MANAGEMENT’S DISCUSSION & ANALYSIS | MarketScreener

Our Management's Discussion and Analysis (MD&A) will help readers understand our
results of operations, financial condition, and cash flow. It is provided in
addition to the accompanying condensed consolidated financial statements and
notes. This MD&A is organized as follows:

•Management’s Overview and Outlook. High level discussion of our operating
results and significant known trends that affect our business.

•Results of Operations. Detailed discussion of our revenues and expenses.


•Liquidity and Capital Resources. Discussion of key aspects of our condensed
consolidated statements of cash flows, changes in our financial position, and
our financial commitments.

•Critical Accounting Policies and Estimates. Discussion of significant changes
since our most recent Annual Report on Form 10-K that we believe are
important to understanding the assumptions and judgments underlying our
condensed consolidated financial statements.

•Recent Accounting Pronouncements. Summary of recent accounting pronouncements
applicable to our condensed consolidated financial statements.

•Quantitative and Qualitative Disclosure About Market Risk. Discussion of our
financial instruments’ exposure to market risk.


Our discussion of our results of operations, financial condition, and cash flow
for Q1 2022 can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" within our filing of   Form 10-Q   for the
fiscal quarter ended April 3, 2022.

This MD&A discussion contains forward-looking statements that involve risks and
uncertainties. See "  Consideration Regarding Forward-Looking Statements  "
preceding the Condensed Consolidated Financial Statements section of this report
for additional factors relating to such statements. This MD&A should be read in
conjunction with our condensed consolidated financial statements and
accompanying notes included in this report and our Annual Report on Form

10-K for the fiscal year ended January 1, 2023. Operating results are not
necessarily indicative of results that may occur in future periods.

MANAGEMENT’S OVERVIEW AND OUTLOOK


This overview and outlook provide a high-level discussion of our operating
results and significant known trends that affect our business. We believe that
an understanding of these trends is important to understanding our financial
results for the periods being reported herein as well as our future financial
performance. This summary is not intended to be exhaustive, nor is it intended
to be a substitute for the detailed discussion and analysis provided elsewhere
in this report.

About Illumina

Our focus on innovation has established us as a global leader in DNA sequencing
and array-based technologies, serving customers in the research, clinical and
applied markets. Our products are used for applications in the life sciences,
oncology, reproductive health, agriculture and other emerging segments. Our
customers include leading genomic research centers, academic institutions,
government laboratories, and hospitals, as well as pharmaceutical,
biotechnology, commercial molecular diagnostic laboratories, and consumer
genomics companies. Our comprehensive line of products addresses the scale of
experimentation and breadth of functional analysis to advance disease research,
drug development, and the development of molecular tests. This portfolio of
leading-edge sequencing and array-based solutions addresses a range of genomic
complexity and throughput, enabling researchers and clinical practitioners to
select the best solution for their scientific challenge.
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On August 18, 2021, we acquired GRAIL, a healthcare company focused on early
detection of multiple cancers. GRAIL's Galleri blood test detects various types
of cancers before they are symptomatic. We believe our acquisition of GRAIL will
accelerate the adoption of next-generation sequencing based early multi-cancer
detection tests, enhance our position in Clinical Genomics, and increase our
directly accessible total addressable market. The acquisition is subject to
ongoing legal proceedings and, currently, GRAIL must be held and operated
separately and independently from Illumina pursuant to interim measures ordered
by the European Commission, which prohibited our acquisition of GRAIL on
September 6, 2022. See note "  7. Legal Proceedings  " for further details.

We have two reportable segments, Core Illumina and GRAIL. Core Illumina relates
to our core operations, excluding the results of GRAIL. See note ” 9 .
Seg ment Information ” for additional details.


Our financial results have been, and will continue to be, impacted by several
significant trends, which are described below. While these trends are important
to understanding and evaluating our financial results, this discussion should be
read in conjunction with our condensed consolidated financial statements and the
notes thereto within the Condensed Consolidated Financial Statements section of
this report, and the other transactions, events, and trends discussed in "  Risk
Factors  " within the Other Key Information section of this report.

Financial Overview


Since 2020, the COVID-19 pandemic and international efforts to control its
spread have significantly curtailed the movement of people, goods, and services
worldwide, including in the regions where we sell our products and services and
conduct our business operations. In addition, armed conflict between Russia and
Ukraine, which began in 2022, and the sanctions imposed by the U.S. and other
countries, has impacted our ability to ship products into affected regions and
to designated customers. Furthermore, macroeconomic factors such as inflation,
exchange rates and concerns about an economic downturn have impacted both
Illumina directly and our customers' behavior. For example, some customers
experienced supply chain pressures that delayed their lab expansions and others
are managing inventory and capital more conservatively. We expect these factors
to continue to impact our sales and results of operations in 2023, the size and
duration of which is significantly uncertain.

Financial highlights for Q1 2023 included the following:


•Revenue decreased 11% in Q1 2023 to $1,087 million compared to $1,223 million
in Q1 2022 primarily due to decreases in sequencing consumables revenue and
sequencing instruments revenue, partially offset by an increase in service and
other revenue. We made our first shipments of our NovaSeq X instrument in Q1
2023. We continue to expect revenue to grow 7% to 10% in 2023 compared to 2022.

•Gross profit as a percentage of revenue (gross margin) was 60.3% in Q1 2023
compared to 66.6% in Q1 2022. The decrease in gross margin was driven primarily
by less fixed cost leverage on lower manufacturing volumes and lower instrument
margins due to the NovaSeq X launch in Q1 2023. Our gross margin depends on many
factors, including: market conditions that may impact our pricing; sales mix
changes among consumables, instruments, services, and development and licensing
revenue; product mix changes between established products and new products;
excess and obsolete inventories; royalties; our cost structure for manufacturing
operations relative to volume; freight costs; and product support obligations.

•Loss from operations was $(64) million in Q1 2023 compared to income from
operations of $184 million in Q1 2022. The decrease was primarily due to a
decrease of $160 million in gross profit and an increase in operating expense of
$88 million. We plan to reduce our annualized run rate expenses by more than
$100 million beginning later in 2023 to accelerate progress toward higher
margins and create flexibility for further investment in high-growth areas.

•Our effective tax rate was 103.9% in Q1 2023 compared to 38.3% in Q1 2022. The
variance from the U.S. federal statutory tax rate of 21% was primarily because
of the tax impact of research and development expense capitalization for tax
purposes, and the tax impact of GRAIL pre-acquisition net operating losses on
GILTI and the utilization of U.S. foreign tax credits. This was partially offset
by the mix of earnings in jurisdictions with lower statutory tax rates than the
U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.
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•We ended Q1 2023 with cash, cash equivalents, and short-term investments
totaling $1.5 billion, of which approximately $506 million was held by our
foreign subsidiaries.

RESULTS OF OPERATIONS


To enhance comparability, the following table sets forth unaudited condensed
consolidated statement of operations data for the specified reporting periods,
stated as a percentage of total revenue.(1)

                                              Q1 2023      Q1 2022
Revenue:
Product revenue                                84.8  %      87.5  %
Service and other revenue                      15.2         12.5
Total revenue                                 100.0        100.0
Cost of revenue:
Cost of product revenue                        26.2         24.5
Cost of service and other revenue               9.1          5.6

Amortization of acquired intangible assets 4.4 3.3
Total cost of revenue

                          39.7         33.4
Gross profit                                   60.3         66.6
Operating expense:
Research and development                       31.4         26.4
Selling, general and administrative            34.8         25.2

Total operating expense                        66.1         51.6
(Loss) income from operations                  (5.7)        15.0
Other income (expense):
Interest income                                 1.6            -
Interest expense                               (1.8)        (0.5)

Other expense, net                             (1.0)        (3.1)
Total other expense, net                       (1.3)        (3.6)
(Loss) income before income taxes              (7.1)        11.4
(Benefit) provision for income taxes           (7.5)         4.4
Net income                                      0.4  %       7.0  %


_____________

(1)Percentages may not recalculate due to rounding.

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Revenue

Dollars in millions            Q1 2023      Q1 2022      Change      % Change

Core Illumina:
Consumables                   $   770      $   859      $  (89)         (10) %
Instruments                       160          218         (58)         (27)
Total product revenue             930        1,077        (147)         (14)
Service and other revenue         146          144           2            1
Total Core Illumina revenue     1,076        1,221        (145)         (12)
GRAIL:
Service and other revenue          20           10          10          100
Eliminations                       (9)          (8)         (1)          13
Total consolidated revenue    $ 1,087      $ 1,223      $ (136)         (11) %


The decrease in Core Illumina consumables revenue in Q1 2023 was primarily due
to a decrease in sequencing consumables revenue of $92 million driven primarily
by lower NovaSeq 6000 consumables pull-through as some of our high throughput
customers transition to NovaSeq X, as well as customers managing tighter
inventory given the continued impact of challenging macroeconomic factors. Core
Illumina instruments revenue decreased in Q1 2023 primarily due to a decrease in
sequencing instruments revenue of $58 million driven primarily by fewer
shipments of our NovaSeq 6000 high-throughput instrument, given availability of
the NovaSeq X, and fewer shipments of our NextSeq 550 mid-throughput instrument,
partially offset by shipments of our NovaSeq X instrument that launched in Q1
2023. Core Illumina service and other revenue slightly increased in Q1 2023
primarily due to increased revenue from extended maintenance service contracts
on a growing installed base, partially offset by decreases in genotyping
services and development and licensing agreements in Q1 2023. Additionally, Core
Illumina revenue was adversely impacted by $24 million in Q1 2023 due to
unfavorable foreign exchange rate fluctuations, which is net of the amount
reclassified to revenue of $2 million in Q1 2023 related to our cash flow
hedges.

GRAIL service and other revenue increased $10 million, or 100%, in Q1 2023
primarily due to sales of Galleri.

Gross Margin

Dollars in millions           Q1 2023         Q1 2022        Change      % Change
Gross profit (loss):
Core Illumina               $        687    $        851    $ (164)         (19) %
GRAIL                               (25)            (29)         4          (14)
Eliminations                         (7)             (7)         -            -
Consolidated gross profit   $        655    $        815    $ (160)         (20) %

Gross margin:
Core Illumina                    63.8  %         69.7  %
GRAIL                            *               *
Consolidated gross margin        60.3  %         66.6  %


________________
*Not meaningful.

The decrease in Core Illumina gross margin in Q1 2023 was driven primarily by
less fixed cost leverage on lower manufacturing volumes and lower instrument
margins due to the NovaSeq X launch, which is typical with a new platform
introduction until we scale manufacturing and gain operating efficiencies.

GRAIL gross loss in Q1 2023 and Q1 2022 was primarily due to amortization of
intangible assets of $34 million.

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Operating Expense

Dollars in millions                                      Q1 2023           Q1 2022           Change            % Change
Research and development:
Core Illumina                                          $    259          $    238          $    21                     9  %
GRAIL                                                        86                85                1                     1
Eliminations                                                 (4)                -               (4)                  100
Consolidated research and development                       341               323               18                     6

Selling, general and administrative:
Core Illumina                                               286               251               35                    14
GRAIL                                                        93                58               35                    60
Eliminations                                                 (1)               (1)               -                     -
Consolidated selling, general and administrative            378               308               70                    23

Total consolidated operating expense                   $    719          $    631          $    88                    14  %


Core Illumina R&D expense increased by $21 million, or 9%, in Q1 2023 primarily
due to increases in headcount, as we continue to invest in the research and
development of new products and enhancements to existing products.

GRAIL R&D expense in Q1 2023 and Q1 2022 consisted primarily of expenses related
to headcount, including performance-based compensation, and clinical trials.


Core Illumina SG&A expense increased by $35 million, or 14%, in Q1 2023
primarily due to recognizing a lower gain on our contingent consideration
liability related to our acquisition of GRAIL. We recognized gains of $1 million
and $49 million in Q1 2023 and Q1 2022, respectively. This was partially offset
by a decrease in professional services.

GRAIL SG&A expense increased by $35 million, or 60%, in Q1 2023 primarily due to
increases in headcount, including an increase in performance-based compensation,
and professional services.
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Other Income (Expense)

Dollars in millions         Q1 2023       Q1 2022       Change       % Change

Interest income            $     17      $      -      $    17          100  %

Interest expense                (20)           (6)         (14)         233

Other expense, net              (11)          (38)          27          (71)

Total other expense, net   $    (14)     $    (44)     $    30          (68) %

Total other expense, net primarily relates to the Core Illumina segment.


Interest income consisted primarily of interest on our money market funds, which
benefited from higher yields in Q1 2023 due to rising interest rates. Interest
expense consisted primarily of interest on our Term Notes and increased in Q1
2023 due to the issuance of our 2025 and 2027 Term Notes in December 2022. The
decrease in other expense, net in Q1 2023 was primarily due to lower net losses
recognized on our strategic investments. We recognized net losses on our
strategic investments of $16 million and $44 million in Q1 2023 and Q1 2022,
respectively.

(Benefit) Provision for Income Taxes


Dollars in millions                     Q1 2023      Q1 2022      Change      % Change
(Loss) income before income taxes      $  (78)      $  140       $ (218)        (156) %
(Benefit) provision for income taxes      (81)          54         (135)        (250)
Net income                             $    3       $   86       $  (83)         (97) %
Effective tax rate                      103.9  %      38.3  %


Our effective tax rate was 103.9% in Q1 2023 compared to 38.3% in Q1 2022. The
variance from the U.S. federal statutory tax rate of 21% was primarily because
of the $49 million tax impact of capitalizing research and development expenses
for tax purposes, and the $44 million tax impact of GRAIL pre-acquisition net
operating losses on GILTI and the utilization of U.S. foreign tax credits. The
tax benefit in Q1 2023 was also favorably impacted by the mix of earnings in
jurisdictions with lower statutory tax rates than the U.S. federal statutory tax
rate, such as in Singapore and the United Kingdom.

In Q1 2022, the variance from the U.S. federal statutory tax rate of 21% was
primarily attributable to the $24 million impact of GRAIL pre-acquisition net
operating losses on GILTI and the utilization of U.S. foreign tax credits, and
the $4 million impact of capitalizing research and development expenses for tax
purposes beginning in 2022, in accordance with the 2017 Tax Cuts and Jobs Act.
Our effective tax rate in Q1 2022 was also favorably impacted by the mix of
earnings in jurisdictions with lower statutory tax rates than the U.S. federal
statutory tax rate, such as in Singapore and the United Kingdom.

Our future effective tax rate may vary from the U.S. federal statutory tax rate
due to the mix of earnings in tax jurisdictions with different statutory tax
rates and the other factors discussed in the risk factor "We are subject to
risks related to taxation in multiple jurisdictions" described in "Risk Factors"
within the Business & Market Information section of our Annual Report on Form

10-K for the fiscal year ended January 1, 2023.

LIQUIDITY AND CAPITAL RESOURCES


As of April 2, 2023, we had approximately $1.5 billion in cash and cash
equivalents, of which approximately $506 million was held by our foreign
subsidiaries. Cash and cash equivalents decreased by $517 million from
January 1, 2023 due primarily to the repayment of our 2023 Term Notes of $500
million and other factors described in the "Cash Flow Summary" below. Our
primary source of liquidity, other than our holdings of cash, cash equivalents,
and investments, has been cash flows from operations and, from time to time,
issuances of debt. Our ability to generate cash from operations provides us with
the financial flexibility we need to meet operating, investing, and financing
needs. Historically, we have liquidated our short-term investments and/or issued
debt to finance our business needs as a supplement to cash provided by operating
activities. As of April 2, 2023, we had $24 million in short-term investments
comprised of marketable equity securities.
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As a result of our decision to proceed with the completion of our acquisition of
GRAIL during the pendency of the European Commission's review, the European
Commission will likely seek to impose a fine on us. As of April 2, 2023, we
accrued $458 million, included in accrued liabilities, representing 10% of our
consolidated annual revenues for fiscal year 2022, as further disclosed in note
"  7. Legal Proceedings  ."

In March 2021, we issued term notes due 2023 with an aggregate principal amount
of $500 million and term notes due 2031 with an aggregate principal amount of
$500 million. The 2023 Term Notes matured and were repaid in cash on March 23,
2023. The 2031 Term Notes, which mature on March 23, 2031, accrue interest at a
rate of 2.550% per annum, payable semi-annually in March and September of each
year. We may redeem for cash all or any portion of the 2031 Term Notes, at our
option, at any time prior to maturity.

Our convertible senior notes, with an aggregate principal amount of $750
million, which are due on August 15, 2023 and are classified as short-term, were
not convertible as of April 2, 2023. The holders may convert their notes on or
after May 15, 2023 until August 11, 2023.

In December 2022, we issued term notes due 2025 with an aggregate principal
amount of $500 million and term notes due 2027 with an aggregate principal
amount of $500 million. The 2025 Term Notes, which mature on December 12, 2025,
and the 2027 Term Notes, which mature on December 13, 2027, accrue interest at a
rate of 5.800% and 5.750% per annum, respectively, payable semi-annually in June
and December of each year. We may redeem for cash all or any portion of the 2025
or 2027 Term Notes, at our option, at any time prior to maturity.

On January 4, 2023, we obtained a new Credit Facility, which provides us with a
$750 million senior unsecured five year revolving credit facility, including a
$40 million sublimit for swingline borrowings and a $50 million sublimit for
letters of credit. The Credit Facility matures, and all amounts outstanding
thereunder become due and payable in full, on January 4, 2028, subject to two
one-year extensions at our option and the consent of the extending lenders and
certain other conditions. As of April 2, 2023, there were no borrowings
outstanding under the Credit Facility; however, we may draw upon the facility in
the future to manage cash flow or for other corporate purposes, including in
connection with the payment of any potential European Commission fines, the
timing of which is uncertain.

As of April 2, 2023, the fair value of our contingent consideration liability
related to our acquisition of GRAIL was $411 million, of which $410 million was
included in other long-term liabilities. The contingent value rights issued as
part of the acquisition entitle the holders to receive future cash payments on a
quarterly basis (Covered Revenue Payments) representing a pro rata portion of
certain GRAIL-related revenues (Covered Revenues) each year for a 12-year
period. This will reflect a 2.5% payment right to the first $1 billion of
revenue each year for 12 years. Revenue above $1 billion each year will be
subject to a 9% contingent payment right during this same period. We expect
Covered Revenues for Q1 2023 to be approximately $19 million and for related
Covered Revenue Payments to total approximately $183,000 in Q2 2023. In Q1 2023,
we paid $217,000 in Covered Revenue Payments related to Covered Revenues for Q4
2022 of $23 million.

We grant cash incentive equity awards to GRAIL employees that generally have
terms of four years and vest in equal annual installments. As of April 2, 2023,
the aggregate cash value of awards outstanding and unvested was $378 million,
and we accrued an estimated liability of $40 million, included in accrued
liabilities. In addition, we have an outstanding performance-based award for
which vesting is based on GRAIL's future revenues. The award has an aggregate
potential value of up to $78 million, which is expected to be settled in cash,
and expires, to the extent unvested, in August 2030. As of April 2, 2023, it was
not probable that the performance conditions associated with the award will be
achieved.

We had $7 million and up to $88 million, respectively, remaining in our capital
commitments to two venture capital investment funds as of April 2, 2023 that are
callable through April 2026 and July 2029, respectively.

Authorizations to repurchase $15 million of our common stock remained available
as of April 2, 2023 under the $750 million share repurchase program authorized
by our Board of Directors on February 5, 2020. The repurchases may be completed
under a 10b5-1 plan or at management's discretion. We do not intend to make any
share repurchases during fiscal year 2023.
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We anticipate that our current cash, cash equivalents, and short-term
investments, together with cash provided by operating activities and available
borrowing capacity under the Credit Facility, are sufficient to fund our
near-term capital and operating needs for at least the next 12 months. Operating
needs include the planned costs to operate our business, including amounts
required to fund working capital and capital expenditures. Our primary
short-term needs for capital, which are subject to change, include:

•support of commercialization efforts related to our current and future
products;

•acquisitions of equipment and other fixed assets for use in our current and
future manufacturing and research and development facilities;

•the continued advancement of research and development efforts;

•the potential payment of European Commission fines related to our acquisition
of GRAIL;

•potential strategic acquisitions and investments;

•repayment of debt obligations; and

•the expansion needs of our facilities, including costs of leasing and building
out additional facilities.

We expect that our revenue and the resulting operating income, as well as the
status of each of our new product development programs, will significantly
impact our cash management decisions.

Our future capital requirements and the adequacy of our available funds will
depend on many factors, including:

•our ability to successfully commercialize and further develop our technologies
and create innovative products in our markets;

•scientific progress in our research and development programs and the magnitude
of those programs;

•competing technological and market developments; and

•the need to enter into collaborations with other companies or acquire other
companies or technologies to enhance or complement our product and service
offerings.

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