Good day, ladies and gentlemen, and welcome to the Second Quarter 2022 Illumina Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Salli Schwartz, Vice President of Investor Relations. Please go ahead.

Hello, everyone, and welcome to our earnings call for the second 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 have not had a chance to review these 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 & 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, Salli. Good afternoon, everyone. Illumina delivered revenues of $1.16 billion in the second quarter, up 3% year-over-year or 5% on a constant currency basis. While sequencing activity across our markets was robust in the second quarter, with sequencing runs on our connected high and mid-throughput platforms growing more than 15% year-over-year and clinical growing even faster, our second quarter results were impacted by macroeconomic challenges that we expect to play out over the next couple of quarters. Specifically, some customers experienced supply chain pressures that delayed their lab expansions and others manage inventory and capital more conservatively. We also saw adverse effects of foreign exchange and anticipated COVID-related shutdowns in China. The robust sequencing activity levels, underlying growth of our target markets and our conversations with customers across the globe indicate these dynamics are temporary. During the quarter, we also made terrific progress on our innovation road map, and are poised to soon deliver the next generation of breakthrough technologies that will fuel the next era of genomics. Turning now to performance across our platforms. In high throughput, NovaSeq shipments in Q2 grew 23% year-over-year, our highest second quarter ever. Consistent with prior quarters, clinical customers, primarily in oncology testing, drove half of our NovaSeq shipments. In mid-throughput, NextSeq 1000, 2000 orders were up 20% year-over-year. Despite some shipments shifting from Q2 to Q3 due to supply delays, Q2 NextSeq 1000, 2000 shipments increased slightly year-over-year. Low throughput shipments were relatively flat year-over-year, even with the comparison to last year's COVID surveillance-driven volume. Turning to our markets. We continue to gain traction in clinical, with sequencing consumable shipments for the second quarter, up 11% year-over-year, and all of our clinical markets contributing to the increase. As I mentioned earlier, we have seen continued growth in our oncology markets.…

Thanks, Francis. As a reminder, our second 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, then conclude with additional remarks on our current outlook for 2022. I'll be discussing non-GAAP results, which include stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and in supplementary data available on our website. In the second quarter, consolidated revenue was $1.16 billion, up 3% year-over-year or 5% on a constant currency basis, net of the effects of hedging. Revenue was impacted by the macroeconomic factors that Francis referenced. As you know, we had anticipated the headwinds from the China shutdowns, the negative impact of FX and slowing COVID surveillance. Each of these were slightly worse than we expected, and collectively, they drove one-quarter of the variance between our expectations and actual results. The remainder of this variance was driven by the lab expansion delays encountered by a few of our large customers as a result of global supply chain constraints, as well as customer inventory and capital management. Nonetheless, overall sequencing activity on our connected instruments was strong in the second quarter, with sequencing runs in our high and mid-throughput instruments growing more than 15% year-over-year. We believe this is a useful reference that shows the general activity trend across our installed base and is directionally correlated with revenue over time. For the second quarter, GAAP net loss was $535 million or a loss of $3.40 per diluted share, which included $609 million in legal contingencies recorded in Q2 due to the potential fine that the European Commission may impose related to our GRAIL acquisition and settlement of our litigation with BGI.…

Thanks, Joydeep. Turning to our innovation road map, we have significant opportunities to reimagine the power and potential of genomics. Development and registration activities for NovaSeqDx, the first-ever high throughput clinical sequencer are progressing as planned and on track for a Q4 launch. We continue to get good feedback from initial customers on our Infinity Long Read technology with many saying it has the potential to replace on-market long reads for a broad range of applications, including human rare diseases. Infinity is on track to be available later this year for early access customers. In Multiomics, our partnership with SomaLogic to accelerate NGS into proteomics is progressing, and we expect to deliver our ultra-high throughput ultra-high plexity assay in 2024. Turning now to Chemistry X. Our next-generation breakthrough SBS chemistry, we've made fantastic progress over the last quarter. We're now producing flow cells using our new manufacturing process based on 300-millimeter wafers. We successfully tested Chemistry X on the new flow cells and the results exceed our expectations for quality, cost and speed. We're excited to showcase these breakthroughs and reveal how they come to life at the Illumina Genomics Forum. And we look forward to hosting you at our Investor Day on October 3rd, where we will discuss these technologies and our long-term growth strategies. If you haven't already registered, please be sure to do so soon. I'll now invite the operator to open the line for Q&A.

Thank you. [Operator Instructions] We'll take our first question from Derik De Bruin, Bank of America. Please go ahead.

Hi. Good afternoon. So Francis, I'm a bit perplexed on the lab expansion comments, are channel checks and discussions at AGBT in June didn't suggest that this was happening. So is this more of an issue with your clinical customers not expanding? And how do you know it wasn't the impact of potential them evaluating competing products? And just exactly how much consumable inventory is there still in the channel? Thank you.

Hi, Derik. So in terms of the lab expansion, what we saw happen in Q2 was a few of our customers that had plans to launch new labs or expanded labs experienced some delays on their own because of their own supply chain issues, equipment that they were expecting to get for those expanded labs didn't come in as they expected. And so we saw a few lab expansion plans delayed, some into Q2, into Q3 and then one into Q4 of next year. As you can imagine, we are very close to our customers. So we know the specifics of those lab expansions. And to be clear, those lab expansions are delayed, but still progressing. And so that's what's driving the number we talked about, both in Q2 and for the rest of the year. In terms of inventory, what's playing out is some of our customers that are looking to manage their capital more closely are holding less inventory on their site. They have a lot of confidence in the resilience of our supply chain. And so they're looking to trim back the inventory levels that they hold on their own site. And so from our perspective, we expect that to play out. It started to play out in Q2. It will play out a little bit in three and four as well. But in the end, their demand activity levels are going to match what we are seeing from the data that we get from monitoring their instruments. And there, the activity and therefore, demand continues to be very robust. As we said in Q2, the activity levels that we're monitoring on the high and mid-throughput instruments reflected a growth rate in runs that are greater than 15%. And so as we work through these transitory impacts, we fully expect both demand and therefore, orders to more closely match the activity levels that we're seeing.

We'll take our next question from Dan Brennan with Cowen. Please go ahead.

Okay. Thanks for taking the questions. Maybe just a follow-up to Derik's question and then a related one. So just the magnitude of the second half decline, Francis. So the guidance -- the new updated guidance for core Illumina growth suggests kind of flat growth in the back half of the year versus kind of the high teens that you were initially guiding to. So just the magnitude from a few customers. Maybe you can just speak a little bit more to just -- any more color on that front, just kind of is there a healthy amount of conservatism that you're baking in here, or just kind of how do you -- how do we reconcile the magnitude of the cut with a few customers kind of holding back? And then kind of as a related question, to Derik's point, Mike, are you seeing any delay, whether it be ahead of Chemistry X launching, so customers might be pausing or any impact from some of the competitive noise that's out there, which I think would be more palatable, I think, so the cut if it was like a pause on as we're waiting to evaluate new products. Thank you.

Yes. Thanks for that question, Dan. And maybe I'll start with the second half, and then I'll turn it over to Joydeep to sort of size the magnitude of the factors that we talked about. From what we are seeing and what we are hearing from our customers, the challenges that our customers are addressing are around their lab expansion delays, as I said, related to dealing with their own supply chain for the expansion of their labs. And again, tighter management of their inventory levels. And that really were some of the big drivers of the change in addition to a little bit of foreign exchange and so on. And so what they're telling us is this isn't really related to Chemistry X or any competitive issues. In fact, they're excited to hear about Chemistry X, and they're looking forward to learning more about it at the Illumina Genomics Forum. But really, what's driving the change are the factors that we talked about. And maybe I'll turn it over to you, Joydeep, to shed some more color on the size of that.

Yes. Thanks, Francis. So I think, first of all, our -- Dan, you asked about the forecast for the second half conservative, we believe, based on trends we've seen that it's actually a balanced forecast, right? There's always upsides and downsides. There are -- the factors that we saw in the second quarter, we believe will continue into the next -- through the rest of this year. To size them up, approximately 25% of the decline from our forecast, it really is coming from factors such as FX, the faster-than-expected acceleration on the COVID side and some of the declines we have seen in China, which are really more GDP-related effects on the research side of our business in China. The other 75% or so are related to the factors that Francis referred to, which are really around lab expansion delays due to broader supply chain constraints that are impacting the construction of labs at our customers and them bringing up new assays and instruments. And then, the impacts we're seeing from the macroeconomic headwinds on our customers that are causing a temporary reduction in inventory levels and also some capital push-outs.

We'll take our next question from Dan Arias with Stifel. Please go ahead.

Good afternoon, guys. Thanks. Francis, maybe just back on the consumable side. You've talked a lot about the fact that the outlook for sequencing there is good, because that work essentially has to be done in order to support patient assessment. So what's slamming the brakes on purchasing so abruptly? Is it more development on the commercial side related to things like liquid biopsy work, or are you actually seeing lower spending patient-facing institutions, clinical oncology institutions, et cetera? And then just a follow-up, why no preannouncement when Sam left, only three weeks left in the quarter. So it seems like a miss was well on its way at that point. Thanks.

Yes. So let me take both parts of the question, Dan. So let me start by addressing the consumables and demand point. You're right. We end up -- because we serve clinical customers, a lot of our customers continue to see robust demand. They're targeting, for example, cancer patients that need their tissue biopsy to then sequenced or ctDNA tests. And that is reflected in the activity levels that we saw in Q2. That even as customers were looking to manage their inventories more tightly, they continue to run their machines hard, right? So we said, overall, if you look at the run activity on the mid and high throughput instruments that we monitor, across our customer base, so we monitor, the runs grew 15% year-over-year. But in the clinical markets, that was actually higher, for exactly the reasons you talked about that our customers in the clinical markets, especially in areas like oncology therapy selection testing, which represents for us the largest segment that we serve, that they continue to see robust demand, and that was reflected in their activity levels. Now, as we said, our customers are looking to manage their cash more conservatively, so they trim back the amount of inventory that they're holding on their sites. I think they can do that as a one-time sort of rebalancing down. But ultimately, their ordering levels will match the activity levels that they have on their instruments. And so that's why we expect this impact to play out a little bit in Q2, a little bit in the coming quarters, but then order rates will match, we believe, the actual activity that we're seeing on their machines. Let me talk a little bit about the Sam point. So when Sam left, as we said, he left because of personal reasons, and he needed to be on the East Coast. And that's what we said when he left, obviously. From our perspective, our quarters tend to be more back-end loaded. And so, the impact that I talked about became more clear at the end of the quarter. And so hence, there was no color commentary at the time Sam left.

We'll take our next question from David Westenberg with Piper Sandler. Please, go ahead.

Hi. Thank you for taking the question. Yes. I’m sorry, I'm going to go back to kind of the quantification of the guidance here. You back out the guidance, it looks like $400 million. FX got worse. I don't know if you want to quantify that. COVID surveillance, what that number is? I know GRAIL was $20 million and then lab expansion. I mean, is there anything in addition to those factors that maybe you can point out? And then I want to go back to like the instrument or I mean the backlog here. You guys felt really good about the backlog exiting the quarter. It seems like maybe that didn't -- those orders didn't go as expected or fill out as expected, or what's going on with that? Thank you.

Yes. So Dave, thanks for the question. Let me reiterate what I said earlier, right? So two broad buckets, about 25% or so of that -- of the miss was really around things which included FX, the faster than expected decline in COVID surveillance. China and some of the effects, the macroeconomic effects that we are seeing in the second half of the year, which are not related directly to the lockdown with the slower than expected GDP growth that they're having, right? And then the other bucket, the 75% really was the two factors, the lab expansion delays, which, again, we expect to see coming back in 2023. So these are comments that we have heard directly from our customers. And then the second piece was around the slower than expected accumulation or restocking of inventory and some capital pushouts from a broader set of customers. Again, as Francis mentioned, we expect these to be transitory. I think in terms of the backlog, I will say that the backlog that we're exiting Q2 with a strong backlog of $1.1 billion. This is in line with what we have seen in the previous six quarters. Again, backlog does move around a little bit from quarter-to-quarter as you would expect. But this, again, is very much in line with what we have seen in the past six quarters, which, as you will remember, were pretty strong.

We'll take our next question from Julia Qin with JPMorgan. Please go ahead.

Hi. Thanks for taking the question. Just two specific follow-ups on the guidance. On NovaSeq, I noticed you took down the pull-through guidance to $1.1 million to $1.2 million. Given you noted there's pretty strong volume utilization. Are there pricing factors at play for your updated guidance? And then on GRAIL, you take it down by $20 million. So could you -- given that NHS seems to be progressing well, could you explain what the factors are played there? Thank you.

So, thanks, Julia, for the question. So let me take the NovaSeq pull-through question first. So no, first, let me address -- I mean, this is not about pricing pressures. What we -- as you know, the pull-through is really an output of a number of factors, right? So, shipments in the quarter divided by a number of instruments that we expect to have activated at a certain point in time. Now both these played out this quarter in a way that are transitory and we had not expected. So first, although the -- as Francis mentioned, right, the number of runs in our instruments were strong due to the inventory deleveraging, the actual number of shipments, which is the numerator of that calculation was slightly low. Also because we had customers that bought a large number of NovaSeqs in previous quarters and because of some of the lab expansion delays that you heard about, some of these instruments didn't come online, right? So the denominator, because of the way we calculate pull-through, was inflated. So we do see this pull-through number being lower in this quarter as a result of those two factors. However, as we look forward, given the strong number of runs growth that our instruments are seeing across a broad range of our high throughput customers, and given the strong market factors that are very intensive in sequencing, like MRD, like oncology testing, and things like spatial and proteomics, we do expect that in the long run, this number will continue to grow. And then I think you had a second question, which was – oh, the GRAIL factor. So, a couple of things, right? As Francis mentioned, GRAIL has already proven itself to be a very well adopted test. It is the fastest revenue growth first year after launch of any screening test on the market ever. So while GRAIL numbers have been somewhat lower than expected, from the earlier guidance, it is nonetheless a very strong test, and we see a really strong adoption in multiple hospital systems across the country. So we believe that the test ordering from these systems that have already committed to GRAIL will pick up. But for the time being, I think we remain very optimistic about the quality of the test and it's potential.

We'll take our next question from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good evening. Just a quick follow-up to kick things off there on the pricing, but from a more forward-looking perspective here. Francis, you mentioned some customers thinking harder about CapEx. Some of them are even undergoing restructuring as we've seen this quarter. I was curious as to how you're thinking about this weighing on growth in 2023 and perhaps more importantly, in the near term. How, if at all, does this change how you're thinking about pricing for Chemistry X, backward compatibility options for Chemistry X and so on?

Sure, Tejas. So in terms of helping our customers as they're working through the macro challenges, obviously, we remain close to them. The reality is we are core to their business and their revenue generation, and we are a very important supplier to these customers. And so while we can help them in the sense that, because of the strength and the resilience of our supply chain, they're more confident in maintaining less inventory on site that obviously helps them with cash outlays. The reality is they need to continue to service the demand they're getting, because that's what drives their revenues and their growth and their long-term success. And so we are not seeing a pullback in terms of activity levels from those customers, again, because we are core to their revenue generation and their success. And we'll stay – we're staying close to them. We're also very staying close to the lab expansion plans and making sure we were on top of when they expect to get equipment for the labs as they come online. In terms of pricing from our perspective, our thesis continues to believe that, there is a huge opportunity to expand the genomics market by continuing to drive the price for high-quality sequencing, highly accurate sequencing down. That thesis continues to hold certainly in the research markets, but also in terms of opening up new clinical markets. We're seeing promising work, for example, happening in areas like cardiovascular disease and neurological disease. And those will require both very large experiments from a research perspective, but also maybe different price points from a clinical perspective. And so we continue to march forward with the idea that part of our mission is to make genomics more accessible by driving costs down. In terms of Chemistry X and the instruments, the way we are thinking about it is there certainly -- we're certainly capable from a technology perspective of making Chemistry X available on instruments that are already on the market. So, that is a lever available to us. And as we look at the market, we want to be sensitive to the fact that if customers have bought an instrument that we launched fairly recently, that they may not have gone through their depreciation cycle. And so we'll think more about making Chemistry X available on those kinds of platforms. But if it's been an instrument that's been on the market for a while, and they've gone through a depreciation cycle, then there is an opportunity for us to help that market upgrade and not just take advantages of the innovations in Chemistry X, but take advantage of the innovations across all the other technology components, whether it's optics, for example, of data pads, and really deliver transformative new instruments. And that's how we're thinking about it.

We'll take our next question from Puneet Souda with SVB Securities. Please go ahead.

Yes, hi Francis. Thanks for taking the questions. The first one is really -- could you talk a little bit about, at a high level, maybe about who these customers are? Just trying to understand in terms of are these customers more COVID customers or oncology customers or genome center customers and their lab expansion plans because I think that's where the challenge is because when we look at the life science tools companies, the peer group that you have, some of those companies have delivered very strong growth. They had supply chain challenges in the first quarter. In fact, supply chain challenges were even more pronounced. And these labs have taken delivery of a lot of these instruments. That's why peer group companies have delivered strongly. So, just wondering what is different here with Illumina instruments or what's unique about these customers? And then on GRAIL, I mean, you're pointing out as the fastest adopted test, but at the same time, you're lowering your guide. So, just trying to understand, is there anything -- any unique dynamic with certain customers there? Thank you.

Yes. So, let's take both. In terms of the labs, and I think you're asking about the labs that are delaying their expansion plans. Who are they? And you're saying, look, some of the other life science tools companies haven't seen that. So, I'll describe them a little bit for you. First of all, it's a few customers. Second, they're obviously genomics-focused customers. They run genomics labs. And so you may not see that in the general life sciences tools market, but you'll certainly see that in the sequencing market. They tend to be customers that are growing. These are the ones that have expansion plans. So, they are successful customers. They're experiencing robust growth. And in fact, they're serving markets like oncology, for example, where they see significant increased demand coming and are expecting to -- and are building significant labs. And so these are large customers, they are growing customers and they are customers that are facing significantly increased demand and are looking to expand their labs. Now, their genomics labs and the primary -- they're pretty much Illumina customers. And so obviously, we are the ones that ride that cycle with them. And that's why you'd see it with us. And that's why you'll see it as those labs come online, that's why you'll see the benefit of crude to Illumina. So, that's the characteristics of the customers we're talking about. In terms of GRAIL, it really has been just quite remarkable to see the fantastic growth they've had in their first year. If you look at their first 12 months of June and in this June, they just lapsed their first 12 months. They are the fastest revenue growth of any cancer screening test in history. Now that's quite remarkable, right? They're also doing a fantastic…

We'll take our next question from Kyle Mikson with Canaccord. Please go ahead.

Hey, thanks for taking the question. Just a few on the guidance. So I was just curious about components of instrument revenue for ’22, 1.5% year-over-year. Maybe Joydeep, can you talk about expectations for placements versus orders versus pricing, maybe pricing is locked in or not locked in at this point? Just given the backlog commentary, it was a very strong kind of like entering the year and recently, just how is that trending recently and going forward? And kind of relatedly, the year-over-year decline in mid-throughput shipments in 2Q. I mean I hear you on China and the other factors, but any chance that's partially due to the platform evaluation process as these new vendors into the market or at least make some noise because obviously, the large clinical labs already test driving these products, so it's just worth asking? Thanks.

Yes. Thanks, Kyle. So let me start with the 2Q piece on the mid throughput, right? So as I mentioned right there, the orders for med throughput really were very strong, right? So we saw continued interest in strong orders for NextSeq 1000, 2000. This is our latest platform on that, pickup considerably and while there was a temporary supply chain issue at our end, which prevented us from delivering these orders in 2Q. They have subsequently been delivered already in this quarter. So we are very optimistic, and we see very, very strong demand and interest in our mid-throughput platform, both on our research and our clinical customers. On the full year, so a couple of things, right? So you start with NovaSeq first, right? So we've had a strong first half of the year. Our orders for the first part – first half of the year were up 30% year-over-year. And as we mentioned, right, 23% growth in the second quarter. Now this is for a platform that has -- it's now six years from launch, right? So we see extremely strong unprecedented demand even on the back of a very strong 2021 and we're excited about that. Remember also that these instruments have -- most of these instruments have now been deployed. We expect now that the pull-through on consumables on these instruments will come and will continue to accelerate in subsequent quarters and years. So, we feel very good about our portfolio, both in the high throughput and the mid-throughput segment.

We'll take our next question from Patrick Donnelly with Citi. Please go ahead.

Hey guys, thanks for taking the question. Francis, maybe one for you just in terms of kind of the operational spend that you guys are doing. You obviously kind of talked about the op margin pull down in the back half. Can you talk about how you're balancing some of the growth investments with also being mindful of kind of insulating the margins, protecting the bottom line. Obviously, you have Chemistry X and Infinity coming up. I would assume you'd want to invest in kind of the launches there. So maybe just talk about, again, kind of that balance of investing for growth and at the same time, kind of realizing with things slowing, you protect the bottom-line a bit and where you're pulling back and where you're pushing forward? Thanks.

Yes. Sure, Patrick. So obviously, with the revised revenue outlook for the year, we are taking a look at our spend and exactly as you said, doing that balance. On the one hand, we're looking for areas where we can contain costs. That means pulling back on discretionary items, for example like travel and other discretionary spend. And we're also prioritizing the hiring that we're doing. And so, there are some hires that we will put off because we don't think it's essential to do right now. So, the team is absolutely doing that book. Having said that and we're also protecting our innovation roadmap, as well as essential hires in other parts of the company as we scale the business. We have very ambitious product plans, as you know and we're going to continue to protect that roadmap because that's what drives the success of our customers and our long-term success and that's what creates the long-term shareholder value in the company. So that's the balance we're doing. We're protecting the innovation roadmaps. We're protecting activities that drive that long-term shareholder growth, including things like capacity expansions, IVD capabilities commercial expansions in targeted markets and sort of maintaining that balance.

Yes, I would also add, we continue to have productivity improvements on our gross margin side as well, right? So that's, of course, despite the reduced volume that we have seen this year. Some of those improvements are contributing to increased gross and operating margin as well.

We'll take our next question from Vijay Kumar with Evercore ISI. Please go ahead.

Hey guys. Thanks for taking my question. Francis, maybe a 2-part question for you. Your guidance for the back half, it implies 1% growth. You just did 3% in 2Q. Are you – is the guide assuming things to worsen from 2Q levels? Because if I understood you, some of these are temporal factors. If I look at your inventory on-hand, I don't think your customers stock up 12 months. So, shouldn't some of these factors were – how conservative is this guidance for the back half? And on Chemistry X, I think we've heard a 30% price cut 20%, 30%, somewhere in the ballpark. Does it have any implication to revenue growth for fiscal '23? Thank you.

Yes. So, thank you. Let me start with the first part of the question, which is Q3 guidance, sort of what's driving that number? And so I'll talk about some of the factors that are driving that number. If you -- and if you normalize the impacts I'm talking about, the growth is higher, and I'll come back to that as well. So, some of the factors that are driving it are the headwinds that I talked about. There is a headwind around COVID surveillance demand pulling back, that's playing out in Q3 as well. There's obviously a foreign exchange headwind and the tough compare with the UK Biobank that concludes in Q3. So, that's another factor playing out in Q3. We also expect the continued slower GDP growth in China growth and that will play on us. And then the two factors I talked about, sort of inventory management and the lab expansion. So, those are some of the factors that we factored in and giving the guide for Q3. And obviously, if you normalize for those factors, and you're looking at a significantly higher growth rate in Q3.

We'll take our last question from Jack Meehan with Nephron. Please go ahead.

Thank you. Good afternoon. Francis, I have a two-part question for you on GRAIL. So, the first is just given the prolonged regulatory uncertainty here, is there a point where you could choose to walk away? What's your conviction level on getting this done? And then second off, that obviously now isn't the most accommodative environment for capital markets activity. So, in a scenario where you might have to spin GRAIL out? How would you fund the ongoing operations? I look at your balance sheet after the BGI payment and that you define you have your marks through European Commission, you have roughly $550 million of unrestricted cash. So, just talk about if you got to that, how would you finance a spin if it ends up there?

Yes. So, I'll start by saying that our focus is going to be continually to focus on and think about the things that create the most long-term shareholder value. And as we embarked on this process, as you said, we clearly felt that combining GRAIL and Illumina creates the most long-term shareholder value. I'll give an example, right. So, even on their own largely, the GRAIL team was able to achieve the fastest 12-month ramp of any cancer screening test in history, as we've said. And I imagine what that could have been in the power of Illumina behind it. And if we think forward, what could we do if we were able to take that test into markets like Europe and Asia and Africa, beyond the plans that GRAIL could happen. So, that's sort of what drove our thinking. Having said that, we're going to continue to assess as we work through this process. What are the right next steps? And there obviously are a set of nodes on the decision tree that would lead us to either spinning out GRAIL because the regulatory process doesn't go our way or contemplate other forms of exits, whether its dividend in the back or -- and so we're going to continue to assess that as we work through the regulatory process. In terms of your question around funding the operations, that's absolutely going to be a consideration as we contemplate the options and how we have to spin GRAIL out, right? So, the idea is that what you'd want to do is make sure that you protected the asset value to allow GRAIL to continue to execute on its mission. And so that means making sure that it's capitalized, so it can continue to be successful as well as it has access to future capital that will need for its own expansion plans. And that's going to be a combination of Illumina, but other shareholders too potentially and other people who would get capital both maybe at the time people who would get capital both maybe at the time of divestiture, but then over time as well. And so those are some of the considerations as we think about what a divestment would look like. How do we -- how would we set it up to be successful? And what's the path for it to continue to be successful? Obviously, those are not decisions that we're making today, but those are some of the considerations that would go into it.

Ladies and gentlemen, this concludes our Q&A session. I will now turn the call back over to Salli Schwartz.

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 Investor Day on October 3.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.