Illumina, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter 2024 Illumina Earnings Conference Call. 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 fourth quarter and year-end 2024. During the call today, we will review the financial results we released after the close of market and offer commentary on our commercial 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 2024. For a review of historical financial results for GRAIL and Consolidated Illumina, please see our earnings release and our SEC filings. We will be discussing non-GAAP results, which includes stock-based compensation. We 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. As we go through the results, please note that year over year refers to comparisons against the corresponding period in fiscal 2023, while sequential is as compared against the third quarter of fiscal 2024. Additionally, please note that all revenue growth rates discussed are presented on a constant currency basis to exclude the impact of foreign exchange fluctuations. 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. Before we get started, I wanted to take a moment to address the recent announcement from the Chinese Ministry of Commerce that we know is on top of mind for many of you and for us. We are in dialogue with the relevant parties and promptly seeking additional information to reach a resolution. Illumina has a longstanding presence in China, where we continue to serve the local markets, including both our clinical and research customers. Wherever Illumina operates, we comply with all applicable laws and regulations. And as a reminder, China represents approximately 7% of our global revenue, and we continue to see significant opportunity to bring our innovations to the healthcare ecosystem there. Now, let me turn to the overall review. 2024 was a transformative year for Illumina, enabling us to enter 2025 with momentum. As I shared with you last month, we made significant progress towards our strategic goals despite market conditions. We launched our new corporate strategy to return to revenue growth in 2025 and step into high single-digit revenue growth by 2027. We deepened our focus on customers and partners to further expand the genomics ecosystem into multiomics. We introduced new innovations across the sequencing workflow to support what matters most to our customers, the highest quality insight for the lowest end-to-end cost. We made strong progress with the NovaSeq X transition, with research and clinical customers increasingly use the instruments for deeper and broader sequencing. We built a new leadership team and refined our organization structure, and we rolled out a robust operational excellence initiatives to improve our margins and to drive double digit to teens EPS growth. We just at the beginning of our transformation and are confident that 2025 will bring us closer to our goals. Turning to our Q4 results. In the fourth quarter, Illumina delivered revenue of $1.1 billion, exceeding expectations and reflecting approximately 1% growth from the prior year. The transition to the NovoCX continues to progress well. The Q4 year-over-year revenue growth driven primarily by consumables as customers increase their instrument utilization. In 2024, NovoCX pull-through averaged $1.3 million per system. Sequentially, our results exceeded expectations due to the higher than anticipated shipments of the Novosig X series. We placed 91 instruments during the quarter, bringing the installed base to 630. Across our regions, America's revenue, which is more than half of our business, was up 3% year-over-year on a constant currency basis. Europe's revenue was up 3%, MER revenue was down 10% and Greater China revenue was up 1%. We continue to focus on three key priorities to guide execution of our strategy. First, deeper customer and partner collaboration. Second, continuous innovation. And third, commitment to commercial and operational excellence. Our first priority, deeper customer and partner collaboration, is centered on providing a range of targeted solution to serve the increasingly diverse need of our customer base to evolve the broader ecosystem and enable higher volumes of sequencing. Last month, we announced several examples on how we're partnering with leading players to broaden our reach into the intersection of technology, healthcare, and pharma. These partnerships will enable our customers to generate more detailed data and richer insights. Our recently announced collaboration with NVIDIA brings together Illumina's software capabilities and NVIDIA's advanced AI tools to enhance the analysis and interpretation of multiomics data for customers. We are also proud to take part in the Troveta Genome Project alongside Troveta, Regeneron, and several leading health systems across the US. Together, we are creating one of the largest genetic databases linked with phenotypic data, sequencing 10 million exomes exclusively using Illumina technology. Our second priority is continuous innovation. which is underpinned by spending time with customers and partners to share insights and support their ambitions. In December, we began shipping the new single-flow cell NovoSig X, which delivers the same high-quality performance and speed as the NovoSig X+, but at an even more accessible price point. We also began shipping our new 25B100 and 200 cycle kits for the NovoSig X, which are key for advancing multi-omics applications. These kits also support our recently introduced single-cell solution, formerly known as PIP-seq from Fluent Biosciences. As we mentioned during the strategy update, our customers are increasingly focused on getting the highest quality insight for the lowest end-to-end cost. To meet this need, we continue to expand our portfolio of fully automated, streamlined workflows, including with our new MiSeq i100, which accelerates sample to answer for oncology, microbiology, and for several other applications. Uptake since launch in Q4 has been strong. We placed more than 70 instruments with early access customers before year end. Also, we've been developing proteomics solutions in collaboration with Standard BioTools. This is a fully integrated end-to-end workflow that offers greater automation and ease of use compared to other on-market products. As a part of this rollout, Illumina announced the pilot proteomics program to analyze 50,000 UK biobank samples to generate a new collection of NGS-based proteomics data. We are also extending our early access program for our Constellation map read technology. The customers who have elected to enroll in the program have been encouraged by Constellation's ability to detect structural variance that was previously challenging to identify with short read sequencing. As we said during our strategy update last year, we are committed to keeping customers updated on our innovation roadmap at industry conferences and events. We look forward to sharing more at the ATPG conference later this month. An equally important priority is our commitment to commercial and operational excellence. By getting closer to our customers, enhancing productivity, and optimizing our investment spend, we are building a foundation that powers Illumina's long-term success. We have made great progress in building a culture where every employee is contributing to commercial and appraisal excellence. In Q4, we achieved additional cost savings from greater manufacturing and logistics efficiencies, contributing to more than $100 million in cost savings across 2024. Our ability to improve margins, even under tough market conditions, showcases the essence of the new Illumina operating model. And you'll see more of that going forward. Turning to 2025, our guidance does not attempt to reflect any impact from the recent China announcements, which we are promptly assessing. Our full year guidance also assumes a continuation of the current macroeconomic and political environments. We are closely monitoring the evolving circumstances in Washington, particularly as it relates to research funding. Ultimately, we committed to supporting our customers globally and the important work they do to advance scientific discovery using the powers of genomics. Within this context, our views for 2025 are aligned with the commentary we provided in mid-January. We continue to expect revenue to grow in the low single-digit percentage range on a constant currency basis and a non-gap operating margin of approximately 23%. 170 basis points improvement from 2024. We also expect diluted EPS in the range of $4.50 to $4.65. We have a clear vision for expanding the exciting markets in which we operate and a future defining roadmap to support our customers. We remain focused on delivering on our long-term financial targets to achieve high single-digit percentage growth by 2027, more than 500 basis points of operating margin expansion, and double-digit to teens EPS growth. As we said before, three growth drivers will help us achieve these goals. One, leading with our strong core business of sequencing as we progress the X transition. Two, scaling our entry into multiomics this year and next. And three, expanding our data and services to add an additional layer of growth. Before turning to Ankur, I want to thank our employees for their commitment and performance this past year. I'm very proud of the Illumina team for staying focused on delivering innovation to support our customers and the patients they serve and driving margin improvements. I'll now ask Ankur to share more detail on our 2024 results and the outlook for 2025.

Thank you, Jacob, and good afternoon, everyone. I will give you an overview of our financial results, provide more color about revenue, expenses, earnings, and developments on our balance sheet, and then speak about our outlook going forward. All financial information, including guidance that we shared on this call, is for Core Illumina only and excludes GRAIL. All revenue growth rates are on a constant currency basis. During the fourth quarter, Illumina's revenue of $1.1 billion exceeded our expectations, and we made significant progress towards our goals of driving customer-centric innovation, margin expansion, and EPS growth. Cash generation remained strong, and we continued to put cash to use in accordance with our capital allocation strategy. Let me add more color, starting with revenues. Fourth quarter revenue of $1.1 billion exceeded our expectations and was up 1% year over year. The growth was mainly driven by our high throughput consumables business, while above expectations performance was driven by NovaSeq X placements, including encouraging uptake from clinical customers. Sequencing consumables revenue of $698 million grew approximately 2% year over year. driven by continued transition of high-throughput sequencing to X and also growth in mid-throughput consumables against a modest prior year compare. As of the end of Q4, in line with the X transition cadence we've discussed, more than 65% of high-throughput gigabases shipped and approximately 40% of high-throughput consumables revenue was on the NovaSeq X series. Moving to sequencing activity, total sequencing GB output on our connected high and mid throughput instruments grew at a rate of more than 30% year over year with robust growth from both clinical and research customers. Sequencing instruments revenue of $155 million declined 3% year over year in Q4. driven primarily by a decline in mid-throughput shipments due to capital purchase and cash flow constraints that continue to impact our customers' purchasing behaviors, partially offset by successful launch of the MySeq i100. Sequencing service and other revenue of $151 million was down 1% year-over-year, mainly due to timing of certain strategic partnership revenues last year. Instruments services contract revenue, revenue from CDX agreements, and revenue from our informatics solutions grew as we anticipated. Moving to the rest of the Illumina P&L. Non-gap gross margins of 67.4% for the fourth quarter reflected typical Q4 seasonality of a high instruments mix of business. On a year-over-year basis, non-GAAP gross margin increased 270 basis points, primarily driven by the execution of our operational excellence initiatives that continue to improve productivity and deliver cost savings, as well as continued growth in our consumables business. Non-GAAP operating expenses of $526 million reflect both cost control measures as well as project expenditures tied to key investments. Non-GAAP operating margin was 19.7% in Q4, up 120 basis points from last year, reflecting the discipline and operational excellence measures delivering results. Non-GAAP tax rate came in lower at 23.7% for the quarter and 23.6% for full year 2024. Q4 non-GAAP net income was $152 million, a non-GAAP weighted average diluted share count for the quarter was approximately 160 million. Altogether, non-GAAP EPS of 95 cents per diluted share came in above our expectations, driven by higher revenue and some benefit from a lower tax rate. Moving to cash flow and balance sheet items for the quarter, cash flow provided by operations was $364 million, Capital expenditures were $42 million and free cash flow was $322 million. In Q4, we repurchased 134,000 shares of Illumina stock for $17 million at an average price of $129 per share. We ended the year with approximately $1.22 billion in cash, cash equivalents, and short-term investments. Jacob outlined the significant progress we've made towards the goals we have set for Core Illumina. We've also re-established a strong cash generation profile and a robust balance sheet that positions us well for the future. Moving now to our 2025 guidance. As Jacob mentioned, we were currently assessing the recent announcement from China, and our 2025 guidance does not attempt to reflect any impact from this announcement. Our guidance also assumes a continuation of the current macroeconomic and political environments. Our overall expectations for fiscal year 2025 remain in line with our commentary from a few weeks ago. We expect constant currency revenue growth in the low single-digit percentage range, weighted towards the second half of the year, driven by the NovaSeqX transition. We expect sequencing consumables to grow in the low single digits on a constant currency basis, driven by strong sequencing activity, especially with our clinical customers. The multiomic product launches, like single-cell and proteomics, are attracting a lot of interest from the research community. We also remain on track for roughly 75% of high-throughput gigabases shipped to transition to the X-series at the second half of 2025. For instruments, we are assuming that our customers will continue to manage their capital investments closely and hence the projecting instrument placements to moderate in 2025, reflecting a low single-digit decline in sequencing instrument revenues on a constant currency basis. For your modeling purposes, the usual pull-through assumptions have been included in our slides. We expect total sequencing revenue growth to be in line with total Illumina revenue growth year over year. Looking at the rest of the P&L, we expect a core non-GAAP operating margin of approximately 23%, an expansion of 170 basis points versus 2024. Our operating margin expectations reflect the benefit of our continued gross margin improvement and expense reduction initiatives, partially offset by the impacts of inflation and market-based merit increases. We're also lowering our non-GAAP tax rate, now expected to be approximately 22.5%. Putting it together, we expect non-GAAP diluted earnings per share in the range of $4.50 to $4.65, growing at 10% at the midpoint. We've also included in our slides other financial information that would be helpful for modeling purpose. The presentation will be posted on our investor relations website following our prepared remarks. Now moving to the first quarter of 2025. As mentioned before, our guidance does not attempt to reflect any impact from the recent China announcement. For the first quarter, we expect revenue to be flat to down 1% year over year on a constant currency basis. driven predominantly by a decline in sequencing instruments and timing of certain strategic partnership revenues. For the first quarter, we expect non-GAAP operating margin of approximately 20.5% and non-GAAP earnings per share in the range of 93 to 98 cents. I will now turn the call back to Jacob for his closing remarks.

Thanks, Ankur. I'm proud of what our team accomplished in 2024. As we begin 2025, our refresh strategy is driving meaningful progress for customers around the world. We'll continue to deliver breakthrough innovations that push the ecosystem forward and create value for all our constituents. We look forward to engaging with many of you at the upcoming conferences and events. Thank you for joining our call today. I'll now invite the operator to open the line for Q&A.

Thank you. At this time, if you would like to ask a question, please click on the raise hand button, which can be found on the black bar at the bottom of your screen. To give as many analysts as possible the opportunity to ask a question, please limit yourself to a single question. If you have additional questions, please raise your hand again to be put back into the queue. We will allow a few moments for the queue to form. Our first question will come from Vijay Kumar with Evercore. You may now unmute your audio and ask your question.

Hey, guys. Thanks for taking my question. I guess, Jacob and Ankur, high level. I know you noted China. You're not making any assumptions for potential disruption. I guess, can you update us on what you've heard so far What is your revenue mix in China, clinical versus research, margin profile? And as you think about the guidance here, Ankur, black to down in Q1, does it imply like the revenues throughout the year, it's going to be in that low single digit range? What is the implied exit rate here? Thank you.

Well, thank you, Vijay. And that was a lot of questions baked into one there. So I'll try to just address China overall here. But as we mentioned, First of all, this is, of course, very relatively or it is very new news. We have known this for a few days. But just to contextualize it, China is a significant market with an aging population. It's a country like many others are investing into and prioritizing health care and looking at sequencing as a key component into that. So therefore, we are seeing that, of course, other competitors also seeing China as a significant market opportunity. And we truly believe that Illumina, with our leading NGS technology and our innovation pipeline, are serving and will continue to serve the Chinese customers and patients very, very well. The recent announcement, as I mentioned, is really only a few days old. And we are working promptly with the relevant parties to get a resolution on this. What I can say is, as you know, the size of our business is approximately 7% of our total revenue. But at this time, we are not going into the details of our China business in more detail than the revenue.

Understood. And Ankur, maybe on the cadence?

Yeah, I think the question on the cadence overall for the year remains similar to the discussion I had a few weeks ago. As you know, driven primarily by the high throughput sequencing transition, our top line growth is more skewed towards the second half of the year as we make the transition to X and the pricing transition expecting to come down a little bit. So that drives higher profitability in the top line in the second half of the year. Overall, though, our focus on taking costs out as well as driving operational excellence will be visible throughout the year.

All right. Thank you, guys. Thanks.

Our next question will come from the line of Dan Brennan with Cowan. Please unmute your audio and ask your question.

Great. Thank you. Thanks for the quarter here as well. Maybe just a couple of part of your just on volumes. So I think you talked about greater than 30 percent volume in Q4. I think that was a bit of a decel from what you had reported in the prior quarter. Maybe just give us some color on what you're seeing in volumes and elasticity and kind of what's contemplated for 2025. And then kind of related to that, you know, you flashed the pull-through numbers on the screen. We'd love to get some insight in kind of what's contemplated in 25 for, like, the NovaSeq to the NovaSeq, you know, the NovaSeq to the NovaSeqX transition, kind of what you're seeing. Is it rateable? Is it accelerating? Just any color on that as it drives 25. Thank you.

Okay, Dan, so let me start by just, again, positioning what we see the volume is that what we are really excited about and what we have seen through 24 is a continuation of the movement towards the X. And when our customers are moving to the X, that they are really using this to increase their volume, increase their sequencing, both in terms of larger assays, but also deeper sequencing. So we continue to see that the customer has moved to X is driving significant more volume than the customers that have stayed on the 6K. So that's exciting. We also, when we started to provide those volume numbers, we wanted to make sure that everybody understood that it's indicative. It's not a perfect measure for whether it's 30% or whether it's 40%. That is not the main message here. The main message is that there's significant volume out there, and we continue to see volume grow higher than it has done in average. What we are expecting is that on the longer horizon is that volume growth should be around in the mid 20%. So we're still above that and we can expect to continue above that for a little while here. So I'm still very pleased with where we are with the results and it shows really strong progression as Ankur is also talking about towards the X and we still believe that we will have more than 75% of our volume being on the X by mid-year.

Yep, that's well covered, Jacob. And then we have put the slide out for all of the pull-through assumptions, et cetera. We've exited 2024 with very good pull-through overall for the year. Very pleased with the ramp of X now and see potential for it to keep going next year as well. The detailed assumptions for modeling are on the slide.

Our next question will come from Puneet Sauda with Lirink.

Yeah. Hi, guys. Thanks for taking my questions. Just first one, Jacob. You know, I appreciate the comments earlier on the unreliable entity list, but just that was a strong statement from China. And you obviously pointed out a number of years and your strong position in China historically. But Just could you elaborate a little bit just so we understand why you expect that to be reversed? There was obviously another larger software company involved here and so it looked fairly pinpointed. So just wanted to understand that. And then on the clinical transition, Ankur, wondering if you can clarify where that 50% gigabase shipped number could yield in 2025 or by end of 2025. Thank you.

Yeah, thanks, Puneet. I think in the beginning, as you meant, I mean, this is new information. We've only known this a few days. I don't think I've commented on it on timelines on this when we have more insights or even on whether if we got it's been reversed. I don't think we haven't and we will not comment on that. We are in dialogue with the relevant parties and we would like to keep that dialogue between the parties before we have more insights here.

And of course, on the 50%?

Yeah, on the 50%, basically giving additional color on the transition of X. We've said roughly two thirds or over 65% of the total volume at the end of the year here in Q4 has transitioned. When you parse it out by clinical and by research for clinical, that's about 50%. So half of the clinical volume has already transitioned to X at the end of the year.

And what do you expect that for 2025?

Well, in aggregate, I'm still at 75% in aggregate for the entire volume, given that 80% of research has already transitioned. Most of the remainder should now come from clinical.

Okay. I'll hop back into the queue. Thank you.

Our next question will come from Doug Schenkel with Wolf. Please unmute your audio and ask your question.

All right. Good afternoon, guys. I want to start on China and then turn to a bigger picture, longer term question. So, you know, cutting to the chase. financials and not taking this opportunity to ring fence things. I'm sure you understand, but that creates yet another overhang for the stock. So Ankur, I'm wondering if you would at least be willing to talk about the levers you have identified and you have available to you at both the margin line and via initiatives like buybacks to protect are unable to reverse what's going on in China. So that's the first. And then longer term, sort of related to that, Jacob and Ankur, recognizing you inherited a lot of problems from the previous leadership team. Once you buy the house, you own it. This is your company. It seems like every quarter there's something new. There's pricing. Then there's mid throughput. Now it's China. And in a couple of weeks, we'll get some new announcements from Roche. You see what we see. In fact, you see more between the market opportunity, your network effect, the fact that you're spending almost a billion dollars in R&D per year. Do you feel comfortable you can get back to mid single digit revenue growth over the next one to two years?

Yeah, thanks, Doc. That was, again, a lot of questions baked into this. Let me just come to the essence here is that we, as you now have been in this job for one and a half years, so you can absolutely be certain that I feel like I have fully ownership of the company and the execution of what we need to do over the next period of time. And we came out with a plan this summer, stating we would step back into high single-digit growth by 2027 and also continue to deliver double-digit to teens EPS growth and deliver on a 26% operating margin. That is our commitment, and that's what we are committing to do, and we will do the right work in order to get there.

Yeah, thanks, Jacob. To the other part of your question, we're looking at all possible opportunities irrespective of whatever the outcome is from China. We'll keep driving margin, tax, operating margin, operating leverage drivers. forward. And we have several opportunities there, as we've outlined. Our base case already looks at 170 basis points of margin expansion year over year. And we'll keep driving additional margin there. So not really walking off of that, but I see additional opportunities from an earnings growth perspective. We're heavily focused on this.

Our next question will come from the line of Connor McNamara with RBC. Please unmute and ask your question. It appears you're on a phone, Connor. Star six will allow you to unmute.

Thanks for that. Thanks, guys, for taking the question. I appreciate that. So just on the sequencing growth, was there any impact in the quarter from RBC know slow down relative to q3 because of the higher x uh placements or any um slow down from you know customers but we're looking at the um single cell x that may have slowed down uh consumable growth in the quarter and then you're already at 65 conversion so you know it seems to be tracking ahead of the 75 conversion that you talked about uh exiting q2 so how should we think about the pricing impact uh early on in 2025 if that's going to be less than you've laid out in the in your

analyst event thanks for the questions yeah thanks connor and overall i we continue to be pleased with the progress we're making um on the on the conversion as you're mentioning and we are we are certainly on a good trajectory um for delivering on the mid years we have said 75 as you also mentioned where we are today so we feel good about that um i think it's also we're still in the in a situation where you have a very high volume growth and of course mix and other things can impact some of the performance quarter by quarter. But if you look at trajectory, we are definitely on the right track. We did anticipate that we would see a little bit of a slowdown here in Q4. There's less working days and other things that impacted us. So we had anticipated some of that. So we feel good about where we are and that we are in the progress to deliver. And as you mentioned also, when we are starting to lapse, the main part of the... having the revenue on the X, then of course, we will see more revenue growth based on that we now have, we are growing on a different cost basis, so to say, or price basis, so to say. So we're encouraged about that. And therefore, we're also expecting that we will continue to see improvement during the year of our consumables growth.

Our next question will come from Dan Arias with Stifel. Your line is open. Feel free to unmute.

Hi, guys. Thanks for the questions here. Ankur, can you maybe just give us a sense of the extent to which you've worked your way through the production and efficiency exercises that you had teed up? I mean, how much of what you saw as an opportunity when you showed up to Illumina did you tackle and capture in 2024 versus what's sort of open to you in this year? Love to sort of understand the untapped opportunity that you have here for the next 12 months.

Yeah, sure. So still significant opportunities. In 2024, my perspective, what we've captured is some tweaks in our manufacturing strategies, some of the lower hanging fruit in terms of optimizing some of our teams. We have, and we've started working on this, the team's already actioning our ability to further consolidate our manufacturing as well as our R&D capabilities in Singapore. It's a dual benefit for us to be in Singapore. Not only do we get the cost arbitrage, it also allows us to drive synergies between our R&D and the manufacturing team locally to lead to both lower R&D cost as well as a lower cost manufacturer. It also, below the line, allows me to increase my R&D base in Singapore and be able to take advantage of a tax structure, which is beneficial in the long run. Some of the benefits you're beginning to see in the 25 guide there already. Within our operating expenses, we said we've started set up an office in India. We talked about that about four months ago. We have 150 people there now, and we have very good runway and a meaningful structure identified to keep expanding our capabilities within India. And we have several plays going on within our sales and marketing as well as the R&D side. So lots of opportunities over the next two years, both through 2025 and through 2026 to keep optimizing just structurally our cost structure here.

Our next question will come from Rachel Vattenstahl with JP Morgan. Please unmute and ask your question.

Perfect. Thank you. Now, there's been a few questions on China and you guys are trying to assess the situation given it's so early. But could you at least unpack for us what was contemplated initially in the 2025 guidance for China? You had pointed us towards this like $300 million business last year. So can you just give us a view on what you were expecting that to grow or decline in 2025? And then my follow up is just on first quarter. Can you walk us through your assumptions in terms of consumables growth? Is it going to be up sequentially in one queue? or what should we see on that front? Thank you.

Yeah, thanks, Rachel. And let me start there and then have Ankur to provide a little more insights also. But on China, as I mentioned also in the previous calls, is that we had our new head of China coming in approximately a year ago. And Jenny and the team has done a wonderful job on assessing the opportunity in China, put some more structure around and strategy about where we're going to focus. She's made some changes to the organization. And I actually think that we have a we are starting to see that play through in in our performance also meaning that that we're starting to see and be actually nice to see growth in in china in in q4 um and and also sequentially it's starting to look really nicely so we were we were constant we were we were guiding of in underlying the guide here we were expecting a approximately flat growth of china in in 2025.

Yeah, that's right, Jacob. Rachel, I think we've kind of said that during our strategy day and otherwise in the near term, we weren't anticipating any meaningful growth contribution from China. It being stable would have been very good to see the Q4 growth of 1%. Now, certainly with the announcement, we're assessing the situation while we're still supporting our customers on the ground.

Our next question will come from Tejas Savant with Morgan Stanley. Please unmute and ask your question.

Hey, guys. Can you hear me okay? Yes. Yes, Tejas. Perfect. So, Jacob, I want to take a slightly different tack on China. I know you don't want to say too much in the specifics here, but it is an important question, and we live in the era of of making deals, right? So, you know, back in the day, there were a lot of folks who lobbied for BGI's exclusion from the US market. They got added to the military entity list and biosecure, et cetera. Would it make sense for that to be undone? Of course, with appropriate data safeguards in place in exchange for you guys getting unfettered access to the Chinese market. You know, we live in a different world today. You guys have other credible competitors besides BGI now. So would that be an effort that you would be in principle supportive of? And then second, sort of on the competitive landscape, you know, a couple of high profile sort of wins here for one of your emerging competitors, one with the UK Biobank for proteomics and the other for Chan Zuckerberg, you know, for single cell work. Can you just share some color on what worked against you in those RFPs?

So let me start by the first one here. And, and, and, On China. And I think, first of all, I would say that we, as I mentioned before, we always take competition very seriously. Actually, I do like competition. I think that keeps us on the toes. It keeps... All of us make sure that the customer gets the best and the highest quality of service. So in the end, competition is good in industry. And we will compete with anyone. We believe that we have the best technology. We continue to innovate. It doesn't matter whether it's in US or in China. We believe that our innovations and what Illumina stands for is providing the best solutions for our customers. Related to what is happening in Washington, we will leave that for the lawmakers to decide. It's a Capitol Hill conversation and not something that we have any influence on. Got it.

And on the emerging vendors situation, Jacob, if you may.

Yeah, I mean, again, there's competition out there. We recognize that. I think we are not going out and do press release on every deal we do. And so I'll leave it with that. Got it. Fair enough. Thank you.

Our next question will come from Tycho Peterson with Jefferies. Please unmute and ask your question.

Hey, thanks. A couple things. I just want to make sure there was no pull forward with the 91 placements in the fourth quarter. It doesn't sound like you're calling that out, but I want to make sure there was nothing ahead of the new administration and, you know, some expected NIH noise. And then on the clinical momentum for X, I think you said before 20% of tests will never move over to X. Is that still your view? What are you assuming for 25B uptake? I think it's been about 50% of customers. And then on the pricing dynamic, you've talked about customer discussions around application-specific pricing, essentially helping customers hit a certain margin target. Where are you in that process? And And I think you do have to address Tejas' last question about the UK biobank. You know, I understand your competitor effectively gave away that business, but, you know, there are a lot of these programs out there. The UK biobank was a big one. How do you deal with an irrational competitor in the market potentially that's giving away instruments? Thanks.

Okay, so let me start to address the high level there on biobank. the percentage of customers that will be staying. What we're trying to give from a modeling perspective is just saying that we have seen historically that there will be the lion's share of customers will move to the X and to the new technology, but there will always be a fraction of customers that for reasons that they see that their assay works well and they have a nice profitability or they don't, they see that that they don't want to invest more in in that part of of the business for example that they stay on on you could say the the older technology for a while so it's it's we're just seeing that rule of thumb is probably around 20 percent will will stay in the world it of course becomes smaller smaller over time but it's taking substantially longer to transition the last uh the last part than it did for for the first uh let's just say 75 to 80 percent so that's how we we think about that um I think if you go to the UK Biobank, as we mentioned also here at the recent releases, that we are now in a 50,000 pilot study on the UK Biobank, project study on the UK Biobank. That's the first step you need to take. That was actually also where we saw the other protein provider, protein assay provider, actually did a 50K project before they went for the full one. So we actually are following the same trajectory and believe we have a strong solution for that. As you're also mentioning, yes, there are new competitors in the market. In the end, we are also in an environment where competition and everyone has to eventually show that they can make money. And we have shown that. I think it's up to us to show that they can also do that. Otherwise, eventually, the bank will run dry.

And then can you just address the pricing dynamic with clinical customers? You know, these discussions around application specific, you know, pricing, essentially helping your customers, you know, hit a margin target.

Yeah, that's right. Let me add to that, Tycho. On the application-specific pricing, we have had active discussions with quite a few of our customers and are continuing to do that for some of the emerging tests. We're having discussions with them about having a separate set of pricing that enables much higher volume of sequencing for that test. and working with them to enable that as a separate line rather than discussions about bringing the pricing down for the entire portfolio. There are a set of customers who are already on board with that and are looking at launching tests over the next quarters or so based on whatever their clinical timelines are and would be part of that as a very specific category. So that's our first foray in working with these set of customers. And the initial discussions have been quite encouraging specific to that test so far. The second and third set during this year that we're seeing will emerge is going to be with our proteomic solution as well as our single-cell solution, which is where some of the early discussions and placement could be around the entire end-to-end workflow, could be around a full set of studies as well as programs, rather than working on a per-GB discussion there. So that's emerging as well.

Thank you.

Our next question will come from Dave Westenberg with Piper Sandler. Please unmute and ask your question.

Hi, thanks for taking the question. I'll go a little bit of a different tack since a lot's been covered. First, I want to just maybe talk about NVIDIA. What are the customers getting in this? Can this collaboration turn into something bigger? And how would this impact kind of the network effect with Illumina and keeping customers on it with their familiarity with the product? And then also, I want to talk about the TruVeta deal. I mean, obviously, a couple other analysts talked about the Chan Zuckerberg Biobank, but the TruVeta is interesting because it's more on the private sector. Do you think there's other private sector opportunities in genome projects? What's the funnel look like that in genome projects in the private sector? And, you know, just given that utility that we could be seeing out of that, how close are we from maybe like the dream of, you know, sequencing at birth? Thank you.

Yeah, thanks, Dave. And yeah, we're certainly excited about those relationships or those collaborations also. And let's start with the NVIDIA one, where with NVIDIA, as all of us know, is that there is a lot of capabilities and compute power put in place by NVIDIA right now for many different applications, especially within AI. And with that also, We're now moving into a space where even now with large cohorts of sequencing, but also going into multiomics, it requires a lot of compute power. And while our Dragon platform on FPGA is working very nicely, the customers that have already invested in GPU infrastructure, you will want to make sure that the Dragon platform also is available on the GPU platforms. So that is one thing that can really drive, I think, a big network effect and really help our customers compute huge amount of data. At the same time, NVIDIA is also providing infrastructure for building these foundational models that I think is going to be key for really modeling biology for the future and really being a key for for predicting diseases and help for drug discovery and other things. This is requiring a significant amount of sequencing to build up those kinds of predictive models. And so we are now together with NVIDIA, we are enabling those models and that programming language on our platforms or our uh, infrastructure. So our customers can, can get access to that. So very exciting and certainly, uh, a huge network effect beyond genomics, but really into multiomics also. Um, yeah, you're right. It's a private sector, you know, project. And I think you, we seeing a lot of interest around that, um, just both in US but around the world. We're seeing this in Middle East, UK, Germany, other places. We're seeing that both from sequencing in sovereign countries, but we're also seeing a lot of interest for pharma to get access to much more diverse data sets. So there's a lot of activities for that specific, but generally speaking, we are seeing pharma being very interested to work closer with us on many different applications. And these are some of them, but there's much more coming on this.

Our next question will come from Subbu Nambi with Guggenheim. Your line is open. Please go ahead.

Hey guys, thank you for taking my question. You guys have maintained R&D at just below 1 billion per year. Is that the plan moving forward? How have you reprioritized efforts since you took the lead at the company? How should we assess the success of this investment, which I note is far higher than peers as a percent of sales?

Yeah, thanks for that. And I think we continue to believe that overall the genomics opportunity and the multiomics opportunity that we are in is still that there's a significant opportunity in front of us. And we're just getting started on that and thereby really opening up that market and really get the benefit of that opportunity require continued innovation and investment into R&D. So there's a logic in that. But we also, and that's why we're also going out and commit to that, that we will step back into growth because obviously things is tied together. And we believe that over the next two years, we can step from where we are today into high single-digit growth. We continue to have, and I think Illumina has been known for, a very, very innovative platform. We have a roadmap for the next 10 years that we believe is going to set the tone for where genomics and where multiomics is going to be and really have a significant impact, not only on health, but also on drug discovery going forward. So that excites us a lot. The number itself is certainly something we continue to look at. We are We've been working just in 24 here a lot with the R&D team to really work about how we become more effective and efficient in how we run things. We also take costs out in certain places and we continue to assess opportunities. But the idea is to, of course, is more to grow ourselves into a different percentage point rather than cut ourselves into that.

Our next question will come from Mason Carrico with Stevens. Please go ahead. I can see that your line is open, Mason. We are not able to hear you. Okay, we'll move to our next person and we'll return to you, Mason. Our next question will come from Sungji Nam with Scotiabank. Please go ahead.

Hi, thanks for taking the question. Maybe kind of related to David's question earlier. On the project Stargate, the $500 billion AI infrastructure initiative that was announced, I know it might be early days, but, you know, Larry Ellison's commentary around kind of the aspirations of personalized cancer vaccines and tumor gene sequencing. Was kind of curious if you might be able to comment on kind of the opportunities for Illumina to take a more kind of proactive approach or role in this initiative to really help shape that aspect of the project.

Yes, indeed. I think that's a great example of the opportunity ahead and really show the commitment that US have to to drive healthcare going forward and use new technology for that. As was also very evident in that program, genomics will be a huge and play a huge role in the Stargate project. And I truly believe that Illumina is the natural partner for that. So we're excited about the opportunities ahead.

Our next question will come from Patrick Donnelly with Citi. Your line is open. Please go ahead.

Hey guys, thank you for taking the questions. I wanted to drill in a little bit on the consumables side. You know, even after the pre-announcement, thought consumables would come in, you know, maybe 20 million higher than they did. Can you just talk about, you know, what you saw as the quarter progressed? And then I didn't hear an answer on the 1Q consumables guide. Just can you break that down, consumables and instruments? And then the last one, I hate to beat a dead horse on the China piece, but are you guys currently able to sell into China? I just want to hear what the current situation is there. I know you're working through the regulatory piece, but what the last week has looked like. Are you able to sell or not there? Thank you, guys.

Thanks for that, Patrick. Let me start with the last question here. Yes, we continue to serve our customers and their patients in China, and we will do our best to continue to do so. We believe the opportunity in China is vast, and we will work through the current challenges with speed and hopefully get a resolution as fast as possible. But Ankur, you want to talk to...

Yeah, so on the consumable side, Patrick, as we had guided during the start of the quarter, the actual consumable results for Q4, I think we had guided saying that Q4 would be a step down from Q3 given the number of holidays and And the actuals played out roughly in that same trajectory coming down from Q4 into Q3. Our X was very much in line, overall X consumables. So no surprises there. The uptick both on the research and the clinical side, et cetera, directionally was very much as expected. 6K was slightly lower, but in terms of an aggregate, when I'm thinking about the results for the quarter, From my perspective, they were roughly in line. I didn't see anything worrisome from a trends perspective, either on the conversion from 6K to X perspective or in terms of overall activity perspective either. So I feel good about the overall trajectory as well as getting to that 75% conversion by the second half of the year.

And just the 1Q guide specifically, Ankur, just the consumables instruments would be helpful.

Yeah, the 1Q guide, I think I've said for Q1, I'm guiding similar uptick. So a sequential increase from Q4 into Q1 for our consumables. The Q1 consumer guides is also both sequentially as well as up year over year. I'm showing you think about the The growth rate for Q1 expect consumables to be positive year over year, but the instruments to likely be on the negative side.

And that will conclude our Q&A session. I will hand it back to Sally Schwartz for closing remarks.

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.

And again, ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may now disconnect at this time and have a great day.