and investments we are making in R&D to support the continued advancements of our innovation roadmap. Despite the year-over-year increase, non-GAAP Core Illumina operating expenses were approximately $25 million lower than we had originally planned. As a result of lower performance-based compensation expense given our lower revenue outlook as well as cost containment initiatives focused on prioritizing hiring and discretionary spend, including travel. Transitioning to the financial results for GRAIL, GRAIL revenue of $10 million for the quarter consisted primarily of Galleri test fees. GRAIL non-GAAP operating expenses totaled $149 million for the quarter and consisted primarily of expenses related to headcount and clinical trials. Moving to consolidated cash flow and balance sheet items, cash flow used in operations was negative $52 million, a net outflow due to a one-time payment related to the litigation settlement with BGI that I mentioned to you last quarter. DSO was 51 days compared to 50 days last quarter due to revenue linearity. Third quarter 2022 capital expenditures were $67 million and free cash flow was negative $119 million. We did not repurchase any common stock in the quarter. We ended the quarter with approximately $1 billion in cash, cash equivalents, and short-term investments. Moving now to 2022 guidance. We now expect full year 2022 consolidated revenue to be flat to up 1% year-over-year, including approximately flat core Illumina revenue compared to 2021 and GRAIL revenue in the range of $55 million to $65 million. Our revised outlook for the full year reflects the more challenging expected macroeconomic headwinds we observed through October. For core Illumina, approximately one third of the reduction in our 2022 guidance from our previous expectations is primarily driven by delayed recruitment for some large research projects in the Americas and Europe and the impact of inflation on research customers in Europe. The remaining two-thirds of this reduction is split approximately 70-30 across two higher-than-expected factors. One, delays in instruments and consumables purchases primarily due to the excitement around NovaSeq X; and two, negative FX impact and consumables inventory deleveraging. For the full year, we now expect core Illumina sequencing revenue to be approximately flat year-over-year. This continues to include intercompany sales to GRAIL of approximately $25 million which are eliminated in consolidation. Within core Illumina sequencing revenue, we now expect instrument revenue to be down slightly year-over-year and consumables revenue slightly below our guidance range of $1.1 million to $1.2 million per system for 2022, primarily driven by recruitment challenges at some large research and PopGen customers. The remainder of our pull-through ranges are in line with the historical guidance ranges that we have previously provided. For full year 2022, we now expect consolidated non-GAAP operating margin in the range of 9.5% to 10% and core Illumina non-GAAP operating margin of approximately 23%, reflecting our lower revenue outlook. We expect a consolidated non-GAAP tax rate of approximately 7%, which continues to assume that the R&D expense capitalization requirements implemented by the Tax Cuts and Jobs Act of 2017 will be repealed in Q4. We now expect non-GAAP earnings per diluted share in the range of $2.35 to $2.50 which includes a lower than previously expected non-GAAP operating loss dilution from GRAIL of approximately $600 million. Lastly, we continue to expect diluted shares outstanding of approximately 159 million shares for 2022. We expect the macroeconomic headwinds we are experiencing to persist into 2023. As we noted in our last earnings call, we are proactively and prudently managing operating expenses with a continued focus on sustainable long-term revenue growth. We are well positioned to seize opportunities to scale in key areas that align to customers' future needs and our innovation roadmap. At the same time, you'll see us gain additional scale and efficiencies from other areas. We will continue to adapt our investments and expenses to support our customers, drive further progress in the genomics industry, and enable our long-term growth. I will now hand the call back over to Francis for his final remarks.

Thanks, Joydeep. As Joydeep shared, we will continue to identify opportunities to mitigate the near-term effects of the global economic environment. At the same time, we are prioritizing our innovation roadmap and remain confident in our long-term growth trajectory. As I shared earlier, we're hearing high praise for the innovations we announced at the Illumina Genomics Forum, from Illumina complete long reads to our most powerful and sustainable sequencer yet, the NovaSeq X Series. These innovations will continue to evolve the genomics industry and we look ahead with tremendous optimism over the long term. We will help our customers through the current challenges and seize the potential of the genome era together. I'll now invite the operator to open the line for Q&A.

And our first question will come from Dan Brennan with Cowen.

I wanted to mention that there's a lot to discuss, but I will focus on the NovaSeq X and the 300 shipment guide, including the 50 in the first quarter, which is ahead of our model. Francis and Joydeep, could you provide insights regarding early customer activity? Specifically, where are the orders coming from, particularly in relation to large research customers like genome centers versus smaller clinical customers? Additionally, with 50 orders confirmed and 170 advanced order books, suggesting you have over 200 already, would you describe the 300 shipments as attractive, yet potentially conservative, considering the expected order momentum in the next 6 to 9 months?

Great. Thanks for the question, Dan. So let me work through those questions. First of all, you're right, we are very, very pleased with the very strong response we've gotten from customers around the NovaSeq X. Frankly, it's been stronger than we expected and we had high expectations going into the Illumina Genomics Forum. The customers are coming from a broad swath of customer segments. We're seeing more of a mix from clinical in addition to the usual genome centers that you'd expect to be some of the early adopters. And we're seeing a mix both from U.S. customers as well as customers from outside the U.S. So sort of a nice broad brush of early adopter customers and maybe even a little bit more on the clinical side than we saw when we first launched the NovaSeq 6000 a few years ago. As you pointed, the initial orders we've got that you pointed out, 50 orders already in hand, that means that our Q1 shipments are already sold out. So we're really entering the year in a really strong position for NovaSeq X shipments. And we have a very healthy pipeline of 170 customers that are down the pipeline already. So when you look at the shipment number for the year, the number that I called out, the 300 units, it's clear that the shipment number is going to be more constrained by supply availability next year than it is for demand. Because as you point out, we're entering the year with a very strong demand book. And the way we think about it is that over the first couple of quarters of the year, you can expect us to have more demand than we can ship just as we continue to ramp up the manufacturing capability for NovaSeq X and we'll start to service that backlog as we get into the second half of the year.

Our next question comes from Vijay Kumar with Evercore ISI.

Francis, I had a 2-parter, if you will, just on the prior Nova X. The constraints here at the to mention. Can you give us some color on how this cycle compares to the prior NovaSeq X? I mean, we're like a month into a product announcement north of 200 orders. This looks like it could be a really big year for you guys from an order perspective next year. So maybe compare versus the prior cycle and the implied Q4 guidance here on for. I think revenues are minus 13%. And if I think about first Q1 of next year being in the negative territory, maybe next year shaping out to be maybe a mid-single to high top line. So any color on how to think about fiscal '22 would be helpful.

Yes, sure. Thanks for the question, Vijay. So as I said to the last question, you're right in the sense that the customer reaction to NovaSeq X has certainly been stronger than we anticipated. And we modeled the reaction based on our previous launches which have been really strong. But if we look at the number of orders we have already, the 50 orders we have, the 170 in the advanced pipeline. If I were to compare it to where we were at a similar time with previous launches, I'd say we are better off than we've been with some of the other previous launches. So certainly in a very strong position going into next year. Again, next year, NovaSeq shipments number is going to be supply constrained. And we ramped up an entirely new manufacturing line because we've redone every component of this instrument, right? So entirely new chemistry, new FFM, new flow cells, new manufacturing process for the flow cells. And so we're really happy with the way that scale-up is happening. So if I compare the number I gave you for the Q1 shipments that would be ahead. So the 40 to 50 shipments we expect in Q1, that would be more shipments than we did in the first quarter when we launched the NovaSeq 6000, so slightly ahead of where we were before. And then the 300 units that we're expecting to ship would be ahead of where we were with the first year of NovaSeq 6000 as well. So that's how it compares with previous launches. Maybe I'll turn it over now to Joydeep.

Yes. So regarding what has changed for NovaSeq, we are experiencing strong early demand from clinical customers, which we attribute to the ongoing robust clinical research that is now moving towards NovaSeq X for some studies. This is a positive trend. As for your next question about our relationship moving into Q4 and 2023, we have noticed a worsening of some macroeconomic conditions, including inflation and foreign exchange rates. This has led us to adopt a more cautious approach for Q4, and we expect these conditions to persist into 2023. We are taking a closer look at these factors. Specifically, the foreign exchange situation has deteriorated and is anticipated to be a continued challenge in 2023. Additionally, we mentioned that COVID surveillance is likely to decline further into next year. All these factors have tempered our earlier expectations regarding interest in NovaSeq X and other technologies such as the Illumina complete long reads. Overall, while we have not finalized guidance and budgeting yet, I believe we can expect revenue growth in 2023 to be closer to 10% rather than our previous guidance.

And our next question will come from Dan Arias with Stifel.

Francis, can you just touch on the lab delay issue a little bit? It sounded like last quarter, the delays were a 2Q to 3Q phenomenon more than they weren't. You were in line this quarter. So the fourth quarter assumption is obviously getting adjusted here which just seems a little bit more extended than we would think. So can you just sort of talk to what's going on there? And then when your expectations call for some of these labs actually getting going and being where they need to be?

Yes, sure. So when we talked about the results last time on the call, we talked about the fact that we've seen some delays that we're looking to get ramped up later this year and some that were going into next year. And what we found is in both of those cases, ended up being a little later than those customers had expected. And so we're seeing a push out from what was expected to come this quarter being pushed out into next year. And then even the dates for next year opening have been pushed out somewhat too. So the pandemic-related effects around supply chain are definitely persisting and are impacting those lab delays.

And our next question will come from Puneet Souda with SVB Securities.

So first one, I just want to clarify that 10% growth that you mentioned for 2023, that's on the entire top line. And then I just wanted to also get a little bit around the 10 and the 25 billion sort of flow cells. 10b is launching earlier, 25 is going to be later in next year. It appears to us that the 10 billion read flow cell could be most meaningful in your portfolio, just given that it can turn around samples in 24 hours and to still give the NovaSeq capacity that is delivered through NovaSeq 6000 today on. So maybe just walk us through how do you see the ramp for that? And what does that all mean in terms of sort of pull-through into 2023.

Thank you, Puneet. So let me talk to both. I'll start by saying that the answer we gave around the 10% wasn't intended to guide for next year. It was intended to just talk about how we were thinking about some of the factors that are at play Q4 going into Q1 and we'll give a specific guide as we get into next year once we've done the budgeting. In terms of the flow cells, I think you're absolutely right. That comparing it to the existing instrument they have because it's very similar in terms of footprint, in terms of output and will probably take on some of the same workloads. And so customers will see a sense of familiarity and move to the X with that flow cell. And so you'll see customers that start with that. And then the $25 billion flow cell is really intended to unlock the next generation of studies, the very large programs that customers have been talking to us about and have been waiting for the price points of the X that are fundamentally enabling to those studies. And so you can think about it as there will be the first flow cell that existing NovaSeq 6000 customers will view as very familiar to them in terms of output and the workloads that it does and will start using as sort of their entry point into the X series.

Dan, maybe Puneet, to add, right? We expect the transition, obviously, to move forward on the consumables side much faster with research customers and clinical customers because their validated workflows will switch a little bit later into the cycle.

And our next question will come from Julia Qin with JPMorgan.

I remember, you noted at the Analyst Day that enabled by NovaSeq, it could be a meaningful catalyst event for some of the PopSeq initiatives around the world. But at the same time, I think you noted in 4Q, there will be some research project delays, including recruitment challenges for some of the POPC program. So I guess, in light of that, how should we think about how meaningful the POPSEQ programs will be in terms of our revenue contribution next year?

Let me address both parts of your question. First, regarding the effects we're observing in Q4 related to some of the POPSEQ programs, and second, about the potential of X in enabling future proxy programs and its significance. In Q4, we mentioned that there are a small number of specific ongoing population sequencing programs that are facing recruitment delays. It's a limited number, and these projects are experiencing slower progress than anticipated in recruiting. However, we are confident that these projects will continue and complete successfully, although at a slower pace than expected in Q4. Now, considering what X enables for the next generation, customers have been increasingly discussing, especially in the past few weeks since the X announcement, large-scale projects involving millions of samples. They are looking at sizable exome and genome projects that were previously not economically feasible before the introduction of X. One point we highlighted on Investor Day is that our team can play a crucial role in facilitating these projects. Our technology will empower these initiatives by providing scalable instruments at viable price points, and often, we assist in bringing together key stakeholders like pharmaceutical companies, biobanks, or national health systems to launch these projects. Recently, our commercial team has seen high demand from health systems globally wanting to leverage the capabilities of X to establish programs that create more diverse or significantly larger cohorts than currently available. Therefore, I believe that X will have a substantial impact in this area.

And our next question will come from David Westenberg with Piper Sandler.

I apologize for following up on my previous question regarding consumable ordering behavior. I'm aware that some of these consumables have expiration dates. You mentioned, Joe, that there are ongoing dynamics related to the usage burn down extending into the fourth quarter. While this might align with your expectations, it appears to contrast with my model as this trend continues among corporate clients. How are we interpreting this situation? Is it not seen as a slowdown in sequencing or the wider market, especially since many of your customers have budgets, including NIH funding, that need to be utilized for necessary tests? I am curious why, despite all this, we're still seeing a 10% growth in 2023. Wouldn't there be a catch-up effect for consumables that were missed in Q3 and Q4? I hope that question wasn't too convoluted.

Yes. Let me try to clarify. As Francis mentioned, we are still in the budgeting phase. So the 10% figure wasn’t intended as a benchmark; it is more reflective of the macroeconomic conditions we are observing. To address your question about whether inventory deleveraging is accelerating or decelerating, we are aligned with our expectations regarding inventory deleveraging, with only a minor portion of our additional guidance for Q4 coming from incremental inventory adjustments. Regarding any slowdown compared to what we communicated at the end of Q2, we have identified two specific areas where activity has been slower than anticipated. One involves a few key customers, mentioned by Francis, who are facing recruitment challenges for significant research and PopGen projects. We believe these issues will resolve over time. This is not primarily a budget problem or mostly related to inflation. Additionally, we observed inflation and foreign exchange impacts specifically affecting research customers in Europe, which is contributing to a slowdown. We anticipate that some of these challenges will persist into the next year as these headwinds continue. However, this is not a fundamental change; it is a temporary situation influenced by particular macroeconomic factors.

And our next question will come from Michael Ryskin with Bank of America.

Great. I want to try to squeeze in a couple but they're all on the same topic. One, for the GRAIL write-down, the $3.91 billion. Could you talk through the rationale, the underlying reason we've taken out this quarter? Does that have any impact on divestment discussions or sort of the puts and takes on what goes into that decision, especially if you sort of think back to a year ago, I think the deal goes right around a year ago for $8 billion? And then also, did you clarify like Grail was down sequentially, $12 million in the second quarter to $10 million in the third but the midpoint of the fiscal year since. So was it just some lumpy orders coming through? Just what's going on there?

Yes. So let me take the first part of your question. So the reassessment of GRAIL's book value was really more of an accounting requirement triggered by some of the regulatory decisions coming out of Europe. Again, the primary driver of the valuation change was the higher discount used really as a result of the current capital and equity market conditions, right? The underlying the performance of GRAIL in terms of how it's progressing on its clinical results and signing up customers really has not changed and in fact, has improved a little bit over the last few quarters. Impairment, again, is an accounting change. It has no impact on our pursuit of various options on the GRAIL front and those are continuing as we had described earlier in our Investor Day. I'll turn it over to Francis.

Yes, in terms of the GRAIL number. So the way the quarter played out, the first month of the quarter of July was slow in terms of test ordering. And then the pace really picked up in September, partially driven by the ramp-up in the sales force that GRAIL has brought on board and we talked about that on the Q2 call. And so that's paid off in the last month of last quarter and in the first few weeks of this quarter. And so that's what's driving the shape of the curve. In terms of the expectations for the year, they're off to a strong start for Q4 and the midpoint of guide remains the same. And then the other factor that's playing out in Q4 is the revenue they're getting from their pharma partnerships associated with their MRD development.

And our next question will come from Kyle Mikson with Canaccord.

Just a quick market part question for me. On NovaSeq X, I was wondering what your expectations are for trade-ins and bundles in the near term just given the X is basically like the equivalent of multiple 6000. So maybe you could talk about that in the context of the '23 shipment numbers that you provided today maybe kind of spoke to earlier? And then on kind of separately Francis, just wondering if you can share your thoughts on the complete offering in the long-read space, just given the updates from PacBio and others recently?

Yes. So let me take the first part first, which was around our expectations of trade-ins. So our customers, based on their experience with us know that we keep customers whole when we launch a new platform. And so as we've always done when we've launched a new platform, we have trade-in programs for customers that have recently purchased to 6000. And we actually have programmed even now that if you want to buy a 6000 now to get going, you can trade it in, so you can buy now and trade it in once we launch the next year. And certainly, there have been customers that have appreciated that very much and have taken us up on that. And we expect some more to take us up on that through this quarter and going into next year. So that's a standard part of our launching a new product. In terms of our complete long reads, we've seen a really enthusiastic response from our customers around being able to use their existing installed base across the throughput sizes. So whether you're a MiSeq, all the way to Nova 6000 or the X to do both long-read and short-read workloads and to do that in a way that allows them to take advantage of low sample inputs lower than they can perhaps on other platforms.

And so we expect that to be fundamentally enabling to that space. And if you especially if you combine the existing platforms you have with the complete long read it enrichment, you end up with the ability to do long reads much, much more cost effectively than you could do on other platforms without compromising accuracy in any way. So, you still get the gold standard of accuracy and you can do it much more cost effectively. So that's really exciting. What it does is it opens up that last bit of the genome, the last few percent of the genome that historically was hard to read with short read technology.

And our next question will come from Tejas Savant with Morgan Stanley.

Francis, a 2-parter for you here. So I want to talk about the metered ramp down for the NovaSeq 6000 consumables, you alluded to at the Analyst Day because of a higher proportion of clinical users. But then today, you guys out a higher clinical mix for the X. So I'm just trying to juxtapose those two dynamics as we think about the NovaSeq 6000 consumables tail off over the next couple of years here? And my second question is really around some of the PopGen recruitment delays that you called out over here. If I remember right, in the last product cycle, essentially, ops had to be removed from the guide because it became so unpredictable in terms of timing. Can you just call out sort of what you see is different this time around that drives your confidence that at least as far as POPSEQ goes, you will continue to get that sort of elasticity of demand?

Yes, that's a great question. To start with the first point, you are correct that for those running production clinical workloads, the NovaSeq 6000 will still be the primary system for some time. There will be a gradual transition to the X system that will take place over months and years. We believe this aligns with the feedback from our customers. What's particularly encouraging is that clinical customers are discussing new projects and showing interest in starting those on the X system instead of the 6000. This intention to develop on the X and later scale it to production has been more significant than we anticipated, indicating that many of our larger clinical clients are venturing into new areas. This is a promising development for both the industry and for us. Regarding POPSEQ, we’ve noted that when we secure new major POPSEQ deals, we typically exclude them from our guidance until we determine their timing. This approach is based on our previous experiences with these deals. Once these deals are in production, they will be reflected in our guidance, and the fluctuations will be smaller than waiting for a significant new deal. We’ll inform you if there are any changes in that regard, especially as we approach Q4. So, this means there will be less uncertainty compared to incorporating a new deal into our projections.

And Francis, I'd just add, I think it is a great question about the clinical side, right? I think we are seeing some of these newer tests that Francis called out going more towards NovaSeq because these are also the higher intensity tests which have much higher throughput requirements which is consistent with what we mentioned regarding elasticity and continuing to go up with the introduction of new technologies.

And moving on to Dan Leonard with Credit Suisse.

I just want to make sure I understand the change in the 2022 guide for core Illumina. It seems like you attributed half of the guidance reduction to delays associated with the X, if I'm doing the math right, 70% of the 2/3, you knew you were launching the X. So what evolved differently from your expectations?

Yes, you're absolutely right. We knew we were launching the X and we sort of modeled the customer interest based on the previous launches we've done. Frankly, we've been really surprised in a positive way around how much interest there has been from our customers in getting to the X. And again, as I said, we fully expected our clinical customers to be a little bit slower in terms of coming on board for the X. And what we're finding is that they're not; the reasons we talked about that while they're keeping production workflows on the 6000, they are excited about using the X for their new applications which, as Joydeep said, tend to be more sequencing-intensive applications. And so that has been an upside surprise in terms of the enthusiasm for the X but has a knock-on effect that people are saying, look, I'm going to hold on the 6000 in Q4 and wait for the X as it starts to ship in Q1.

And our next question will come from Patrick Donnelly with Citi.

Francis, maybe 1 just on the customer base, more on the kind of clinical diagnostics side. I know in the past quarter, you kind of called out there being a little more conservative with cash, particularly kind of speaking to the inventory question. Are you still seeing that piece? What are the conversations like and kind of the outlook for that market?

Yes. Thanks, Patrick. So we're definitely seeing that continue to play out. We think two things glad. One, activity levels in terms of runs on the instruments that they have continue to be robust and generally in line with the commentary we shared in Q2. At the same time, we are seeing concern around their cash position and our desire to want to manage their inventory levels more conservatively perhaps than they have historically. That's also enabled by the fact that they've seen that our supply has been very consistent and robust and stable even through the pandemic. And we have confidence in saying, look, we can run at a lower inventory level for a while and still maintain the integrity of their operations capability. And so we're definitely seeing that dynamic continue to play.

And our next question will come from Luke Sergott with Barclays.

Can you give us a sense of the margin profile of what X LEAP is going to come through? I think it's important to think about as you ramp on the NovaSeq X next year. And as that continues to come up and you're having the higher pull-through, we need to kind of figure out where the operating margin is going to come through?

Yes, sure, Luke. The expectation and the design point is to maintain similar margins with the instruments that use the new X chemistry as the instruments that they're replacing. So if you look at the X, for example, you should think about it over time as it scales to have a similar margin profile to the NovaSeq 6000, both in terms of the instrument side and certainly on the consumable side. And so that's the design criteria we use. The idea is to invest in technology that fundamentally lowers the cost to make the product and then pass on those savings to our customers. So maintain the same margins and pass on the savings to our customers associated with the innovations that we're bringing like X, like the new optics, like the new flow cells and so on.

And our next question will come from Jack Meehan with Nephron Research.

I wanted to talk a little bit about the guide here for the fourth quarter. So I think for the year, the new consumables guide is flat by my math, and you can check me on this a lot of earnings tonight. I think that implies down 16% in the fourth quarter. Can you just talk us through what's going on there maybe between price and volume? And it just seems like given you're talking about it's kind of concentrated in one part of the customer base, it just feels like a big move.

Yes. Overall, for the full year, you're correct that sequencing consumables are flat. Pricing is not affected; this is mainly driven by volume. We monitor pricing closely, and it aligns with our observations from previous quarters. The reasons for the volume decline have been discussed earlier. There is also a component of foreign exchange impacting revenue. In terms of volumes, there are two main factors. First, there's an inventory reduction that we've noted before, and there's an additional aspect. Specifically, large research customers and delays in recruitment, as well as some inflationary and foreign exchange impacts we've observed in Europe, are the main contributors to the slowdown. Additionally, as Francis mentioned, the rising interest in NovaSeq has led to some delays in consumables purchases for NovaSeq X.

Thank you for joining us today. As a reminder, a replay of this call will be available in the Investors section of our website. This concludes our call and we look forward to our next update with you at the JPMorgan Healthcare Conference in January.

Thank you. And that does conclude today's conference. We do thank you for your participation. Have an excellent day.