Illumina, Inc.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sally Schwartz, Vice President of Investor Relations.

Hello, everyone, and welcome to our earnings call for the first quarter of 2024. During the call today, we will review the financial results we released after the close of markets, and offer commentary on our commercial and regulatory activity, after which we will host a question and answer session. Our earnings release can be found in the Investor Relations section of our website at Illumina.com. Providing prepared remarks for Illumina today will be Jacob Tyson, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will provide an update on the state of Illumina's business, and Ankur will review our financial results, which include GRAIL. Jordip Goswami, who is serving as an advisor to the company through June 30th, will then join us for Q&A. As a reminder, GRAIL must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation. 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 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 Jacob.

Thank you, Sally. Good afternoon, everyone. Before going into our first quarter results, I want to take a moment to thank our former Chief Financial Officer and Chief Strategy and Corporate Development Officer, Joydeep Goswami, for his many contributions to Illumina over more than four years. As Sally noted, Joydeep will stay on an advisory role through June to support a smooth transition. I also wanted to welcome our new CFO, Ankur Dhingra, who you will hear from shortly. and congratulate Jacob Wedel, who has now been named as Chief Strategy and Corporate Development Officer. Jacob joined Illumina in November and has been heavily involved in our long-term strategy planning. Throughout the quarter, I continued to meet with customers around the world and had the opportunity to bring a number of them to our San Diego headquarters to discuss new ways to collaborate, innovate, and shape what their future looks like with Illumina. Some of our customers shared how they are scaling up their projects with NovoCX to unlock greater discovery power. One key area of focus is harnessing whole genome opportunities in minimal residual disease. Other customers are starting to sequence deeper and are adding multi-omics layers to their projects, while others are looking at epigenomic biomarkers and methylation to help diagnose and characterize disease. We are seeing a significant opportunity to expand in multiomics. Customers are looking for more sophisticated solutions to support their work, and we are exploring all avenues to create value in this space. Our recent acquisition of Partech, a specialized multiomics software solution, is a building block of our expansion into this space. Our intent is to collaborate with our customers to understand how we can provide more sample-to-answer solutions. Illumina is at the heart of the ecosystem, and we will continue to catalyze the industry with an even greater focus on our customers' priorities. Turning to our first quarter results, I'll focus my comments on Core Illumina. In Q1, we delivered Core Illumina revenue of approximately $1.06 billion ahead of our expectations. While it was a decent start to the year, we remain cautious due to the persistently challenging global microenvironment where customers are still constrained in their purchasing decisions. As expected, we are seeing this playing out across our regions, notably with lower Novosig X placements versus the first quarter of 2023 when we shipped our first X instrument to fulfill a strong pre-order book. three of our regions declined year-over-year. America's revenue was down 4%, EMEA revenue was down 3%, and Greater China revenue was down 14%. Europe revenue was up 7% year-over-year, although we expect a decline in Q2 given the last year's strong X shipment in Europe in the second quarter. Nonetheless, Illumina management team continues to make significant progress executing against my three key priorities to accelerate value creation across the company. My first priority, driving our top line, is grounded in a growing installed base and helping customers realize the full potential of our instruments. In Q1, we shipped an additional 55 Novosig X instruments, bringing our total X installed base to more than 400 instruments. This is a solid start of the year and we expect momentum to continue to build. We also saw promising consumables demand throughout the quarter as our customers continue to scaling their operations and expanding their sequencing projects. With the launch of the 25B rating kit in Q4 and the 1.5B in Q1, and alongside with the well-received upgrade of the 10B flow cell, we are now providing our customers with the full suite of NovoSeq X products. In Q1, we also made XLEAP SBS chemistry available to our mid-throughput customers with the launch of our P4 flow cell on the existing NexSeq 1K-2K instruments. In the first several weeks post-launch, we have received exceptional feedback from customers who are reporting reads that exceed specs for quantity and quality. Customers are positive about the simple migration that's enabled them to run spatial and single-cell projects, and they are impressed with the accuracy they see with the dragon on board. Illumina continues to pursue strategic partnership and alliances to drive the entire genomics ecosystem forward. As a recent example, Pillar Biosciences announced FDA approval for its pan-cancer IVD for general tumor profiling on the Illumina MiSeq DX system. We've been partnering with Pillar since 2017 and are excited for this important milestone. Also in the quarter, Bristol-Myers Scripps joined our previously announced collaboration with Johnson & Johnson Innovative Medicine on the development of our multi-cancer whole genome sequencing-based molecular residual disease assay to better understand disease recurrence. You should expect to see more of these types of activities going forward. Now turning to my second priority. I'm continuing my focus on delivering operational excellence by driving margin improvement through increased productivity by sustaining innovation and growth. It has been my goal to align our organization in a way that best supports our customers' evolving needs. In March, we brought together our marketing and commercial teams under one customer-first global function. I'm confident that combining these teams into one global commercial organization will build our agility to better serve customers while delivering more sustained growth and margins over time. Additionally, we are focused on driving further improvements throughout our end-to-end supply chain and are taking a disciplined approach to improve our cost structure. In Q1, we implemented new initiatives to adjust pricing cross our portfolio to better cover our global operational costs. We also made progress in streamlining our real estate footprint as we exited select facilities in the Bay Area and in San Diego. These actions add to the number of ongoing initiatives that will continue to support our margins and increase further flexibility for investment in high-growth areas. We are also tightly focused on stabilizing our Greater China business. And in Q1, we brought on Jenny Tsang as head of region. Jenny has deep expertise in healthcare and global organization and a strong leadership and execution mindset. She's already proving to be a great leader of our China team and is introducing changes to make our business more in China for China, which will include improving our local manufacturing and partnerships in the region. Moving on to my third priority, which is working to resolve GRAIL as quickly as possible. In April, we reached an important milestone in the divestment process when the European Commission approved our divestment plan for GRAIL. The approved plan contemplates both sales and capital markets options, and we have made progress on both paths, consistent with the European Commission's divestiture order. In the event of a capital market transaction, we are required to capitalize GRAIL with approximately $1 billion, deflecting two and a half years of funding based on GRAIL's long range plan. The amount includes cash on GRAIL's balance sheet. We are on track to finalize the terms of the transactions by the end of the second quarter. I look forward to having additional updates for you soon. Overall, I'm encouraged by the progress we have achieved in the quarter and optimistic about delivering on our initiatives here in 2024. Now, I'll ask Ankur to share more detail on our first quarter results and outlook.

Thank you, Jacob, and hello, everyone. I'm very excited to join Team Illumina to improve human health by unlocking the power of the genome. I'm passionate about making a positive, meaningful impact in healthcare. I am very familiar with the role Illumina has played in establishing and advancing the genomics industry over the last 25 years. Building on that strong foundation, I'm confident we can continue leading, supporting our customers, and delivering on the promise of what genomics can do for patients around the globe. I would also like to express my thanks to Joydeep for his support as I transition into my role. It's been a great first two and a half weeks. I'll start by reviewing our segment results for Core Illumina and GRAIL, followed by consolidated financial results, and then conclude with my remarks on our current outlook for 2024. I will 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 the supplementary data available on our website. Starting with our segment financials. Core Illumina first quarter revenue was $1.06 billion, which is down 2% year on year, both on a reported and constant currency basis. This revenue performance exceeded our expectations and was primarily driven by three areas. First, Strong performance in high-throughput consumables. Second, timing of revenue from certain strategic partnerships. And third, some customers accelerating delivery of a few NovaSeq X instruments from Q2 into Q1. Core Illumina sequencing consumables revenue of $698 million was up 1% year-over-year, primarily due to growth in high throughput. On a sequential basis, NovaSeq X consumables grew in the double digits following the successful launch of the 25B flow cell. Total sequencing GB output on our connected high and mid throughput instruments grew over 35% year over year and grew at a high single digit rate quarter over quarter. The research and applied activity benefited as transition to the NovaSeq X continues to ramp and 25B adoption grew at large core labs. Clinical activity continued to be driven predominantly by the NovaSeq 6000. As a reminder, we believe this data is a useful reference that shows the general activity trends across our install base and is directionally correlated with revenue over time. Sequencing instruments revenue for core Illumina of $110 million declined 29% year-over-year in Q1, 2024. The year-over-year decline was driven both by, one, an expected decline in mid-throughput shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements, and second, lower NovaSeq X placements as compared to significant pre-order launch-related shipments in the first quarter of 2023. For NovaSeq X, as Jacob noted, we shipped 55 instruments in Q1. Core Illumina sequencing service and other revenue of $151 million was up 27% year-over-year, driven primarily by an increase in revenue from strategic partnerships and higher instrument service contract revenue on a growing install base. Moving to the rest of the Core Illumina P&L, Core Illumina non-GAAP gross margin of 67.1% for the quarter increased 190 basis points year over year, driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight and improved productivity. This was partially offset by certain strategic partnership revenue that is lower margin, and increased warranty and field service cost. Core Illumina non-GAAP operating expenses of $491 million were down $23 million year-over-year, primarily due to decreased labor expense as a result of reduced headcount and continued savings from our cost containment initiatives. Core Illumina non-GAAP operating expenses were lower than expected due to timing of project spend shifting from Q1 into Q2, and lower stock-based compensation expense due to one-time reversals. Putting it all together, Core Illumina non-GAAP operating margin was 20.6% in Q1 2024 compared to 17.4% in Q1 2023. Transitioning to financial results for GRAIL, GRAIL revenue of $27 million for the quarter grew 35% year-over-year driven primarily by adoption of gallery. Grail non-GAAP operating expenses totaled $197 million and increased $24 million year over year, driven primarily by increased headcount to support commercial expansion and research and development. Moving to consolidated financial results, in the first quarter, Consolidated revenue of $1.08 billion was down 1% year-over-year, both on a reported and constant currency basis. Non-GAAP net income was $14 million, or 9 cents per diluted share, which included dilution from GRAIL's non-GAAP operating loss of $185 million for the quarter. Non-GAAP EPS exceeded our expectations, driven primarily by higher core revenue, and lower core operating expenses in the quarter. Our Q1 non-GAAP tax rate was 46.4% compared to 27.3% in Q1 2023, with both periods including a meaningful impact from the consolidations of GRAIL's operating loss, which increased by $21 million year over year. Absent the impact of GRAIL, our Q1 2024 and Q1 2023 tax rates were in the mid-20s. Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million. Moving to consolidated cash flow and balance sheet items for the quarter, cash flow provided by operations was $77 million, capital expenditures were $36 million, and free cash flow was $41 million. And we did not repurchase any common stock. We ended the quarter with approximately $1.12 billion in cash, cash equivalents, and short-term investments. Moving now to 2024 guidance. As a reminder, Illumina is moving as quickly as possible to resolve GRAIL, and the company is focusing its 2024 financial outlook on core Illumina, given the uncertainty around the specific timing and impact of the GRAIL divestment. Our guidance does not assume any impact from the potential divestment of GRAIL in 2024. We will provide non-GAAP EPS guidance for 2024 upon completion of the divestment. We are encouraged by our results in Q1 that came in ahead of our expectations, both for top line and margins. We've also seen the seasonal rebuild of our total performance obligations, our backlog, which increased more than 20% from the end of Q4. At the same time, we're still not seeing any significant improvement in the macroeconomic environment or our business in China. And we are monitoring the impact of a strengthening US dollar. While we are seeing early strength in consumables to start the year, it's being offset by capital constraints that are continuing to weigh on instrument purchases. As such, we are reiterating our full year 2024 core Illumina revenue guidance of approximately flat from 2023, and non-GAAP operating margin of approximately 20%. Our operating margin expectations continue to reflect the benefit of gross margin improvement and disciplined management of our expenses, including reduced headcount, offset by normalization of our performance-based compensation, as well as the impacts of inflation. For the second quarter of 2024, We expect core Illumina revenue in the range of $1.072 billion to $1.084 billion, deflecting a year-over-year decline of 6.5 to 7.5 percentage points. The year-over-year decline is predominantly because of the lower NovaSeq X instrument shipments, given the significant backlog we worked through early last year following the launch. At the midpoint, This guidance reflects a $22 million sequential increase from Q1 of 2024. For the second quarter, we expect core Illumina non-GAAP operating margin of approximately 18%, resulting from a seasonal step-up in operating expenses in Q2 compared to Q1, primarily due to an increase in stock-based compensation expenses from the timing of equity grants. We also expect an increase due to some project spending shifting into Q2 from Q1. With that, I will now turn it back over to Jacob for his closing remarks. Thank you.

Thanks, Ankur. Before we close and move to Q&A, I'd like to comment on our upcoming strategy update event. Illumina's leadership team has been reexamining our strategy, the roadmap and initiatives for achieving it, and the profitable growth we believe it can produce. Our strategy will continue to play to Illumina's strength of building the genomics ecosystem and maintaining a tight customer focus in an increasingly competitive space. Central to this is our goal of making customers the heroes in their labs. In every customer meeting, we are listening intently to understand what they need to unleash the full power of their Illumina instruments and making their priorities the core of our strategy. You will see us continue to develop more sample-to-answer solutions to enable the genomics and multiomics ecosystem. We will maintain our open platform approach and continue to drive the innovation that our customers need to succeed and for which Illumina is known. Illumina has long been the standard in NGS. Our strategic, hands-on support for customers globally, our deep experience and expertise across multiple research and clinical markets, and our decade-long technology roadmap position as well to continuing leading the industry and enabling our customers to improve human health. I am excited to announce that we will be sharing our comprehensive strategy work with you during a virtual event in the fall of this year. We will have more information in the coming months. Thank you for joining. I'll now invite Ankur and Jaydeep to join me for Q&A.

Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. As a reminder, please limit yourself to one question so that we can accommodate as many analysts as possible. You are welcome to re-enter the queue if you have additional questions. Again, please press star 1 to ask a question. Our first question comes from the line of Doug Schenkel with Wolf Research.

Hey, good afternoon, and thank you for taking my question. Jacob, I want to start with a high level one that kind of builds off of the announcement you just made. And then I want to ask a specific cleanup question on the quarter. So first, you know, it's hard to believe, but we're now just over, I think it's eight months into your tenure as CEO of the company. From the outside, we see the changes you are starting to make to leadership, to the broader organization, and in moving towards a resolution on Grail. That said, there continues to be a lot of uncertainty about things like, first, I'd say your view on Illumina's long-term growth profile, especially given uncertainty about the competitive landscape and the outlook for market elasticity. Secondly, What are reasonable operational targets? And then thirdly, ultimately, whether the company, as we sit here today, is positioned to play offense. Would you be willing to share at least a little bit more today about where you are in the process of moving from data gathering and business assessment to maybe putting some stakes in the ground regarding the medium and long-term outlook for the company from a growth and operating margin standpoint? And I know that was a lot, but let me let me sneak in the mathematical follow up question on the quarter. It seems like high throughput sequence and consumable revenue grew low to mid teens. Is that right? And if so, what does that tell you about evolving competitive dynamics and questions regarding elasticity? Thank you.

Well, doc, thank you very much. That was a long question. And, uh, I think also a happy birthday to you. So, uh, I'll do my best here to, to answer the first question. And, uh, I think actually I'm just a little bit over seven months into my tenure. So maybe I should have them another month before we asked this question, but, uh, but definitely I'm spending, I continue to spend a lot of time with our customers, uh, with our employees. I'm excited every time I go and walk over in the R and D building and, and, uh, on, uncover new innovations that we are doing. There's a lot going on in this company. And in the meantime, we're also spending a lot of energy on looking into, of course, where, how are we, in what direction are we putting Illumina going forward? And I think we covered a little bit then in my prepared remarks is that we see a lot of opportunities in both in genomics with now with the X coming out there, and we see a lot of elasticity in that area already with Many customers are using that to go into single cell into spatial and doing bigger and bigger program and deeper and deeper analysis. This is not something that is in the future. It's already happening now. But obviously, at the same time, we're running through that change in price point. And of course, we expect to see elasticity to really help us here over the next period of time. So, while I'm not ready to share with you where we would go from a. overall growth perspective, long range, I can guarantee you that we still are optimistic about the growth of Illumina going forward. Secondly, as I think you saw here in Q1, we are highly dedicated to continue to expand our margins. And I'm really pleased with what all the work that went into with the team here and how we saw the growth margin expansion here for the quarter. So I think that's just an evidence on what we are committed to do to continue to drive up. And I don't think there's anything that holds us back to to drive up margins over the next period of time to where we have been in historic levels. But then again, you know, I do want to wait a little more to have everything lined up from a strategic point of view and thereby also our growth algorithm and our cost structure algorithm to really go out and share the details. But fundamentally, I truly believe that Illumina has a great opportunity of being and continuing to what we have done the last decade of leading the genomics industry, being in the middle of the ecosystem, really go out there and support our customers. But now in the future, where the customer expectations aren't different from what they have been in the past, to really focus on end-to-end workflows, but also new innovations into the multi-genomics space that we're highly committed to. So that was where I am right now. I think then maybe Yeah, on, George, you can help us a little bit on the consumable question.

Yeah, look, I think, hey, and happy birthday again, Doug. On consumables, we, as expected, you know, saw strong growth with ex-consumables. And, you know, we saw ex-consumable revenues offset, or growth in ex-consumables revenues offset the decline in, the expected decline in 6K consumables, right? So, that's a good piece. We also are seeing very strong sequencing activity growth driven by X and X customers, right? So, this is a really positive thing and it underpins a lot of what Jacob talked about in terms of new applications or expanded applications in clinical and in research, right? So, we're excited about that and, you know, we expect that to continue as the 25B flow cell gets more adopted and more used.

in regular activities at our customers.

Thank you. Your next question comes from the line of Puneet Sudha with Lyrinc Partners.

Hi guys, thanks for taking my questions. Let me focus a bit on the mid throughput segment. I just want to understand, can you provide us what was the growth in that mid throughput segment for both consumables and more importantly instrumentation? There are increasingly more questions as customers in the core labs that don't necessarily have an X or a 6K are taking on a competitor system because it's lower price, I mean, or lower cost per gigabase, almost half of what XLEAP is in the next week. So just wondering, can you elaborate a bit more on what's happening in that segment and how do you address that? Thank you.

Yeah, thanks for that, Puneet. I think as a starting point, we are not providing details on the growth on MIS throughput segment, but let me just try to address some of your questions anyway, is that We, of course, are very committed to the MIS throughput, and I'm really excited with the Axis chemistry now coming out on the 1K2K. It's only been a few weeks out there, but we have seen, as I mentioned also before, tremendous excitement from our customers that this doesn't need a new instrument. You can pretty much, with a software upgrade, you can use new flow cells, and you can get higher quality Scores you can, you can get more capacity and you can also, of course, with a, with a low price point. So a lot of our customers are super excited about that. And it really makes us highly competitive in that space. That said, you, you're right. There's competition. And by the way, we take competition very seriously in the, in, in, in our whole segment, but mid throughput is clearly where there's a, there's more activity, competitive activities, and maybe other spaces. We are seeing that mostly in, in China still. But in the rest of the world, that's also that. But we will continue to innovate in this space. I think the X-Leave, as I mentioned, was a good step in that direction. But it's an area we will continue to compete in. And also, we expect to fight for every market share points out there.

Maybe to add, right, so two things. We continue to see consumables growth. So the last city in that mid-throughput segment. So that's one. And two, you know, we had, as we had told you when we set our budget for the year. We had already anticipated a certain level of competition and what we're seeing in the market is in line with what we had expected. And again, I want to emphasize that some of the, you know, the forecast that we're given from Ed Throughput accounted for the macroeconomic headwinds that we had expected to see going through this year. And we actually, those have come to bear, right?

So, again, it's in line with what we had told you.

Thank you. Your next question comes from the line of Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question. Ankur, welcome. I guess my first question is on the guidance here. And, Jacob, maybe you can chime in on this. So, sequentially, core revenues are up. by about $30 million. Is that all being driven by consumables? I think you mentioned you saw improving consumable pull through on the X throughout the quarter as the quarter progressed. So maybe some color on what the exit rate is and where is that increase coming from?

Yeah, I think Ankur can certainly also chime in here, but we saw actually strength throughout the quarter. There was nothing of this being the last few weeks of the quarter, but We continue to see customers adopt the X consumables. Now when we have a full portfolio of both the 25B, the 10B, and the 1.5B, we see a lot of more applications coming on from our customers. So it has really been truly by the X, as Jadib also was talking about before, that we have seen improvement. Besides that, we have also... So the beat was very nice on the consumables, but we've also seen... our BD revenue grow. We've seen some partnerships that have been accelerated and we're just excited about that because it's a big part of our strategy also to continue to develop together with our partners. So that was also part of our performance. Ankur, you have more?

Yeah, I think that was well covered. The only thing I would add specifically that the sequential increase in business that we're forecasting and building the guidance comes both from instruments and consumables.

We're expecting both of that positive trend to continue.

Thank you. Your next question comes from the line of Dan Brennan with TD Cowen.

Great. Thank you, Ankur. Welcome aboard. Maybe just a question on multi-omics and some of the new products that, Jacob, you've been talking about, and it's been kind of in the aluminum proxy as well. Can you just give us some color Maybe start with maybe the Somalogic kind of partnership. Is that the multi-omic excitement that you're expressing? And then any other color you could provide about like sample to answer and some of the newer areas that you're looking to explore. Timing-wise, when do you think we'll get an update on that? Will it be an investor day? Or just how do we think about potential opportunity for Illumina? Thank you.

Yeah, for sure. Thanks, Dan. And you're absolutely right. I mean, overall, I'm excited about the way that sequences can play in multi-omics. And I'm excited about how we can help also partners and customers stimulate that market. And that goes for all the multi-omics spaces if you look into them. But of course, we are, if you just look short term here, we are of course very excited about our relationship with Somologic and where we can go with proteomics. We are still in early access. So 24 will be the year where we are going out with a few handfuls of customers and really going in and make sure we truly understand the power, but already the feedback from customers so far has been very positive on that. So I'm certainly excited about that. But we will continue to look into options for us to play even stronger into multiomics going forward across all the opportunities there, both organically, but of course also together with our partners out there. If you look into end-to-end workflows, I think that's really a great opportunity, as I mentioned also before, that I see customers obviously are looking for the best technology, but they're also looking for ease of use. That it's not only about the sequencer itself, but sample to answer. And the more we can automate, the more we can simplify, both from, of course, sample prep, but of course, also from informatics. I think we can really make sure that our customers can spend the time on where they can create most value. So we'll speak more about that, as you mentioned, also in our strategy update. And I think Illumina has a great opportunity to cover whole workflows and create great applications for our customers.

Thank you. Your next question comes from the line of Daniel Arias with Stifel.

Hey, guys. This is Paul on for Dan.

Thanks for the questions. I think just one from us. In terms of PopSeq, can we get some commentary on that? It seems like all of us have seen some budget pressure. There's been some news there with recent cuts. Does that create any risk to the consumables forecast for the year? And maybe on the flip side, in Europe, with Genome of Europe, there's been some chatter about that picking up. Is that something you could see increased activity in 2025 that would be meaningful?

I think overall we have, if you look at the longer run, we are a long horizon, a mid-term horizon. I'm very excited about the POPtN, not only for POPtN, but what it really constitutes in terms of summary and really looking into big genomic studies to, in the end, to implement into the healthcare system. And we have more than 30 programs ongoing right now, and we have at least the same number in the funnel for opportunities for the future. But we're not banking on anyone's individual program. So it's clear with these big programs where you have sovereigns having to make decisions and budgets and so on, that there's a little bit of puts and takes in that. And thereby, we are not really budgeting and building our budgets based on individual programs. So I don't foresee that any of them are making a big impact on our other 24, 25 programs. But obviously, we are doing our best to stimulate the market out there.

Thank you. Your next question comes from the line of David Westenberg with Piper Sandler. Hi.

Thank you for taking the question. So I just want to start with the continuation of who needs question on the mid-throughput side. How has XLEAP helped maybe in that mid-through port, or how do you anticipate it helping it? And Joydeep, I think you mentioned there is some elasticity there. I think there it's a little bit less clear. In the X department, you definitely see the whole genome. From Axome, you see a lot more single-cell kind of stuff. Can you just reiterate some of that elasticity and how to prevent that from being erased at the bottom? Just given that, as you mentioned, the competitor is using price there. And then on the high throughput side, you did say that you expect the order rate momentum to build. Is that based on actual orders in the book? Is it very late in the cycle orders, or it's just anticipation of budgets? I mean, any way you can walk us through how – Make us a little more clear on that. Thank you.

Yeah, no, so thanks. Let me try to give a little more color on the missed throughput. It's that we're actually seeing with, actually, chemistry is, as I said, there's really three dimensions to it. It's high quality of sequencing, but it's also high capacity with a lower cost. So it really gives customers an opportunity to do more with the sequences. And thereby, we also see that there are customers that were looking to maybe go into a single cell or even spatial that they felt they couldn't afford or they couldn't do with the capacities or with the cost positioning that was previously, that now opens up for that space. So I think we are seeing again an elasticity game that will play out over the next period of time. I think in the end, customers are really looking to work with innovators here in the field. And I think XLEAP chemistry is just another example that we continue to innovate in all our segments. And so while it is an environment right now that's also been impacted by the macro, I actually am pretty excited about what the XLEAP chemistry will do for us over the next period of time and what new applications it will bring on also in the mid throughput. As you mentioned, A lot of things going on in high throughput also, but we see some of the same things happening in the mid throughput.

Yeah, I think just to comment on, you know, and add to what Jacob has said, right? XLeap, remember, was a way for us to help our customers use the same instruments that are already out in the field and with a simple software change, right? They basically can get increased output, better accuracy, better performance, And I think we saw that come through very clearly with our launch in Q1. I want to emphasize, too, right, you're seeing the elasticity and really immediately in the research domain, right, where, you know, a lot of what Jacob was talking about in terms of multiomics, single-cell, spatial things do tend to get performed first on the research side, on mid-throughput. We are also continuing to see that we can maintain, because of our innovation and our technical superiority, a price premium over what others are offering in the market. So we're seeing a lot of that continue, and we're encouraged by that. The macroeconomic pieces are there, but they will end at some point, and we do expect that at that point, some of the cash constraints that our customers are facing will lift.

Yeah, and then I think you had the question about how orders on on the X and I would say, first of all, the, we've seen the X orders being up year year. And so we certainly encouraged by that. And I should also know that that we expect that we will that we will have improvements during the momentum during the year. So, at this point, we are just expecting this to. to look better, and especially since we have a lot of customers, you know, that bought one or maybe two Xs, have done validation work on that, and we are starting to see these multiple orders coming in now up to 10 instruments at the time. So I think you will see that momentum going through the year also.

But, Dave, this is not based on some magic new budget thing, right? We, as you just reiterated, we have expected to see the macroeconomic conditions continue as they are right now.

Thank you. Your next question comes from the line of Subbu Nandy with Guggenheim.

Hey, guys. Thank you for taking my question. You reiterated guidance for the core sequencing revenue growth this year, and I apologize if I missed it, but do you still expect the mix of consumables and instruments to be the same, or is the expected trajectory now a bit different?

Yeah, great question. This is Ankur. So you're right, we reiterated our guidance for the full year, both for revenue as well as for the operating margin. Actually, we're off to a great start for the year as well with the Q1 performance, certainly looking at that, de-risking the performance a little bit. Overall, we'll be confirming our guidance, so the construct is still there, and you've seen the Q1 performance. Just to add a little bit more color there, if you think from a half-one, half-two perspective, et cetera, instrument growth rates, given how the shipments of X were last year. Those growth rates have a variability during the year between half one and half two. Although consumables, as they're starting now, should have a more steady kind of profile. Now, we saw good pricing. We've seen good pull through during the quarter as well. So as of now, we're just reiterating the overall guidance for the year.

Thank you. Your next question comes from the line of Sungji Nam with Scotiabank.

Hi, thanks for taking the question and also welcome to ANCOR and congrats and thank you to Joydeep. Just a quick one on the status of the jurisdictional appeal in Europe and whether the resolution of that, you know, the timing of that, if it doesn't happen before the end of QQ, would you still be providing your final terms of the divestiture? Thank you.

Yeah, so thanks for that. And overall, as you know, we are moving forward with GRAIL as fast as we can. And we have committed to provide, of course, insights here by end of Q2. And I would say at this point, there's nothing, no information or nothing that holds us back from that. So, excuse me. We don't know when the ECJ information is coming, and as I said, we're not waiting for it.

If it comes before Q2, it really doesn't change the timeline ahead of Q2.

Thank you. Your next question comes from the line of Tejas Savant with Morgan Stanley.

Hey, guys. Good evening, and thanks for the time here. Just a few cleanups on the high throughput side of things, Jacob, if I may. So on the 25B flow cell, sounds like you're getting really good traction there. Can you give us an update on that 40% number you provided in the past and X customers who adopted 25B? Where is that number today? Second, any update on where high throughput clinical customers are in their X validation process? Any metrics you could share there? Or should we think of the production workflows and clinical ramping as mainly a 2025 dynamic? And then last one, just on excess high throughput capacity, that's a dynamic that comes up every once in a while. Is that starting to weigh on customer purchase decisions for these high throughput customers at all? You've got Altima launching as well here. So just curious as to the macro headwinds versus the digestion of that high throughput capacity that's being added given the NovaSeq X and the 25B launch, but also the competition. Thank you.

Yeah, overall, I think we are very pleased with seeing where the X and also the 25B consumers, where it's going. And right now, we are approximately half of our customers are using the 25B flow cells. So that's really exciting for us, and we are encouraged by that momentum. I think many of our clinical customers, I know they're still on the running most of their assays on the 6K. We are tracking very closely each of them and seeing where they are in where they're doing for validation and when they're going into production. So, we have people that inside. I don't think we at this point, we are ready to share that, but we have a very good understanding on that. But I still think that is, you know, that is, A lot of them are still working through the validation, and then they will bring on one by one of new types of assays that likely have higher or deeper depth or more insights in these assays than they had on the 6K.

Thank you. Your next question comes from the line of Mason Carrico with Stevens.

Hey guys, thanks for taking the question. Sorry if these have been addressed at a joint bit late here.

Could you update us on win rates outside of China last quarter? I think you said they had stabilized in Q3 and Q4. Have you seen that stability continue throughout 2024 so far? And then second, could you give us any insight into the mix of orders coming that are coming in in terms of 6K upgrades, fleet expansions, new customers, new to high throughput customers?

So I think overall, we are following very closely, of course, where we are on the win rate. And as we also mentioned, it's stabilized. And we are looking at that regularly and ensuring that we continue to hone in on how we can do even better. So I'm actually pleased with the performance out there. But obviously, we are keeping a very close sight on this. As I mentioned before, we take competition very seriously. we are doing everything we can to keep our customers being very highly supported and make sure that they are successful in laboratories, which I think in the end, in the long run, is the winning formula for being the preferred partner for our customers. I think on mix of orders, I don't know whether we normally are sharing that information, But I think there are, at this point, there are certainly still more research customers that have moved on to the X. And we have seen customers with multiple 6Ks that is now starting to move over to the X. But I would say the vast majority still are in the transition phase.

Thank you. Your next question comes from the line of Rachel Vattenstall with JP Morgan.

Great. Hey, good morning, or good afternoon, and thanks for taking the questions. So I wanted to push a little bit on the instrument placement number for the X this quarter. You mentioned 55 placements, but you also highlighted that there were a number of placements that were pulled forward from 2Q into 1Q. So first, can you just quantify how many placements were pulled forward? And then just in terms of full year dynamics, you continue to highlight that the macro backdrop remains difficult. We've seen that really across the sector this quarter. But can you just give us, in light of that assumption, what are your latest assumptions on placements for the year? Thanks so much.

Yeah, I would say overall, as you mentioned, there were, we didn't pull anything forward. We were, there was customers that was requesting to put forward because some of their programs were running faster than anticipated, but it's only a few. So it was not really a big change in expectations. But, you know, in the end, I like that because it shows that there are a lot of interest out there and customers that are already purchased, one is looking to accelerate now their transition into the X. So I'm excited about that. At this point, we are not providing a number, but we know that as we entered into 2023, we had a very, very strong backlog, of course, as you know, coming into 2023. And that by 2023 was a very strong placement year of high throughput. So we do expect to be lower than that. as we also communicated in our original guidance. But we're not able to provide, at this point, we're not changing really our expectation for the year.

The only thing I would add, Rachel, for you, just in terms of our top-line performance was quite better than what we were expecting. Relative to that overall achievement or overachievement, only a small portion, say about a one-fourth or so, came from these customers who asked for an earlier delivery of the instrument. So relatively small portion from that phenomenon.

Thank you. Your next question comes from the line of Patrick Donnelly with Citi.

Hey, guys. Thanks for taking the questions.

Can you talk through the margins? 2Q, obviously, a little bit of a step down. I know you guys mentioned maybe some product costs there, but Can you just give a little more color in terms of what spend picks up in 2Q and how we should think about that metric if we work our way through the year? And then just a quick cleanup, just on the service REBs, those came quite a bit higher than we were expecting. If you could just flesh out what happened there as well, that would be helpful. Thank you.

Yeah, sure. Good question. So let me address them both. So on the OPEX, as I said in my prepared remarks, yes, there is a step up in spending from Q1 to Q2, primarily coming from two factors. One of them relates to just the timing of our merit increases and the annual stock grant cycles. We end up getting the full impact of that cost in Q2. So that season typically happens every year for the company. So roughly about half of our sequential increase in the OPEX comes from that. The other half is generally around certain project-related spend. that we've pushed out, either pushed out into Q2 or there are milestones into Q2 that will happen. In terms of going forward as you think about your P&L for the rest of the year, I do expect the overall operating margin performance to continue to improve sequentially every quarter. So Q3 better than Q2 and then Q4 better than Q3. And then on the service? And then on the services side, again, very strong overall growth, about 27% year-over-year growth. two main components. One part of that is a little less than half is coming from specific pharma customer services, which had the timing of that in the quarter. So that was less than half of it, but roughly half of that growth is coming from just the excellent performance in our core instrument services business.

You would expect that given the number of instruments replaced. And just to add to Ankur's comments, We are expecting, you know, and delivered better gross margin performance, right? So that should help our operating margin. We expect to continue strong performance on gross margins. So that should help us. And as revenue steps up as well, you know, and given that we have taken measures to control our costs, we've reduced our headcount overall by about 12% compared to last year. That should also add benefits to the operating margin line as we go through the year.

Thank you. Your next question comes from the line of Eve Bernstein with Bernstein Research.

Hi there. Thanks a lot for taking the question. Earlier this week, the FDA published a final rule exercising regulatory power over lab-developed tests. For you guys, you have the benefit of having IVD-compliant machines when a lot of the companies that are emerging to challenge you don't have those yet. However, our understanding is that research use only machines are actually used quite a bit for FDA approved tests. It's a little bit harder, but it can be done. So, we don't expect this to affect you that much or give you a big competitive advantage. Is that the right way to think about it or could there be more upside from the rule for you?

Yeah, no, first of all, I think we are pleased for sure that we have now more of greater clarity on the FDA ruling and the direction of this. But there's still a lot of details that needs to be clarified. But overall, you're right that with our positioning, both with our DX portfolio and the investment we have made into high quality, and also helping with required documentation for our customers to go in there and get their PMAs approved, I think we're very well positioned. You mentioned that LEDs are used for FDA approvals. Well, really only if you go into a single-site PMA setup, and that requires actually a lot of work for vendors like Illumina to help our customers with that, with the right level of documentation and so on. So I think it actually plays to our strengths going forward, and we are committed to support this area and help our customers be successful independent on whether it's a full PMA, single site, or other types of opportunities that this new world will bring us.

Thank you. Your next question comes from the line of Connor McNamara with RBC Capital Markets.

Hey, guys. Thanks for taking the question. You know, I know you talked about not giving too much detail on the consumable adoption with the X customers, but is there any – can you quantify at all, like, of the 400 or so boxes placed, how many of those customers are just – would you say are at scale and ordering, you know, at what their demand is versus those that are, you know, still validating or whether for economic conditions haven't really ordered what you expect from them? And vice versa, has there been any stocking – orders with any of the X customers?

Yeah, it's a good question. At this point, we still see that most of our customers are still in the ramp. I think there are, of course, research customers that have worked very fast out and really run bigger programs. We have seen perturbed seek. We have seen single cell being some elements or areas where there has been a lot of interest in running. And I think that we have seen some of those research customers already been on scale, at least with one of the instruments they bought, and now maybe they're starting to move on to the next one. But then again, if you look at the broader 400, I think most of the general is still that this is still in a ramp positioning. Now, yeah, so that's where we are right now.

And the stocking.

Yeah, go ahead, Georgie.

I'll just say, I mean, on the stocking side, look, you know, when we haven't seen too much stocking on the 25B because as a standard, right? The initial shelf life is shorter, so you wouldn't expect people to stock up too much. On the 10B side, it's very early in that stock-up phase. So again, we expect to see a little bit more as we go through the year, but not yet.

Thank you. That concludes our Q&A session. I will now hand the call back over to Sally Schwartz.

Thank you for joining us today. As a reminder, a replay of this call will be available in the investor section of our website. This concludes our call and we look forward to seeing you at upcoming conferences and other events.

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