Illumina, Inc.

Thank you all for standing by and welcome to the Illumina Q2 2021 earnings conference call. Please note that all participants will be in listen-only mode until the question and answer session of today's conference. To ask a question over the phone by that time, you may press the star key followed by the number one. Please also note that today's call is being recorded. I'll now turn the call over to your host, Brian Blanchett. Sir, you may now begin.

Good afternoon, everyone, and welcome to our earnings call for the second quarter of 2021. 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 the chance to review our earnings release, it can be found in the investor relations section of our website at Illumina.com. Participating for Illumina today will be Francis D'Souza, President and Chief Executive Officer, and Sam Samad, Chief Financial Officer. Francis will provide an update on the State of Illumina's business, and Sam will review our financial results. This call is being recorded, and the audio portion will be archived in the investor 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 risk 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 risk and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities Exchange Commission, including Illumina's most recent forms 10Q and 10K. With that, I now turn the call over to Frances.

Thank you and good afternoon, everyone. Illumina delivered Q2 revenues of $1.126 billion, representing 78% year-over-year growth, significantly exceeding expectations across all geographic regions and market segments. Our clinical markets, including oncology, reproductive health, and genetic disease testing are expanding as reimbursement coverage increases, patient awareness grows, and more sequencing applications enter the clinic. Ramping population sequencing programs are contributing to the robust growth in our research business. Additionally, genomic surveillance has emerged as a critical tool in the global fight against the pandemic. with over 70 countries now using Illumina platforms for COVID-19 surveillance. Looking forward, there's momentum for this global surveillance infrastructure to be the backbone of a durable global genomic epidemiology capability to combat future outbreaks, including zoonotic transmissions, antimicrobial resistance, and bioterrorism. Q2 is the second consecutive quarter of record instrument sales, with revenue up 113% year-over-year, and we ended the quarter with the highest instrument backlog since launching NovaSeq. Now, looking at our performance by platform, our high throughput portfolio continued its spectacular run, with NovaSeq achieving its highest order volume since launch in Q1 2017. Demand for high throughput sequencing capacity continues to expand, with over half of the orders in Q2 coming from customers who are new to high throughput. Additionally, our customers are continuing to use these systems at a high rate to meet demand in oncology testing, genetic disease testing, and population sequencing programs. Our mid-throughput platforms continue to drive growth, with record placements in Q2. The strength of the NexSeq 2000, with almost three times the output of NexSeq 550, is enabling exciting new applications for customers like Cold Spring Harbor Labs in single-cell analysis. Clinical customers drove new NexSeq 550 placements. NexSeq DX again set a record for shipments, as we see a trend toward decentralization of clinical sequencing outside the U.S. Benchtop platforms also had an excellent quarter. with instrument revenue up over 50% year-over-year. We shipped more MiSeq instruments this quarter than any prior quarter in the last five years. This record demand has been driven by our core business as well as emerging areas like pre-implantation genetic screening and COVID surveillance. Turning to our clinical and research and applied segments, sequencing consumables revenue of $4 million was up 82% year-over-year. driven by demand in both our clinical and research segments. Starting with our clinical business, our focus on market access and collaborations are expanding reimbursement, powering new and existing testing providers, and benefiting patients around the world. There are now over 1 billion covered lives globally across NIPT, WGS for rugged, and CGP in oncology. demonstrating the expertise and impact of Illumina's market access team to drive coverage and also the opportunity in our clinical segment. Oncology testing, our largest market segment, recorded its third consecutive quarter of outstanding year-over-year growth. Our customers announced additional offerings for therapy selection and MRD tests. In therapy selection, expanding reimbursement for comprehensive genomic profiling is fueling the shift from small to large panels. With 74% of lives now covered for CGP in the U.S. and additional indications approved, new customers are entering the oncology testing field, and existing customers like Karis are expanding their footprint. TruSight Oncology 500, Illumina's RUO comprehensive genomic profiling assay, achieved its 100,000-sample milestone in Q2 and added over 40 additional customers so far this year across 23 countries. In addition, over the last year, MRD testing has emerged as a key driver of future growth in the oncology segment, with positive reimbursement decisions, more customers, and multiple approaches entering the market. It's also exciting to see pharma invest in MRD-based clinical trials to bring proven drugs to early stage disease and improve patient outcomes. Reproductive health consumable shipments continue to benefit from the revised ACOG guidelines. In January, we expected that NIPT would be covered for approximately 3 million pregnancies in the U.S. by the end of 2021. We have already surpassed that milestone, and we expect coverage to continue to expand. We're also making progress outside the U.S. to ensure all expecting families have access to NIPT. In Germany, for example, national coverage will be implemented in 2022. Additionally, we're seeing continued growth from our CEIDD March VeriSeq NIPT solution in Europe and Asia. In Q2, Next Generation Genomic in Thailand adopted our VeriSeq NIPT solution version 2. broadening access to expanded NIPT for expectant parents in Southeast Asia. Genetic disease testing delivered another outstanding quarter, driven by reimbursement coverage increasing across Europe and lower sequencing prices, enabling an accelerated shift from exomes to genomes. In the quarter, we also saw promising research and guidelines recognizing the diagnostic yield and cost effectiveness of whole genome sequencing for genetic disease. In June, Rady's Children's Hospital in the state of California published the results of Project Baby Bear, a groundbreaking program that showcases the significant benefits of rapid whole genome sequencing in decreasing both time to diagnosis and healthcare spending for critically ill infants. More than 30% of these patients had a change of care due to the diagnosis enabled by WGS. This rapid whole genome sequencing protocol is now available through Rady's growing network of over 60 hospital partners, as well as other hospital networks across the country. Turning to our research and applied segments, we saw strong year-over-year and sequential growth. Momentum from population genomics programs continued to grow in Q2. In the U.S., All of Us is now operating at full scale, running thousands of genomes a week. We also saw multiple initiatives ramped internationally, providing an ongoing pipeline of new PopGen opportunities. We expect revenue from over 30 different PopGen initiatives in the second half of the year. Multiomic, spatial, and single-cell approaches are gaining traction in many of our research segments, driving high-intensity sequencing. The success of Illumina's partnerships with companies such as O-Link, NanoString, and 10X will enable novel discoveries and expanded applications to enter the clinic. The emergence of the Delta variant has renewed focus on and heightened awareness for genomic surveillance in the fight against COVID-19 and future pathogens. The launch of the RUO 96 sample COVID-Seq assay and the expanded EUA for COVID-Seq and NexSeq 2000 this quarter demonstrate our continued commitment to provide the workflows, instruments, and bioinformatics to meet this challenge. We are now working with governments and testing labs on COVID surveillance initiatives in over 70 countries. These efforts have driven increased COVID consumable revenue in Q2 relative to Q1, And at this time, we expect the consumable revenue in the second half to remain relatively steady to the first half. Through our philanthropic efforts, we are working to ensure that countries with high needs for COVID surveillance but limited resources also have access to our sequencers and consumables. Earlier this week, we announced the donation of $1 million in sequencing capabilities, including two Nexseq 2000s, to the Molecular Diagnostic Reference Laboratory at Kasturba Hospital, This will enable COVID surveillance in Mumbai, an epicenter of India's devastating second wave. Before I hand the call over to Sam, I'll provide a brief update on Grail. In Q2, Grail launched the first-of-its-kind multi-cancer screening test, Gallery. We made this test available to our employees and are encouraged by the positive feedback we've received. It's exciting to see the promise of genomics come to fruition in oncology screenings. and we're committed to supporting all companies innovating in this space. As we shared in late July, we remain committed to closing this pro-competitive deal and believe with this acquisition, Illumina will be uniquely positioned to help save tens of thousands of lives.

And now, I'll turn the call over to Sam. As Francis outlined, second quarter revenue exceeded our expectations, growing 78% year-over-year to $1.126 billion, driven by 80% growth in sequencing and 57% growth in microarrays. For the first time in company history, total quarter sequencing revenue exceeded $1 billion, growing 4% sequentially to $1.021 billion and representing 91% of total revenue. Our core business continued to accelerate across all regions in the quarter, driven by growth in clinicals, as well as strong demand from our research customers who were particularly impacted by the pandemic in the second quarter of 2020 and are continuing to resume and expand their sequencing. Sequencing consumables revenue grew 82% year-over-year to $704 million, led by record novice consumables shipments with robust demand driven by B1.5 flow cells. Sequencing instruments revenue grew 115% year-over-year to $189 million, reflecting another quarter of significant strength across all instrument categories. NovaSeq shipments more than doubled from the second quarter of 2020, driven by continued adoption by new to high throughput customers. Mid-throughput system shipments reached a new high, driven by record NextSeq DX shipments and demand for NextSeq 1000 and 2000. Since launch, 25% of NextSeq 1000 and 2000 have been shipped to new to Illumina customers. Distributions from COVID-19 surveillance testing exceeded our expectations, contributing approximately $40 million in sequencing consumables revenue and $10 million in incremental instrument revenue. Sequencing service and other revenue was also higher than expected, growing 41% year-over-year to $128 million, primarily due to approximately $20 million of one-time revenue recognized from NIPC royalties received related to a patent litigation settlement. Moving to regional results, revenue for the Americas region was $589 million, growing 76% compared to the prior year period. Revenue growth in the region was driven by record sequencing product revenue related to demand for clinical oncology testing and genetic disease testing. The regional performance was also driven by strength in genetic disease research from population genomic initiatives, as well as contributions from COVID surveillance testing. EMEA delivered revenue of $320 million, representing 90% growth year over year. EMEA's performance was driven by both a recovery in research and an acceleration of the clinical business, including a record quarter for genetic disease testing due to momentum from expanded market access and reimbursement. COVID surveillance testing also contributed to the strong performance in the region. Greater China revenue was $132 million, representing growth of 67% year over year, due to continued strength in sequencing led by clinical growth in the region. Sequencing instrument shipments more than doubled year-over-year, driven by growing demand for NexSeq DX in hospitals, given the superior ease of use, accuracy, and quality of outputs from Illumina sequencers. Finally, APJ revenue of $85 million grew 67% year-over-year, driven by sequencing consumables revenue growth across clinical applications in reproductive health and genetic disease testing, as well as strong utilization by research customers. As expected, APJ revenue decreased sequentially due to timing of fiscal year-end purchases and normal seasonality in Japan in the first quarter of 2021. Moving to gross margin and operating expenses, I will highlight 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 the supplementary data available on our website. Non-GAAP gross margin of 71.8% improved sequentially by 130 basis points mainly due to favorable utilization on strong demand, as well as one-time revenue from a patent litigation settlement. On a year-over-year basis, non-GAAP gross margin increased 320 basis points due to increased fixed cost leverage on higher volumes, as well as a positive impact from the patent litigation settlement, partially offset by product mix. Non-GAAP operating expenses of $471 million increased $51 million sequentially due to higher compensation-related expenses and increased project-related spend, but were lower than expected due to the timing of certain investments shifting to the second half of 2021. As expected, non-GAAP operating expenses were up $137 million year-over-year due to increased performance-based compensation expenses and headcount growth. as well as additional investments to support the growth of our business. Non-GAAP operating margin was 30% compared to 32.1% in the first quarter of 2021. Operating margins were better than expected due to higher revenues and favorable gross margin, driven by higher volumes than the one-time patent litigation settlements. Non-GAAP other expense of $2 million was flat sequentially and $15 million lower year-over-year as expected. The year-over-year decline was primarily due to lower interest income on short-term investments as we repositioned our investment portfolio for the anticipated funding of the GRAIL acquisition. The non-GAAP tax rate, 18.9%, decreased from last quarter due to a tax expense recognized in the first quarter of 2021 on certain foreign subsidiary earnings that are no longer indefinitely reinvested. The decrease in the non-GAAP tax rate year over year was due to a higher mix of earnings in jurisdictions with a lower tax rate. For the second quarter, GAAP net income was $185 million, or $1.26 per diluted share, and non-GAAP net income was $276 million, or $1.87 per diluted share. Moving to cash flow and balance sheet items, cash flow from operations was $253 million, which included $105 million in continuation payments made to GRAIL pursuant to the merger agreement. DSO of 44 days compared to three days last quarter driven by revenue linearity. For 2021 capital expenditures were $44 million, cash flow was $209 million. we did not repurchase any common stock in the second quarter. We ended the quarter with approximately $4.3 billion in cash, cash equivalents, and short-term investments. During the second quarter, we used $491 million to repay the outstanding principal of our 2021 convertible notes, which matured in June. Our weighted average diluted share count for the quarter was approximately 147 million. Moving now to 2021 guidance. We now expect full year 2021 revenue to grow in the range of 32% to 34% or $4.28 billion to $4.34 billion. At the midpoint, this represents an increase of approximately $1.07 billion compared to 2020. For the full year 2021, at the midpoint of our revenue guidance range, we now expect total sequencing revenues to grow approximately 35% year over year, driven by accelerating strength in our core business and higher than expected contributions from COVID surveillance testing. We now expect 2021 non-GAAP operating margin to be approximately 27.5%. reflecting our higher revenue expectations and our ongoing commitment to continued innovation in R&D. We continue to maintain our focus on improving our core business operating margin leverage over time. We expect our non-GAAP tax rate to increase approximately 200 to 250 basis points from the prior year, which is higher than our previous expectations. We now expect non-GAAP earnings per share in the range of $6.30 to $6.50, and GAAP earnings per share in the range of $4.69 to $4.89. Moving to the third quarter of 2021, we expect revenue to increase approximately 30% year over year. We expect non-GAAP earnings per share in the range of $1.30 to $1.35, and GAAP earnings per share in the range of $1.23 to $1.28. Now I'll hand the call back over to Francis for his final remarks.

Thank you, Sam. It's clear from our strong first half results that Illumina and our customers are firing on all cylinders. Our clinical markets are all growing as expanded reimbursement gives more patients access to existing genomic tests, and evidence generation brings new genomic applications into the clinic. In oncology, more cancer patients have access to CGP for therapy selection. and emerging MRD and early cancer detection tests will drive significant long-term growth for sequencing. In genetic disease testing, the speed to diagnosis and treatment benefits that rapid WGS offers is catalyzing awareness and adoption. In NIPT, while coverage has expanded dramatically in the U.S., there is still a significant need internationally, representing a tremendous growth opportunity. Research funding and overall investor capital deployment in life sciences continues to be incredibly robust, which will drive innovation and new use cases for sequencing for decades to come. Single cell, spatial, and multi-omic approaches to complex problems are driving larger scale novel research and clinical solutions. The benefit of population genomics programs in national health systems is driving more governments to take up these initiatives, further broadening the reach of sequencing across the globe. COVID surveillance initiatives are laying the foundation for a permanent global genomic epidemiology infrastructure. Illumina is playing a central role in these advancements in genomics and human health. I am very proud of the execution of our fantastic teams around the world. This is an incredible time for our field, and we have the most exciting technology roadmap in development that I've seen in my time at the company. I'm honored to work alongside my colleagues to fulfill Illumina's instrumental role in improving human health by unlocking the power of the genome. Now, I'll invite the operator to open for Q&A.

Thank you, speakers. Participants, we will now begin the question and answer session. To ask a question over the phone, please press star 1 from your telephone keypads. To withdraw your request, you may press the pound key. Again, that's star 1 to ask a question or the pound key to withdraw your request. Speakers, our first question is from the line of Vijay Kumar of Evercore ISI. Your line is now open.

Hey, guys. Congrats on the solid print here, and thanks for taking my question. Francis, maybe if I could start with one on the guidance question here. You know, your second half of revenue growth, the implied revenue growth is about 20%. You know, comps only get about 500 basis points harder. In the context of you speaking about record backlog of instruments, you know, opportunities on the surveillance side, et cetera, maybe talk about the second half revenue trajectory and why perhaps it shouldn't be stronger.

Yeah, so thank you, Vijay, for that question. So I'll start by saying we are seeing tremendous momentum in the business, as you point out. If you look at every part of our business, we're seeing the businesses, those market segments expand. And so we expect that to continue going into the second half of the year, but there are a number of things that we are watching for. One, and Sam will add more color on this, but there are a number of one-time things that happened in Q1 that we don't expect to repeat in Q2, and we'll list what they are. And then the second thing that's playing out is, look, we're still in the midst of the pandemic. And so, you know, we are keeping a watchful eye to see how the Delta variant, you know, plays out both here in the U.S. and around the world. And so that, you know, that means we should put some moderation in terms of what we expect to see in the business for the second half. We're definitely still in the middle of the pandemic. And those are the two factors I'd say that, you know, counterbalance what we see is incredible momentum in the markets that we're in.

Yeah, Vijay, maybe I could add just some more specificity on the one-time factors in the first half. And thank you for the question, by the way. Our business is really strong and really accelerating across the core markets. There are one-time factors in the first half that I do want to call out that are important when you think about the second half. So the one-time factors, I would bucket as follows. You have in Q1, we had about $20 million of stocking. We did not see any stocking in the second quarter, but we did have $20 million in the first quarter. I would characterize Roughly $55 million of COVID surveillance instruments placements. So that's $55 million in the first half that we are now not expecting to repeat in the second half. So that's another item. There's the UK Biobank, which terminates and basically wraps up in the third quarter. So that's about $30 million of extra revenues in the first half that we will not have in the second half. And then finally, there's a $20 million NIPT settlement in the second quarter that I referred to in my prepared remarks that will not repeat in the second half. So if you put all these together, it's about $125 million of what I would call one-time factors in the first half that don't repeat. If you exclude those from the first half and annualize, basically we're looking at flattish second half versus first half.

That's helpful, Sam. And, Francis, maybe if I could one on that. The comment on utilization picking up in the box is interesting. Given these record placements in healthy and market-budget-free outlooks, how should we think about fiscal 2022? Should comps matter? Or perhaps this uptick in MRD and utilization comments, should we draw a correlation on what the consumer outlook could look like here?

Yeah, so I'll start by saying that, you know, we're not ready to make statements about 2022, but I'll give you more color on the trends we are seeing. As you point out, we're seeing really strong... instrument side across the portfolio and what's especially exciting about that as you know is that instruments tend to be a lead indicator on the business because of the model that we employ and if you look at you know what i said about instruments we have the highest overall backlog for instruments since we launched nova seek on the high throughput side we have the highest order volume uh for nova seeks since we launched the product in q117 On the mid-throughput side, we're on track to almost double the number of next weeks that we ship, if you look at the average we've shipped for the last few years. So really strong momentum in the mid-throughput portfolio. And then even at the low end, as I pointed out in the remarks, we've got the highest MySeq shipment of any quarter in the last year. So, you know, low throughput, mid-throughput, high throughput, all of those businesses are showing really strong momentum, resulting in the big backlog that we have going into the second half of the year.

Next question is from the line of Doug Schenkel of Cohen and Company. Your line is now open.

Thanks, guys. I appreciate it. First thing I want to talk about is Grail. So recognizing what you talked about in your remarks, that you remain committed to Grail, I think it's fair and not controversial to say this process is clearly not going the way you expected it to. You know, unfortunately this, this happened in a different way, but, but recently with PacBio, of course, you know, so, so really kind of a three-parter here, you know, one, it, it seems like the US and the EU regulators tactically could really drag out this process if they want to, and, you know, in a way, try to run out the clock over a one to two year period. Um, I know that's not what you expect to happen or hope to happen, but if that does, are you willing to stick with this, you know, well into 2022? And then secondly, if this doesn't go through, is the conclusion that effectively Illumina can't acquire any service company that is Illumina sequencing dependent? And then third, what do you think you could be doing better with your regulatory evaluation process moving forward, and how are you changing your approach?

Great. I think I have all those questions, so thank you, Doug, for those questions. So first question is, if, you know – we willing to stick with this and does it look like you know the process is going to run out the clock uh so the way the timing is going to work is you know the uh the deal contract lasts till december 20th um and so you know we are working both the ftc and the european commission uh to get approval by that timeframe. At this point, there's processes in work. There's the work we're doing with the FTC, there's the work we're doing with the European Commission in phase two review, and there's the work we're doing in Luxembourg to dismiss the European case because of jurisdiction. At this point, it is possible that all of those land one way or another by December 20th. And so at this point, we're not yet at the stage where the clock has run out. And at this stage, we are committed to working through this period to get this to a conclusion. We continue to believe that this deal is pro-competitive. We continue to believe that this deal will result in the savings of tens of thousands of lives that would not be saved if we didn't buy Grail, just simply because we can accelerate the business. So, to answer the question, we are committed to working through this deal through that timeframe, through the end of the year. I would not read this to mean that we can't buy any other services provider. or anything else we want to buy. We have done a number of other acquisitions in the last 18 months. So those have gone through. And, you know, I think we are going to continue to look for things that we believe add long-term shareholder value. And if it means we need to acquire them, you know, we will continue to look for those from time to time. In terms of what we can do better, one of the things we have learned is, you know, we don't have a DC presence and we don't have employees on the Hill that are, you know, telling the Illumina story to the various agencies, to the other folks on the Hill. And it's become clear to us that we need a bigger presence there. And so we're starting to build our presence there. And the fantastic thing is that I personally have spent a lot more time on the Hill in the last couple of months. And the story really resonates. And so when we tell the story, I mean, people get really behind it and want to support it. And so one of the things we have learned, and we're going to do differently, is we're going to have more of a presence on the Hill. And we're going to be telling the Illumina story more often and more clearly.

And then thank you for that, Francis. And let me ask one. It's kind of a longer-term one. You know, recognizing what we've seen in terms of, you know, recent acquisitions in the space and, you know, some of the new public entrants in sequencing, you know, it seems fair to say that over the next few years, competitive dynamics are going to intensify a bit in sequencing. There's going to be more short-read platforms. There's going to be advancements in long-read tools. We're seeing that already. And I think you appreciate, and I try to say this in the humblest way possible, that coming from somebody that's focused a lot on sequencing over the last 15 years, and has seen a lot of planned technological threats come and go. For me to kind of look at the landscape and conclude that, hey, maybe this feels a little bit different now, maybe means something. So as you kind of think about that and really think about the next few years, is the playbook the same? New instruments, maybe as soon as next year, from top to bottom of the market, morphed low cell density and, you know, essentially play the same elasticity curve the same way you have in the past? Or, you know, as we think about the next few years, is it a little bit different? Thank you.

All right. Another great question. So let's start with a couple of parts of the question. You know, one is, you know, does it feel like that competition is intensifying right now in a way that, you know, it wasn't before? And two, so therefore, is the playbook the same? in terms of competing here. And so let's go to each part. One else is, look, and you'll appreciate this given the 15 years you've been looking at this, is we've always had waves of competition, right? And a few years ago, we'd be talking about hydrogen and thermal, and you were coming from behind. in some markets. And because the market is so big, and we're still at the very beginning of this giant market, we fully anticipate it will continue to attract a lot of venture investors. I mean, there are dozens of companies. And we could have had this conversation any time in the last decade, and I'd have told you there are dozens of companies that are being funded to go after the sequencing space. So I don't especially see a difference in terms of the number of companies being started. The actual competitors showing up are different, obviously, every time. And I liked what you said in one of the notes I read from you, Doug, where you said, you know, the trail is littered with the dead bodies of people whose sequencers look great on PowerPoint, but a couple years away from launch, could never get closer than that to launching. So we've seen that. Now, we will see more competition, though, going forward. Again, we expect that. Part of the playbook is the same, better, faster sequencing, continue to be the gold standard for accuracy, continue to set a relentless pace in terms of innovation that our competitors have to follow, continue to set the price point in the market that everybody else has to follow. Those parts of the competitive playbook will be the same. Another part will be the same. It continues to just add more and more value to the sequencer that our customers get. And you've seen us do that, you know, with Etico, with the hardware acceleration that's now built into a sequencer. You've seen us do that. by expanding the bioinformatics pipeline that's now built into a sequencer. And so, you know, we continue to expand what it means to create a sequencer. And you remember the move we made from the output of our sequencers to our images, and then it became base calls. And now, from our sequencer, you can get variants, and that's unique in the market. And now we'll force everybody else to react to that, to say you've got to add that secondary pipeline now to your sequencer to catch up to Illumina giving you variants. But some part of the playbook has changed. The genomics industry and Illumina's business is way more diversified than it's ever been, right? A few years ago, we used to be targeting the research market, and it was really a single instrument, the high-seq, right, or the GA before that. So you were selling sort of highest throughput sequencers into the RUO, the research market. Today, that's only one segment of our business. Our business is really diversified. Almost 44%, 45% of our business comes from the clinical market, and the rest is research and applied. More than half of our business comes from outside. And we have a lot of cleared end-to-end workflows into the market. And so as I look at the landscape, no single competitor out there matches, you know, all those segments of the business. And so each of them have their own different, you know, sort of playbook. In some cases, if you have to deliver cleared end-to-end workflows, you know, In some cases, it is better, faster, cheaper. And so that's a different – I think there's no single competitor I can look at, Doug, and say that competitor is coming after, you know, most of our business.

Thank you, speakers. Next question is from the line of Teiko Peterson of J.P. Morgan. Your line is now open. Thank you.

Hey, thanks. Francis, back to the guidance question, just thinking about some of the gives and takes in the back half of the year. You know, on COVID specifically, as we think about some of the POPSEQ programs, I'm wondering, you know, how you think about risk to those that are ongoing. And then on the surveillance side, you said last quarter you weren't expecting any instruments. You actually did have some instruments this quarter. So what are the odds that you actually could be underestimating kind of the tail there on the instrument side around surveillance?

So let me two parts of the question. Let me start with PopSeq and then let's go to COVID instruments. We are very happy with where we are with the PopSeq programs right now. I talked about the UK biobank is continuing to go full force. We expect it to sort of end towards the end of this year, but it's continuing to sequence at full production scale. All of us is now sequencing at full production scale. We talked about doing thousands of samples a week. And that pipeline seems really robust. And, you know, I don't expect much disruption, you know, over the course of the year, barring something massively unexpected, you know, for what's happening with all of us. So they're up and running really well. The other thing that is really exciting about PopSeek is now we have 30 programs that are up and running around the world. And so, you know, that means we're starting to diversify our the revenue contribution from the POPSEQ programs as they start to ramp around the world. And that gives us, I think, a little bit more resilience in terms of if any part of the world is more impacted than the other, you know, there's still other parts of that. So I think it's a really healthy setup for us in terms of POPSEQ for the rest of the year. In terms of COVID instruments, you're right. When I was here doing this call a few months ago, I told you that we weren't expecting any more instruments for the year. We thought the buy was going to happen in Q1. And then, lo and behold, we sold some instruments for COVID surveillance in Q2. Now, that part of the business, candidly, Tycho, is hard to predict. And so what we've built into the model is no more instruments for the rest of the year and $50 to $60 million in terms of consumables. And, you know, yes, absolutely, it's possible that people buy more instruments. But, again, that's hard to predict.

Thank you, speakers. Next question is from the line of Peha Savant of Morgan Stanley. Your line is now open.

Hey, Francis. Good evening. I just want to follow up quickly on PopSeek, and then I have a question on China. So, on PopSeek, I mean, there's a little bit of a possibility of a delay here in terms of the MVP renewal. Obviously, you know, that's been an important revenue generator for you over the years. What's the risk here that there could be a bit of an air pocket here with some of your larger customers heading into 2022? And then second, on China, I mean, recently there was some news around new buy Chinese targets issued by the government for hospital purchases. So any thoughts on that impacting your growth? Obviously, next week, DX, following the regulatory approval there, has been an important growth driver for you in that geography?

Yeah, so thank you, Jess. Let's go through the two questions. You know, for the reasons I just talked about, the fact that now we have a number of PopSeq programs, that we have a number of the bigger ones that are already running at scale, we feel really confident in the PopSeq pipeline and the revenue pipe for the rest of the year. And so we've looked at, you know, any of the risks associated with them. We looked at the timing. But we feel really confident, the diversity of the revenue sources in the PopGen pipeline. In terms of China, we were really happy with the performance we've been seeing out of China. We talked about the growth we're seeing in China. We are maintaining our leading position in China. Our strategy there is really paying off, and it touches on the things you asked about. We have always followed a strategy in China that was very partner-centric. And so we have partners that are building their products on our instruments and selling them into customers. And those partners are Chinese partners. And so, you know, a lot of them qualify even under the Made in China regulations, and that puts us in a really good position in China. A couple of other things, one you touched on, which is, you know, the NovaSeq DX, Again, sort of a partner model, but that's a really positive step forward for us in China. And then the regulations around LDTs in China is also very positive in terms of what it means for the future. So we're happy with the growth. We're encouraged by some of the things we're seeing in terms of pointing to positive momentum going forward.

And maybe one thing I would add on population genomics, Tejas, with regards to the second half, but also on an ongoing basis going forward in 2022. You know, the really exciting thing about population genomics initiatives now is what we talked about earlier, which is the 30 or so population genomics initiatives that are driving contributions in half of the year and beyond. We are, I would say, very diversified in that respect in terms of the contributions spread across a number of them that are ongoing. Those are not ones that we are waiting to happen, but they are actually ongoing and starting to drive contribution. And we do have the large ones that we've talked about, one of which is the UK Biobank, which is wrapping up in the second half.

Thank you, speakers. Next question is from the line of Derek DeBruin of Bank of America. Your line is now open.

Hey, a couple of questions. I think the first one would be, you know, that the instrument numbers are quite impressive and the backlog commentary likewise. Francis, what's your philosophy on new product introductions? I mean, it sounds like Inevitaseek still has a lot of runway in it. And I know we've been, you know, I know earlier, or I should say last year we were, or was it earlier this year? And I remember we were talking about potential for, you know, the next generation of NovaSeek or something like that coming out and like that. What's your philosophy now on new product introductions, given the strength in the existing portfolio?

That's a great question. Some part of our philosophy, Derek, has not changed, but actually one part has, and I'll tell you about both. The part that hasn't changed is, you know, we will launch products into the market when we think the market is ready, meaning that, you know, it's ready to absorb the price points, unlock additional elasticity, and grow the market as a whole. And so we continue to be in dialogue with our customers to try and understand where sort of the demand curve is And when we feel that there is an opportunity to expand the market through the launch of an instrument with a certain price point or a certain capability, that's when we bring the product to market. So our technical teams are just constantly pushing the technology, and then when we feel the market's ready, you know, we do the engineering to bring those technologies into an instrument. That part of the philosophy has not changed, and we're going to continue to watch when the right time is to – to catalyze a segment of the market with a new product offering. What has changed, actually, and it's really interesting, has been the result of watching what happened with NextSeek 1000-2000. And what we have seen with NextSeek 1000-2000 is that the 1000-2000 has dramatically expanded the mid-throughput market. And it wasn't just an upgrade or a replacement cycle. And it's quite dramatic, actually. If you look at the number of mid-throughput instruments we've shipped over the last few years, it's been fairly steady. This year, we are on track to almost double that number, and there are lots of people who are still buying 550s and the 550 DXs. What's happened is we've catalyzed and opened up new markets for the mid-throughput instrument with the price points that we've put out with the $1,000, $2,000. That's different than the genomics market has been before. And so now we see an opportunity, even in a market segment, to not just catalyze an upgrade cycle, but actually to open up other parts of that segment with an offering in that market segment. And so that's a different philosophy that we're building into now, our strategies, as we think about future products.

Great. That's really helpful. Sam, you didn't give us any – sort of like pull-through ranges on your instruments. Could you share some color on that, specifically what the NovaSeq pull-through was and the NextSeq pull-through and MySeq? Thank you.

Sure, Derek. Yeah, happy to. With regards to NovaSeq, you know, the last guidance that we shared was $1.1 million to $1.2 million for instruments, and we said we're going to be on the high end of that range. So I can tell you that for Q2 we exceeded that. And now our expectation for the full year is that we will be above that range, the 1.1 to 1.2. We're going to exceed that. So we're not giving an exact number, but we are going to be above that 1.2 million top end. With regards to, you know, next week, the pull-through on next week, 550 at least. We haven't shared any pull-through on next week, 2,000 or 1,000. It's too early right now in the life cycle of those instruments to provide that. But for NextSeq 550, we're at the high end of that 100 to 150 range that we traditionally shared. So pull-through is at the high end of that. With regards to MySeq, we're within the 40,000 to 45,000 pull-through range of that instrument. And with regards to MiniSeq, we're on the high end of that 20,000 to 25,000 pull-through range for that instrument.

Great.

Thank you very much. You're welcome.

Speaker's next question is from the line of Dan Arias of Steeple. Your line is now open. Dan Arias of Steeple.

Good afternoon, guys. Thanks for the question. Francis, maybe just to your point on market readiness and just where your customer base is, do you have a read on what percentage of your Novaseq base is taking advantage of the $600 genome capabilities at this point? I guess more importantly, can you share it if you do?

You know, that's a great question. I don't have any number to give you in terms of straight percentage, but how would I think about it? I would say that, you know, with the price reduction that they put into the market last summer, which catalyzed the elasticity we're seeing, the $600 genome is now pretty broadly available to our NovaSeq customers. So I would expect, you know, a significant number of them are actually availing themselves of that price point. Now, of course, you know that it's non-necessary genomes that they're running. Novaseqs are now used for a very broad range of applications. A lot of Novaseq usage in oncology for the TSO500 or some of these large panels. But I'd say a lot of them, a significant percentage of them, are able to use those applications at that kind of price point, but I don't have an exact number to give you.

Okay. Maybe on the oncology side, Some of the work that we had done had showed a pretty strong response in terms of the usage of AmpliSeq for Illumina equipment. I'm guessing or I'm wondering, I guess, how critical you see that partnership for your cancer franchise going forward. And then are there any margin implications that might be material enough to call out or that we should be mindful of there?

Yeah. The way I think about that is it's nice to have part of the portfolio. but it's not a critical part of the portfolio. In terms of even thinking about the revenue for us, I wouldn't do that as a big part of the revenue we make in the oncology business at all. The reason we did it is we want to make sure that our customers can have the broadest options in terms of what they want to do, but it's not a meaningful contributor to our revenue in oncology.

Speakers, next question is from the line of Patrick Donnelly of Citi. Your line is now open.

Hey, guys. Thanks for taking the questions. Francis, it might be for Sam, actually. I'm just wondering, you know, the cadence throughout the quarter, you know, how things picked up. And then particularly in the last couple of weeks or a quarter to date here, have you seen any slowdown or kind of shutting down of customers in recent weeks due to Delta? Just trying to get a handle on lab activity as we trended through the quarter and then again, particularly recently here.

Yeah, so I'll start with the easy part. We're not seeing any slowdown right now because of Delta. We're not seeing any shutdowns. The whole quarter was fast, you know, Patrick. I mean, you can see that in terms of even, I think, at DSO. Like, you saw improved linearity even this quarter. You know, the way it felt internally is we started the quarter fast and it got faster. So, again, there was no slowdown in the middle. But what was surprising, again, was it started really fast. So, the hockey stick at the end, I'd say, was, you know, was not necessarily as pronounced because we had a fast starting of the quarter. Okay.

Yeah, when you think about, Patrick, with regards to just one more point on your question, you know, no, we did not see that slowdown, as Francis said. You know, we are still in a COVID year, and, you know, Delta is obviously still raging. So we still, when you think about the second half, we still obviously, you know, think about the potential impact of any shutdowns, et cetera. But at this point, we're not seeing that. And the quarter exited very strong as it started.

That's helpful. And then maybe just one on next week. I mean, that continues the record quarter after record quarter there. Can you just talk about what you're seeing on the clinical demand side there? You know, how much it picked up this quarter versus last quarter and expectations going forward?

Yeah, I mean, that has been quite a remarkable story. I think I mentioned a few minutes ago that if you look at the number of instruments we're shipping in that segment, it's now almost double what we shipped historically into that segment. So a few things I'll point out. One, you know, we continue to ship 550s and 550DXs. So there are people who validated workflows on those instruments. They're continuing to buy. We are seeing a good number of new to Illumina and new to that segment customers come in. It continues to be one of the clinical workhorses of our portfolio, and you see applications in oncology, you see applications in NIPT, and that continues to be true. The things we talked about in terms of the expansion we're seeing in the clinical market, all that reimbursement that kicked in last year for oncology, for NIPT, All of that is driving the instrument purchases we're seeing. And that's a really great sign because, as we talked about, instrument purchases for us are a lead indicator of future growth. And so when you place that many instruments, you know, it's exciting for us to think about.

And so those are some of the things that are driving the misreport. Maybe I can add a data point with regards to adoption and, you know, the split by customer type or not maybe customer type, but just in terms of where we're seeing the placements come from. We are seeing roughly 25% coming from new to Illumina customers into the next week, 2000, 1000, which is really encouraging. It's basically expanding the pie in terms of new to Illumina customers. We're also seeing roughly 30% coming from benchtop customers. So, you know, those customers that are either on my seat or mini seat that are now going up to next week, 2000, 1000. And we're seeing also capacity upgrades as well as, you know, NextSeek 550 conversions going to 2,000, 1,000. But as we said as well, the NextSeek 550 and 550DX is really holding very strong with continued placements in those categories. What we are not seeing is high-seat customers going really to NextSeek 2,000 instead of NovaSeek. So that's something we always said we didn't expect and we are not seeing. If we're seeing only a really very, very small handful, of customers having done that.

Questions from the line of Kyle Mixon of Canaccord Genuity. Your line is now open.

Kyle, thanks for taking the question. So, I'll just ask if you're here for the sake of time, and I'll just go on mute. So, the $90 million here by CDC for pathogen centers of excellence, I was wondering when that could be a tailwind for the women. I've just given the funds expected in August of 22. That's the first question. The second one I wanted to ask was about just the spatial and proteomics readout. I'm just wondering if that's going to be a material growth driver, I guess, going forward. Is that moving the needle? Do you see that? And then also just on the pacing of COVID surveillance testing and the guidance for the second half of the year, I mean, maybe Sam, can you just talk about that a bit?

Yeah, so let me start and then I'll start it over to Sam. In terms of the CDC money and the American Rescue Plan Act and all that money, we're watching to see how that money gets allocated out. We haven't really built much of that into our expectations in the course of this year because there's still work to be done in terms of how that money gets allocated out. We certainly expect some benefit from it going into the following years, but we haven't built that much in and some have colored more. Spatial and proteomics are definitely interesting. They're definitely emerging. They are maybe where single cell was a few years ago. Single cell is certainly a much bigger contributor of our business today than spatial or proteomics. But given the amount of interest in both, we do expect those to be growth drivers for our business going forward.

Yeah, so maybe first on the American Rescue Plan and some of the funding that went in there, the $1.7 billion. with $400 million going into these centers of excellence, out of which $90 million has now been allocated. But it'll be really decided in August of 22 how that gets allocated. I think that's more of a long-term benefit that we expect for the business. So that's what we expect will be the durable genomic epidemiology benefit, the infrastructure that gets built that we see as definitely a potential upside in future years, not this year. In terms of this year, Kyle, just to kind of script out what is the progression in terms of the guide, In Q1, we had 55 million with 35 million instruments, 20 million consumables. In Q2, we had 60 million with 20 million instruments and 40 million consumables. And our expectation in the second half is that we have approximately 50 to 60 million of sequencing consumables revenue in the second half. You know, we look at it as equally split between Q3 and Q4. That is higher than what we had guided to on the Q1 call, just driven off of the additional utilization and placements that we're seeing in the first half.

Thank you, participants. I'll now hand the call back over to Illumina for final remarks.

Thank you for the questions. As a reminder, a replay of this call will be available in the investor section of our website, as well as to the dial-in instructions contained in today's earnings release. Thank you for joining us today. This concludes our call, and we look forward to our next update following the close of third fiscal quarter 2021.

And that concludes today's conference. Thank you all for joining. You may now disconnect.