Illumina, Inc.

Good day, ladies and gentlemen, and welcome to the second quarter 2024 Illumina earnings conference call. At this time, all participants are in the 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 Swartz, Vice President of Investor Relations.

Hello everyone, and welcome to our earnings call for the second quarter of 2024. During the call today, we will review the financial results we released after the close of market 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 for Core Illumina. As a reminder, we divested GRAIL in June of this year. For a review of second quarter financial results for GRAIL and Consolidated Illumina, please see our earnings release and our SEC filings. 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 10Q and 10K. With that, I will now turn the call over to Jacob.

Thank you, Sally. Good afternoon, everyone. Throughout this second quarter, I continue to meet with our customers and partners around the world. I've been hearing about all of the opportunities they're excited for and discussing the issues we're facing together in this environment. Most importantly, it has been encouraging to see our customers and partners launch the next generation of their products. Illumina is uniquely positioned to support our customers' aspirations. Ongoing progress in science and technology allows our customers to envision large-scale discovery programs that are now possible using multiomics, and customers are more empowered to move whole genome sequencing that provides significantly more insights. Furthermore, there's an opportunity to integrate genomics throughout the healthcare system to improve patient outcomes. But we also have to help our customers navigate their current realities. There are still many moving elements in the global economy, and we are taking a more measured view. I'm regularly hearing that our customers feel constrained to make significant capital outlays. We also see it in delays in our sales cycle and in orders being pushed out. For Illumina, this means we balance two important jobs. Job one is to stabilize our own base. We're doing that through continued rollout of the NovaSeq X-Series to lay the groundwork for everything our customers and we want to pursue in the future. We are also highly focused on operational excellence and optimizing the ways in which we run our business. And job two is accelerating growth. Our strategy update next week will address Illumina's vision for the future and our strategy to execute new dimensions of technology from our R&D vault and our financial outlook for the next several years. For purposes of today's call, we'll focus on our second quarter results. In Q2, Illumina again delivered results ahead of expectations. We call Illumina a revenue of $1.1 billion and non-GAAP operating margins of .2% driven by continued execution against our strategic priorities. The ongoing transition of sequencing activity to the NovaSeq X-Plus led to a significant step up in consumables in the quarter. We also placed another 62 NovaSeq X-Plus instruments. With that said, we continue to see our customers actively managing their capital spend. As a result, for the remainder of the year, we are adding caution to our guide. We are taking a more prudent view on the instrument business to reflect the further extension of sales cycles. But at the same time, we have a slightly stronger view on consumables. Anchor will provide further details on our adjusted guidance shortly. Turning to our region's performance in the second quarter, America's revenue was relatively flat year over year. Europe's revenue was down 5% given the significant backlog we worked through early last year following the X-Launch. EMEA's revenue was down 8% and greater China was down 35%. I've been talking with you about our three key priorities. I'd like to highlight the progress made by Lumina's management team during the second quarter towards those priorities. I'll start with driving our top line, which has been focused on expanding our installed base and helping our customers maximize the potential of the instruments. As I mentioned earlier, in Q2 we shipped 62 NovaSeq X-Plus instruments, bringing our total X-Plus installed base to 469 instruments. Customers continue to transition their projects onto the NovaSeq X-Plus and we are encouraged by their corresponding increase in sequencing activity. NovaSeq X-Plus average annual pull-through has topped $1 million per instrument, a milestone achievement. Moving to mid-throughput, in Q2 we introduced the X-Leap SPS chemistry to our next SIP 1K, 2K, P1, P2, and P3 flow cells, complementing the P4 flow cell we launched earlier this year. The X-Leap launch has exceeded our expectations. More than 60% of the 1K, 2K installed base now has upgraded software and leading indicator for adoption. X-Leap SPS chemistry delivers improved quality, greater usable reads, and lower turnaround times, in addition to an attractive pricing. While customers' interest in X-Leap is encouraging, translation to additional instrument uptake has been less than we expected. Our mid-throughput segment remains the most sensitive to the macroeconomic environment and we have seen our sales cycles continue to lengthen. This is clearly driven by constrained capital spending. Our win rates have remained stable and our pipeline has grown. We will continue to support our mid-throughput customers through this environment and are confident that bringing X-Leap to next SIP 1K, 2K is further strengthening our leadership position around the world. Turning to our second priority, delivering operational excellence. We are thrilled to have Everett Cunningham on board as Chief Commercial Officer. Everett is already driving a sharp customer focus across the business with an essential underpinning of operational excellence. As I've shared, it has been my goal to align our organization in a way that will make our customers heroes by delivering the products, services and solutions that address their most pressing needs. Following our move to combine our marketing and commercial functions, we've implemented a new commercial organizational design. We are positioning our teams to more effectively serve our customers as their partners for innovation. Teams are equipped with the -to-market expertise to accelerate our multi-omics capabilities and commercialize and scale our software stack across research and clinical customers. This new structure will provide the alignment needed to deliver long-term results for our customers and for the business. Additionally, earlier this year we shared that we are implementing a portfolio optimization strategy to drive productivity improvements across our supply chain. As one recent example, we have identified a number of products that we will rationalize in an effort to increase our focus on higher profitable offerings. We will, of course, work with our customers to provide a seamless transition to other offerings in our portfolio. We continue to make good progress towards achieving greater operating levels this year. Moving on to my third priority, which has been working to resolve GRAIL as quickly as possible. As you know, in June we completed the spin-off of GRAIL, and GRAIL is now an independent public company. Illumina has maintained a majority .5% stake. GRAIL plays a critical role in the fight against cancer, and while it's no longer part of Illumina, we remain confident in its future. We will continue to support GRAIL with our sequencing technology and suite of services. As we continue to deliver our priorities and activate our new strategy, I know we will be well-positioned to move forward and lead the next era of genomics growth and discovery. Now I will ask Ankur to share more detail on our second quarter results and outlook.

Thank you, Jacob, and hello everyone. 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, as well as our consolidated financials that include GRAIL, which can be found in today's release and in the supplementary data available on our website. In the last three months, I've had a chance to spend time with Illumina teams across all functions. I continue to be impressed with how mission-driven this team is, and also how transformation is taking hold at Illumina. I've also heard from several of our investors as part of a listening tour. As I focus my commentary on the financial results and current outlook, I will include some additional color in my remarks. Core Illumina's second quarter revenue of $1.1 billion was down 6% year over year on both reported and constant currency bases, and up 3% from the first quarter of 2024. These results exceeded our guidance. This above-expectations performance was driven primarily by continued increase in high-throughput sequencing consumables revenue, as our customers further ramp activity on NovaSeqX+. Their strength in consumables was partially offset by fewer than expected shipments of our mid-throughput instruments, as capital and cash flow constraints continue to impact our customers' purchasing decisions. Total Core Illumina sequencing consumables revenue of $737 million was flat against last year's second quarter, which was the highest sequencing consumables revenue quarter of the year 2023. High throughput was a particularly bright spot in this year's second quarter, with consumable shipments growing both year over year and sequentially. X consumables revenue grew 35% from the first quarter of 2024, accelerating from the double-digit sequential growth we saw in the first quarter. In order to provide some additional color on transition, as of Q2, approximately 45% of high-throughput gigabases sequenced, and little over 25% of high-throughput consumables revenue was on NovaSeqX+. In terms of pace of shifting mix from 6K to X, to date, on average, roughly 5 percentage points of high-throughput sequencing consumables revenue has moved from NovaSeq 6K to NovaSeqX+, each quarter. As this transition progresses, the impact of price continues to reduce. If this trajectory holds, almost half of high-throughput sequencing consumables revenue should transition to the NovaSeqX by mid-2025, continuing to reduce the impact of pricing transition, and converting volume growth into higher revenue growth thereafter. I hope you find this additional information helpful. We are increasing our disclosures around the NovaSeqX to give you a clearer picture of the progress we are making in this important transition. Moving to sequencing activity, total sequencing GV output on our connected high- and mid-throughput instruments grew more than 40% year over year, and approximately 10% -over-quarter. Growth in activity from both research and applied and clinical customers was healthy. Although not a predictor of near-term revenue, GV output provides us a directional view of underlying applications demand and levels of utilization of our instruments and consumables. Sequencing instruments revenue for Core Illumina of $116 million for Q2 grew 5% sequentially, but declined 40% year over year. The -over-year decline was driven by two factors. One, lower NovaSeqX placements as compared to significant pre-order launch-related shipments in the second quarter of 2023. And two, an expected decline in mid-throughput shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements. Core Illumina sequencing service and other revenue of $143 million was up 7% year over year, driven by an increase in revenue from strategic partnerships as well as 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 margins of .4% for the quarter increased 240 basis points year over year. This strong gross margin performance was driven primarily by a more favorable revenue mix of sequencing consumables and also, importantly, execution of our operational excellence initiatives that improve productivity and delivered cost savings. Core Illumina non-GAAP operating expenses of $516 million were down 15 million year over year, reflecting reductions in headcount and several other cost containment initiatives. Putting it all together, Core Illumina non-GAAP operating margin was .2% in Q2 2024 compared to .2% in the prior year period. This came in well above our guidance of 18% as well as our expectations due to higher than expected revenue, better than expected gross margin, and strides our organization has made in reducing operating expenses. Below the operating income line, Core Illumina non-GAAP other expense of $13 million in Q2 includes 11 days of interest expense for the $750 million delayed drop home loan we drew in full on June 20, 2024. Core Illumina non-GAAP net income for Q2 was $174 million or $1.09 per diluted share. Core Illumina non-GAAP tax rate was .2% for the quarter. Non-GAAP weighted average diluted share count for the quarter was approximately $159 million. Moving to Core Illumina cash flow and balance sheet items for the quarter, cash flow provided by operations was $243 million. CAPEX was $30 million and free cash flow was $213 million. We ended the quarter with approximately $994 million in cash, cash equivalents, and short-term investments. Moving now to 2024 guidance. While we were encouraged by our results in Q2, we see several puts and takes as we consider the remainder of the year. On one hand, our customers capital spending remains constrained. On the other hand, our consumables business, especially high throughput driven by the transition of NovaSeqX, remains solid. We are therefore reducing our revenue expectations, especially for instruments, for the second half of the year. Core Illumina full year revenue is now projected to be down 2% to 3% from 2023 or down .5% to .5% on constant currency basis. Approximately one half of the decline from our prior guidance is due to our lower expectations for our business in China and broader Asia. And the other half is a result of our reduced expectations for mid-throughput and NovaSeqX shipments. From an instruments versus consumables perspective, at the midpoint of the Core Illumina revenue guidance range, sequencing instruments revenue is now projected to decline in the mid-30s rate relative to 2023. Sequencing consumables revenue is now projected to grow towards the upper end of the low single digit range versus 2023. Now about the remainder of P&L. Illumina has been able to execute on stated operational excellence initiatives, delivering operating leverage above our previous expectations. We thus are raising our Core Illumina non-GAAP operating margin guidance to a range of .5% to 21%. This reflects the margin expansion achieved in Q2 2024, but we are also reducing our forecasted operating expenses for the second half of the year. We continue to make progress against our expense actions as well as several operational excellence initiatives under our internal Pinnacle Continuous Improvement Program. We've now launched several new initiatives under this Continuous Improvement Program, which we expect will deliver an additional $200 million in expense savings over the next few years. We'll talk about this in more detail at the upcoming strategy update. Additionally, we expect the Core Illumina non-GAAP tax rate to approximately 25%. And lastly, we are introducing guidance for Core Illumina non-GAAP diluted earnings per share in the range of $3.80 and $3.95 for full year 2024. This range includes second half interest expense resulting from the $750 million delayed raw term loan we put in place in June this year. For the third quarter of 2024, we expect Core Illumina revenue in the range of $1.075 billion to $1.085 billion. The decline from the prior year is driven predominantly by lower NovaSeq instrument shipments, given the significant backlog we worked through last year following the launch. For the third quarter, we also expect Core Illumina non-GAAP operating margin of approximately 20%. The sequential decrease from the second quarter is primarily due to lower revenue and timing of the project spend delayed from Q2. We expect the third quarter non-GAAP Core Illumina tax rate to be approximately 25% and Core Illumina non-GAAP diluted EPS between $0.80 and $0.90, which again includes the said interest expense. With that, I will now turn it back over to Jacob for his closing remarks. Thank you.

Thanks, Ankur. Before we move to Q&A, I would like to spend a couple of minutes on our latest innovations. For 26 years, Illumina's highest value asset has been our innovation engine. One example from the quarter is the launch of our latest version of our Dragon software, which added significant enhancements to our analysis tools. Bioinformatics has become a key driver for customer decisions, and this new release includes our most accurate multi-genome mapping technology, advancement in machine learning, and the ability to genotype difficult genes to unlock deeper insights. Looking ahead, I'm excited to share the next round of NovaSeq X solutions. As you recall, the NovaSeq X series we announced in late 2022 includes two systems, the NovaSeq X+, which has been shipping globally since March 2023, and the NovaSeq X, our single flow cell high throughput sequencer for customers looking for a lower cost entry point to the X series. The X will begin shipping in Q4 of this year and will be upgradable to the X+. Also in Q4, we will introduce 100 cycle and 200 cycle 25B flow cells designed for high output and counting applications, such as single cell and proteomics. Additionally, our next software update for the NovaSeq X and X+, will enable increased yield and other improvements. I'm also pleased with the opportunities Illumina has to further enable the multi-omics ecosystem. We will share more next week, but one recent highlight was our acquisition of Fluent Bioscience, a company with single cell technology that sorts and labels complex cell mixtures to be processed for sequencing. Fluent's approach will make single cell analysis available to a broader set of customers. Together with the specialized multi-omics software solution from Opartek Acquisition, Fluent's solution are yet another building block in our efforts to create a greater value for customers by further integrating their workflows. We want our customers to have the flexibility to adopt the tools that best fit their needs. Illumina will therefore remain an open NGS platform and is committed to maintaining and supporting our existing single cell partnerships. I'm looking forward to speaking more about our vision, our strategy, and our financial outlook next week at the NovaSeq X and X+, and the NovaSeq X and X-Series. Thank you for joining us today. We will now begin our strategy update. This virtual event will be on Tuesday, August 13th. Please be sure to register through our Investor Relations website. Thank you for joining today. I'll now invite the operator to open for the line for Q&A.

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're 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. And our first question comes from Vijay Kumar with Evercore ISI. Please go ahead. Sir, your line is open.

Hey, guys. Thanks for taking my question. And congrats on a nice execution here. Maybe, Jacob, a lot of details here in the deck. But if I just look at the guidance and tie that with your NOAA X commentary rate, the pull-through was about 1 million. But I think there was some details about the amount of data being generated on X versus revenue contribution. Is the delta sort of the pricing impact? Is that how we're supposed to model this transition? When we think about the guidance change here, I didn't see an order number for X. How much of this sort of change is coming from high throughput versus mixed throughput on the instrumentation side? Thank you.

Thanks, Vijay. And I appreciate your comments on the strong quote also. Yeah, so we wanted to provide a little more insight on how to better model how we see it. So we are certainly very pleased, first and foremost, with the we now have reached the milestone of 1 million annual pull-through on the X. And I think the information that you also received from Ankur and Ankur can provide a little more insight here, exactly is to help you guide more on where we are going and how the pricing versus the volume impact is happening. So Ankur?

Yeah, sure. Hey, Vijay. So yeah, as you saw, we've added some more disclosure specifically to help everyone think through the transition here. Let me just lay it out, as I said in the script. So in terms of transition from 6K to Novasik X, what we're saying is roughly about 45% of the consumables volume within high throughput is now on X. So we're nearing roughly about a half a point. So in the second half of this year, if the trajectory holds, the half of the volume would have moved to Novasik X. What I also included was that the pace of that mix is that we're seeing roughly about five points of mix shifting from 6K to Novasik X every quarter. And if that trajectory holds by next year, we should also get to about half of revenue coming from Novasik X. So that's on the trajectory. Your question around the volume growth, yeah, the overall GB sequenced was about 40%. That is across high throughput, across mid-throughput. And as you think about high throughput revenue growth of about 1%, the delta is roughly the pricing and the change of the mix impact there.

And we'll move to our next question. It comes from Connor McNamara with RBC Capital Markets. Please go ahead.

Hey, thanks for the question, guys. And just to follow up to that, so if you, I mean, simple math, if you say volumes were up 40% and sequencing consumables were flat, it's roughly a 40% headwind on pricing. Is that the kind of pricing headwind we should think in, you know, as the 5% conversion continues or was it, is it higher early on in the Novasik X launch? Just trying to figure out what the pricing headwind will be.

Yeah, let me address that. So it's higher early on and more the volume moves to X, the impact of pricing continues to reduce, which is primarily the way I'm trying to position the data. If you go back and think about holistically, there was a transition from 6K to X, would have resulted overall all inclusive, easily more than 60 to 70% price decline on a GB to JB basis. And as the transition continues, our baseline continues to come down. Right. So as the mix improves, as we get to getting into the halfway volume transition point in the back half of this year, and now based on that projection could get to halfway revenue transition point by mid next year and the impact of price continues to go down.

Great. Thanks for that. And just one quick follow up on pricing. Are you seeing any pricing changes on the equipment side? Maybe I have to give price or has that been relatively stable?

Yeah, overall we've seen on the, I think you're referring here to the Novasik X plus and where we have seen pretty much stable pricing. And that's also why we're now introducing the Novasik X, which allows for a lower price point for customers that are capital constrained, but actually wants to get access to the Novasik series of instruments, the Novasik X series of instruments. And what's beautiful about that is that it allows them to later in the period to upgrade it to the Novasik X plus to get the advantages of the both flow cells. So we expect to see some interest from customers here later this year when we launch the Novasik X plus, Novasik X.

Great. Thanks for the questions. Appreciate it.

And we'll move next to our next question. Patrick Donnelly with Citi.

Hey guys. Thank you for taking the questions.

Jacob, maybe one on the $200 million cost savings initiative. I know you want to save some of it for next week, I'm sure, but can you talk a little bit about first the pacing and then second, where you're seeing opportunities? I know from investor conversations, a lot of people have circled that R&D line. A big question is whether you guys are willing to kind of use that as a lever, again, over 20% here. Can you just talk about again, if there are any areas that are off limits in terms of the cost reductions and where you're focusing on for those expense controls, and those feel like there's a lot of opportunity in the P&L, so I'd love to just discuss that a bit.

Yeah, let me start by saying that there's certainly no off limits area. We're looking at all elements in the P&L, and the $200 million is a reflection of that also. We are not, at this point, we're not providing insights on the pacing of this, but what I can tell you is that we are looking at all elements, and we'll provide more insights next week. Just referring to the R&D, and we continue to take a look at how we want to set up, or how the money we're spending on R&D, but just to give you a little bit of my philosophy around R&D is that we are internally looking at each R&D project and valuing them based on type measures, including NPV and RIC. I'm using that also. As you know, I have a background in R&D, and thereby, I'm not just driving by an overall number, but truly just focusing on the programs that provide an overall growth for the company, but of course, also drive shareholder value. We're not building on a top-down budget, and thereby, we are looking at this very, very detailed also. I think, Ankur, maybe you want to say a little bit more about kind of the

- Yeah, sure. Yeah, as we said, we'll likely share a little bit more details during the strategy the next week, but what we are laying out here is the steps we are taking towards a multi-year margin expansion strategy, and we'll focus across all areas where we can lead to structurally better and sustainable cost structure for the company. More to come, but the focus is across all opportunities, across all lines.

Yeah, we will not stay tuned on that one. Thank you, guys. Sure.

And our next question comes from Doug Schinkel with Wolf Research. Please go ahead, sir.

Hey, guys. Good afternoon. Maybe just cutting the model a different and simpler way. As I look at the multi-quarter trend here, it seems like sequencing consumable revenue bottomed out in the fourth quarter at $687 million. It increased to just under $700 in Q1. We're now up to just under $740 in Q2. While you've guided instruments to be down over 30% year over year, it does seem like you're assuming, you know, stabilizing instrument revenue in the range of like $110 to $120 million every quarter this year. So, you know, assuming there's no reason to think that there's a magical material change in that as we fast forward to next year, if instrument revenue is essentially stabilizing at these levels, and consumables are growing every quarter as the installed base expands and, you know, volume use clearly continues to grow, if I'm, you know, kind of just simplifying the math, doesn't that imply you have to return to mid-single digit plus revenue growth next year, or is there something I'm messing up? I'm not asking you to guide. I'm not asking you to get ahead of yourself for the analyst day next week, but just mathematically, what could I be missing here?

Doc, I think you're right in your assumption is that, and what I've said earlier on, that we believe that the consumer growth is the right indicator for the turn into a better performance for the company. I still think it's too early to have a detailed conversation about 25. I mean, last few days that there's a lot of moving elements. We have a US election coming up. There's still, you know, concerns about what is happening in the Middle East. Of course, the interest rates, we will see where that goes. But of course, we are doing everything we can to get back to a much better growth trajectory than we have been on for the past few years.

Thanks for that, Jacob. And then

- Sure.

Oh, sorry. Sorry, Ankur. Go ahead.

Yeah. And the only thing I would add, and, Doug, you're pointing to the right metrics. That's exactly how we're looking at our business as well. And as Jacob said, lots of moving parts here. You've seen the recent prints around the macro. So too early to call on 2025, but the trends we are seeing on the X transition, on the high throughput consumables, as well as the fact that the impact of pricing should continue to erode or become lower over time are all positive factors. This year, what we've also seen is the overall GDP output growth during the first half of the year has been very strong. First quarter was over 35. We're now seeing over 40. If you look at last several years, sort of five-year average, that was more in the 20s to mid-20s range as well. So several moving parts, the fundamentals of the business seem to be moving in the right direction, but still too early to call for 25.

Okay. Thanks. And I'll jump out of the queue to let others jump in. Thank you very much.

Thanks.

And our next question comes from Dan Arias with Stiefel. Please go ahead, sir.

Afternoon, guys. Thanks for the questions. Ankur or Jacob, how is the clinical community moving to adopt the X? And then what kind of expectations should we have for those labs adopting the 25B kit? And if those two things are presumably later than the research community, does that represent an incremental headwind in the back half of the year or 25 if you then have to start thinking about the pricing pressure there? Or do you think that there was a point where elasticity in the clinical markets was actually something you guys were talking about? Do you think that can start to work for you as we head into next year?

Yeah, I think we continue to see, of course, that the academic environment, the academia environment has moved faster to the X than where the clinical is. And that's very, there's good reasons for that. As you know, you have to validate your products and your essays on the X before you put it into full production mode. What we have seen, the strategy for many of our clinical customers has been to keep their current validated products or essays on the 6K and then really been focusing on the new essays. And you've seen a few releases actually over the last few weeks on new essays coming out. So you're starting to see that happening. We actually believe this is going to be, most of our and pretty much all our big clinical customers have multiple Xs already in their laboratories. So we're not foreseeing any material change or swings in transition. We actually think it's going to be quite stable over the next period of time. So I'm not too concerned about sudden

change in the trajectory.

And we'll move to our next question from Tycho Petersen from Jeffreys. Please go ahead.

Hey, thanks. I want to go over some of the mid-throughput comments. I know you're talking about capital cash flow when rates are stable. Can you maybe talk a little bit more as to why you don't think that's a competitive issue?

Yeah, no, we can certainly do that. And I think we have also, first of all, say that we, as I mentioned before, we continue to take competition very seriously. But I've also mentioned before that we have had competition. This is not the first competition we're seeing, illuminate competition all the way through the lifetime of this. That said, I'm taking a very different approach here and proactive stance than from what I saw coming into the company. And we're starting to see that to have a meaningful impact both in the marketplace and culturally in the company. We do see, at least in the mid-throughput space, that with this, the most competitive, intensive area, that China still is an issue here. There is competitive pressure here, but it hasn't really changed over the past quarters. Secondly, we are following each deal very, very closely. And we actually have very good insights on where we are on this right now. And if you look at it, we actually don't see any change in the wind rates. We actually remain quite range-bound over the last few quarters. We don't see any real change in this. And therefore, we are attributing the biggest part of this to the economic environment.

Okay. And then a follow-up. If you're expecting 50% of high super consumables to transition to X by mid-25, I guess how much longer do you expect the transition and therefore the price pressure to work its way through the model? And should we expect 2025 to be a year that's below your forthcoming long-range plan?

Yeah.

Let

me just make sure we got the right number there. So from a mark here in the second half of 2024, in Q2, we saw the 45% of the volume to come on X. The 2025 references half of the revenue should transition over into the X. And with every five, seven point makes, the impact of the price continues to go down. And the contribution of that volume into revenue continues to increase. Specifically around like 2025, we'll talk about this. There'll be several moving parts. So we'll talk about this when we get to the guidance for 2025.

Okay. And then just clarification before I hop off. Is the 200 million continuous improvement program the extent of the cost outs we'll hear about at the annual stay? And is that over three years?

Yeah, we will provide more insight next week, but we're going to come back and give you a comprehensive view of both how we see the growth, how we expect our educational growth over the next few years, of course, on our margin expansion, but also on our earnings power. So we'll provide all that insight next

week.

Over a

three-year period. Yes. Yeah.

Okay. And we'll move to our next question from Sabu Nambi with Guggenheim. Please go ahead.

Hey, guys. Thank you for taking my question. And Ankul, thank you for providing that additional color on Novosic X and 6000 Dynamics. I had a question on the follow-up of 10 areas, which is off your Novosic X casement, what is the mix of clinical versus research? And within clinical customers, what is the mix of new customers versus replacements? Specific to existing customers when they purchase X, are they moving existing assets to X or are they typically using the X for new assets? Assets that tend to require deeper or wider sequencing? I asked the last part because it does seem like utilization of 6000 is fairly resilient.

Yeah,

I don't know, Sabu, I don't know if you've specifically provided that data mix between clinical and research segmentation. You've generally said it's roughly half and half, I believe, right, Sami, in the past, but not something that we're providing on an ongoing basis. Now, in terms of our clinical customers transition to X, the general approach is still around newer tests. Where most of the clinical customer focus is from an X perspective is to develop newer tests on X at the time of launch and then you see the higher volume and Jacob can add more color there.

Yeah, that's absolutely correct. And we're seeing mostly of these newer tests being higher intensive of sequencing. So there's, of course, interest of getting more samples, but samples is not the only parameter here. We're certainly seeing many of our customers looking for larger panels, going to whole genome sequencing, including new insights, for example, methylation insights in your panels and so on and so forth, deeper sequencing in itself. That's what we see in the clinical space. If you look into the academia space, there's a lot going on, certainly in single cell and in other areas. Now we're starting to see an uptake in spatial, which requires much higher intensity of sequencing. So that's what we're seeing right now.

Perfect. Thank you so much,

guys. And our next question comes from Puneet Suda with LeeRing Partners. Please go ahead.

Yeah. Hi, guys. Thanks for the question. So first one is just trying to understand the mid throughput. Is there is cost per gigabase a lever that you can use to lower cost in the near term to compete more effectively in that market? Or do you think the NOAA X comment that you provided at the end, Jacob, X instead of the X plus with a single slow cell, do you think the pricing on that is actually moving lower in order to address maybe a potential gap there with a competitor in the mid throughput segment?

Yeah, I think thanks for that. I think both. I mean, meaning that for the NOAA X with one flow cell, you can run all the applications. You can run 25B flow cell and take full power off the pricing we have for the NOAA X plus level of low cells. But I would say on the mid throughput, we certainly have an opportunity to use our pricing if we need to. But I do think that, but that is, but actually it actually provides a lot of, we already priced that to a very, very competitive element. But I do think it's more complicated than that. And while I certainly believe that there are a lot of great members of teams with our competitors, I think sometimes we also get caught up in very too narrow definitions of claims. So sometimes we see interim workflow steps being just looked at from a claim perspective, we've seen limited applications or even performance that is based on very limited data. And I think pretty much in all cases, our meeting the full computational chain from Dragon, that is also significantly improve the quality and reduce your overall workflow costs. So if you take all that into consideration, and even when we provide premium cost per gigabase, you would actually see that for a full cost of workflow, breadth of application and full computational power, we continue to be highly differentiated. And I actually think our customers are seeing that. I agree, we could do a better job in communicating this, but we will spend more time next week also providing more insights on that, but also more of the different associations we're going to provide both to the mid-throughput and high throughput by giving you examples for what we have in our on-devault.

Okay, that's helpful. And then on the commercial org, just trying to understand why is now the right time to change and just trying to sort of understand what are some of the changes there? What are you driving some change in the quota-bearing sales force that's out there? Some of that has worked really well historically. You obviously have a really solid product in the marketplace, but just wondering what's driving that and what are some of the changes there?

Yeah, I mean, I think what we announced already was that before I ever come in that I felt it was important to bring our marketing and our sales teams together. So if you start at the top when you bring those two teams together, you also have some synergistic effect. You will align leadership team and we have done that now on the average. So we have one commercial team. So that's number one. Number two is that we have taken a deeper look into how do we actually get more quota-carrying people out into the field? And how do we make sure we have even better application capabilities now when we are accelerating ourselves into multi-omics and also where we believe informatics should have an even bigger place? So this is less about changing the regions and the regional structure, but more adding more feats on the ground, so to say.

Got

it.

And then

the last

one, if I could

just ask, how should we think about the overall pull through? It's already more than 1 million. What's your map suggesting where that could land eventually? Thank you so much before I hop off.

Yeah, I mean, we certainly are very encouraged that we are already now at 1 million annually for the X-Series. And while we believe it's going, we don't think this is the exit point or the equilibrium. So we believe it can go higher. We also see customers doing much higher right now already. So we encourage to see where this could go. But we don't have, at least we're not ready to share a detailed view on where we think this could go at this point.

And our next question comes from Sungji Nam, Wisconsin Bank. Please go ahead.

Hi, thanks for taking the questions. Just one for Ankur. Could you maybe give us a bit more color in terms of the outlook in China and greater China and Aeneas? I think if you look at the growth trends over the last few quarters, it seems pretty stable. But just kind of curious if your guidance, I think you said that half of that is attributable to China, Asia. And so just kind of curious, how has your expectation changed since the last quarter? And if you expect significant deterioration in those regions

going forward?

Thank you. Let

me start by addressing this here that I think, first of all, related to China, it's still too early to call where we are in the cycle. And from what we can see, the economy is still weak and customer continues to be constrained. And we don't really, as you mentioned, also, we don't really see any material change in the competitive intensity in China, but it's still a tough market to be in. What I'm really excited about is that we have, and as mentioned, I think at the last call, also, we hired our new head of region there in China. And she's been in place for a little more than a quarter. And she's very active also in optimizing the commercial structure, as with the rest of the world, really focusing on bringing more into field from the back office. She's also resetting partnerships and optimizing those kind of relationships. And of course, continuing to consider how we are targeted in our pricing strategies for specific product groups, and finally bringing more IVD products to China. So there's a lot we are doing there right now. And I think eventually this will turn, but at this point, it's too early to provide deeper insights. I think maybe, Ankur, you can provide a little more insight on the rest of the question. Yeah, let

me give you just a couple more colors specifically, because we've included that as part of our guidance. Our previous estimates and the expectations of China were not for a material recovery in that business. However, if you look at the sequential build of that business, there was an implied increase, even though still down year over year. The business in China over the last several, over six to eight quarters now, has been weak. In fact, if you look at all of Illumina from a year over year basis, at midpoint, now that midpoint of my full year guidance is roughly one and a half points lower on a constant currency basis, or two points on a constant currency basis. A very big part, almost two thirds of that is all due to China, and where our business has been quite weak. We're not seeing signs of recovery, lots of commercial action from our perspective, where we're making changes in the team, but just the overall environment there right now doesn't look where I would go out and assume any kind of increase in business volume for the rest of the rest of the year. So, kind of taken that out of the forecast and trying to do with that.

Great, thank you.

And our next question comes from Eve Burstein from Bernstein Associates. Please go ahead.

Great, thanks so much for the question. In the last few months, we've seen both Quest and LabCorp announce or expand collaborations with one of your competitors. Can you remind us what portion of your revenue comes from those companies? And then I can imagine some reasons why those companies would act differently than other of your clinical customers. So, for example, I'm guessing that they do a higher portion of LBT and FDA approved tests, so they don't need as many DX boxes. Maybe there's a more natural fit, but why shouldn't we take this as a major sign of potential share loss in the clinical market, not just potentially a hit to revenue if and when assays shift to the X and X plus?

Yeah, I think I suggest you speak closer to those companies about their decisions on making collaboration agreements with other parties in the NGS space. I think we are refocusing on first and foremost provide the highest quality to our customers because I think there is a little bit over rotation here on a price that goes for a very, very limited application space. And it's not really addressing what you can do for actually the panels you do today or the whole genomes. So, on the other hand, I think it's not only about providing a price, it's also providing a product and a solution where you have confidence in that the vendor can provide and continue to support you. So, I think there's many more details that goes into this. And we here at Illumina will continue to do our best to provide the best solutions, but not only focusing on one single element in the workflow, the cost of sequencing, but the whole cost of workflow and providing the highest quality of answers to

our customers. Great, thank you.

And our next question comes from David Westenberg with Piper Sandler. Please go ahead.

Hi, thank you for taking the question. So, can you talk about some of the pricing transition in XLEAP? I believe that is the XLEAP is on the mid-throughput is backwards compatible. I believe you said 60% adoption. How should we think about actual total dollar impact with that pricing transition? Can you talk about this year specifically in the guidance? And I just have one follow-up. And then just one further clarification that I had through put. Can you talk about the validation step required for clinical moving from regular to XLEAP on that?

So, first on overall, as we mentioned, we had 60% of our install base as download software. This is what we see an indicator for that people are very interested in the XLEAP chemistry. But we also see a lot of interest in particularly before flow cells been out for a while, but also now going into the P123. We have a different price point as we've also been out talking about for XLEAP chemistry, which is one of the interested areas, but we also have a higher quality of sequencing and higher capacity. So, Ankur, maybe you can provide a little bit more insights on where we are in the transition, but let me just talk to the validation is that that depends on the going from XLEAP over to or from the standard SPS chemistry or to XLEAP chemistry. It really depends on the assays, but normally you would have to go through normal validation. That is just when you shift other software or agents and you will do that and each clinical lab will know how to do so. But there's no specific step that is required from our end from going from one to the other. Ankur, do you want to provide more on that? Yeah,

in terms of transition, XLEAP to our original or the previous consumables, there will be a pricing transition that will happen, but it is significantly smaller and likely more proactive relative to what you've seen on the X side. So, from a modeling or going forward perspective, the volume of empty consumables as a business is a much, much smaller portion of our P&L and revenue base relative to what our X consumables business has. So, I'm not from an impact on overall revenue line perspective, it will be significantly smaller.

Got it. Then just a quick follow up on Fluent. What's the intention there in terms of pricing? Can you drive pricing even lower than that? In terms of pricing and bundles, have you any thoughts to how you would do bundled pricing? Just on IP, do you feel pretty comfortable with IP? I believe that's an emulsion step versus a thank you.

Yes, we are certainly very excited about the Fluent acquisition and as you also mentioned is that we first and foremost believe that the Fluent technology allows for a broader adoption of single cell. So, there are certainly areas in the -through-good where customers can get easily into single cells in

high volume where

the actual cost of the individual experience here, the individual cell is competitive and can certainly address that market space. We're still too early to go into a discussion about how we're going to commercialize this, as we mentioned before, but we will of course go in there and present Fluent as a very attractive offering. We will continue to work with all the partners and all the single cell providers in the industry and allow them to have a very, very competitive offering on our platforms also.

Thank you. We'll move to our next question with Dan Brennan with PDCAL. Please go ahead.

Great. Thanks for taking the questions, Jacob and Ankur. Maybe just a clarification first and then just a question on NGS consumers. On the clarification, Ankur, you said there's really not much of a margin drag as you move X sleep into the -through-good. Is that correct? We were under the impression, I think X sleep is at $9 per G and I guess on label price for next week might have been something into the teens or low 20s. Maybe could you just speak to a little bit how the margin impact flows through as your -through-put base adopts X sleep?

I'm saying there will be margin drag. What you're looking at is the list prices, but the on-market prices are likely different from where the list prices are already. Then second, on the margin drag side, given the contribution that -through-put consumables make on our overall revenue is relatively a smaller part of my P&L. That drag on full aluminum P&L is going to be generally manageable.

I would also say that the Andean team has done a great job together with manufacturing to lower the price of the X sleep chemistry. It actually comes with a lower cox and thereby less of a drag on the margins.

I know you gave a lot of color during the presentation about volume, but did you speak to, and I apologize if you did, a little bit more on the research first clinical side, like revenue growth in the quarter? How did that break out for MGS and any color on what's assumed in the 24 guide between research and clinical and presumably whatever competitive impact that is there, even though I guess you said that you're really having success winning. I would presume it's more on the research side than the clinical side, so any color you could provide there would be helpful. Thank you.

Yes, we're not normally splitting that out, but I can tell you that we are growing healthy on both sides of the academic and the clinical part

of the business.

Ladies and gentlemen, 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 our upcoming investor day and other events.

Ladies and gentlemen, this concludes today's call. You may now disconnect.