Joydeep Goswami
Chief Strategy and Corporate Development Officer at Illumina
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 three 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 to 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 represent a 9% increase year-over-year or a 14% increase on a constant currency basis. Record quarterly revenue in the region was driven by a 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 0 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 road map. 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 onetime payment related to the litigation settlement with BGI and 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 1/3 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 2/3 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 road map. 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.