The operator introduces the Second Quarter 2024 Illumina Earnings Conference Call and hands it over to Salli Schwartz, Vice President of Investor Relations. Schwartz welcomes everyone and introduces the speakers, Jacob Thaysen and Ankur Dhingra. Thaysen will provide an update on Illumina's business and Dhingra will review the financial results. The call is being recorded and all forward-looking statements will be protected under the Private Securities Litigation Reform Act of 1995. Illumina assumes no obligation to update these statements.

In the second quarter, Illumina faced risks and uncertainties that could affect their results. The company is working to support their customers' aspirations and navigate the current economic climate, which has led to delays in sales and orders being pushed out. Illumina's focus is on stabilizing their base and optimizing their operations while also aiming to accelerate growth.

In the upcoming strategy update, Illumina will discuss their vision for the future and their strategy for implementing new technologies. For now, they will focus on their second quarter results, which exceeded expectations with $1.1 billion in revenue and a 22.2% non-GAAP operating margin. The transition to the NovaSeq X Plus led to a significant increase in consumables, but customers are being cautious with their capital spend. The Americas and Europe saw flat and decreased revenue, respectively, while AMEA and Greater China saw decreases of 8% and 35%. Illumina's management team has been focused on driving top-line growth by expanding their installed base and helping customers maximize their instruments' potential. In Q2, they added 62 NovaSeq X Plus instruments, bringing the total to 469. Customers are actively transitioning their projects to the NovaSeq X Plus, leading to an increase in sequencing activity.

In the fourth quarter, Illumina's NovaSeq X Plus achieved a milestone of averaging $1 million in annual pull-through per instrument. The company also launched the XLEAP-SBS chemistry for its NextSeq 1k/2k, P1, P2, and P3 flow cells, with high adoption rates. However, the uptake of XLEAP has been lower than expected due to the current economic environment. The company remains focused on supporting its mid-throughput customers and is confident that the addition of XLEAP will strengthen its position in the market. The company also welcomed a new Chief Commercial Officer, Everett Cunningham, who is driving a customer-focused approach and operational excellence. The company has reorganized its commercial teams to better serve its customers as partners for innovation.

The company has restructured its teams to focus on multiomics capabilities and has implemented a portfolio optimization strategy to increase profitability. They are also working to resolve the spin-off of GRAIL and remain confident in its future. The company will continue to support GRAIL with their sequencing technology. The speaker then hands over to Ankur to discuss the second quarter results and outlook, which can be found in the release and supplementary data on the company's website.

The author has been impressed with how Illumina is driven by its mission and undergoing transformation. The second quarter revenue of $1.1 billion was down 6% year-over-year but exceeded expectations due to increased high-throughput sequencing consumables revenue. This was partially offset by fewer instrument shipments due to customer constraints. High-throughput sequencing consumables revenue grew 35% from the first quarter of 2024 and approximately 45% of high-throughput giga bases and 25% of consumables revenue was on NovaSeq X Plus. The transition from NovaSeq 6000 to NovaSeq X Plus is progressing, with 5% of consumables revenue shifting each quarter and the impact of price decreasing.

The trajectory of high throughput sequencing consumables revenue is expected to transition to the NovaSeq X by mid-2025, reducing the impact of pricing transitions and increasing revenue growth. Total sequencing Gb output on connected high and mid-throughput instruments grew over 40% year-over-year and 10% quarter-over-quarter, indicating healthy demand and utilization. Core Illumina sequencing instruments revenue grew 5% sequentially but declined 40% year-over-year due to lower NovaSeq X placements and expected decline in mid-throughput shipments. Core Illumina non-GAAP gross margins increased by 240 basis points year-over-year to 69.4%.

In the second quarter of 2024, Illumina saw a strong gross margin performance due to a more favorable revenue mix and cost-saving initiatives. Operating expenses were reduced and operating margin exceeded expectations. Other expenses included interest on a term loan. Net income was $174 million and cash flow for the quarter was $243 million. However, the company is reducing its revenue expectations for the second half of the year due to customer spending constraints.

Illumina's full year revenue is projected to decline by 2% to 3% from 2023, with half of the decline attributed to lower expectations in China and Asia and the other half due to reduced shipments of mid-throughput and NovaSeq X instruments. Sequencing consumables revenue is expected to grow, while sequencing instruments revenue is projected to decline by mid-30s rate. The company has achieved operational excellence and is raising its non-GAAP operating margin guidance to 20.5% to 21%. They are also reducing their forecasted operating expenses and have launched new initiatives to save $200 million in expenses. The non-GAAP tax rate is expected to be 25% and the company is introducing guidance for non-GAAP diluted earnings per share in the range of $3.80 to $3.95 for 2024, which includes interest expenses from a delayed draw term loan.

In the third quarter of 2024, Illumina expects a decline in Core Illumina revenue due to lower NovaSeq X instrument shipments, but a 20% non-GAAP operating margin. The company also anticipates a 25% non-GAAP tax rate and a Core Illumina non-GAAP diluted EPS between $0.80 and $0.90. Illumina's latest innovation, the DRAGEN software, offers enhanced analysis tools and the company plans to launch the next round of NovaSeq X solutions in Q4 of this year. These solutions include the NovaSeq X Plus and NovaSeq X, as well as 100-cycle and 200-cycle 25B flow cells for high-output counting applications.

The company's next software update for the NovaSeq X and X Plus will bring improvements and increased yield. The recent acquisition of Fluent BioSciences will make single-cell analysis more accessible to customers, along with the specialized multiomics software solution from the Partek acquisition. The company remains committed to maintaining and supporting existing single-cell partnerships and will discuss its vision, strategy, and financial outlook at an upcoming virtual event. The operator then opened the line for Q&A, with the first question coming from Vijay Kumar from Evercore ISI. He asks about the guidance change and the impact of the NovaSeq X transition on pricing and revenue.

In response to a question about the impact of high-throughput versus mid-throughput on the company's recent changes, Jacob Thaysen and Ankur Dhingra provided more information on the transition from 6k to NovaSeq X. They stated that 45% of the consumables volume within high-throughput is now on X and that this mix is shifting at a rate of 5 points per quarter. They also mentioned that the overall growth of Gb sequenced was 40%, with high-throughput revenue growing by 1%. The remaining difference is attributed to pricing and the change in mix.

The pricing headwind from the transition to the NovaSeq X platform is expected to decrease over time as more volume shifts to the new system. The company has not seen any significant pricing changes on the equipment side and is introducing a lower-priced option for customers who are capital constrained but still want access to the NovaSeq series. There is also an option to upgrade to the higher-priced NovaSeq X Plus in the future.

The operator introduces the next question from Patrick Donnelly of Citi, who asks about the company's $200 million cost savings initiative. Jacob Thaysen, the company's spokesperson, states that there are no off-limits areas for cost reductions and that they are looking at all elements of the P&L. He also mentions that they are evaluating R&D projects based on NPV and ROIC, with a focus on driving growth and shareholder value. Ankur Dhingra adds more details about the cost savings initiative.

The speaker confirms that more details about the company's multiyear margin expansion strategy will be shared next week. They are focused on improving the cost structure for long-term sustainability. The next question asks about the company's revenue growth and the speaker agrees that the growth in consumable revenue and stabilization of instrument revenue could lead to mid-single-digit growth next year, but it is too early to discuss specific numbers for 2025.

The speaker discusses the various factors affecting the company's growth trajectory, including the upcoming U.S. election, events in the Middle East, and interest rates. They mention that they are working to improve growth and point to positive trends in the X transition and high-throughput consumables. However, it is too early to make predictions for 2025. The speaker also discusses the clinical community's adoption of the X and expectations for the 25B kit, and mentions potential headwinds and opportunities in the clinical market.

The speaker discusses the difference in speed of adoption of new technology between academia and clinical environments, with academia being faster. They also mention that clinical customers are focusing on new assays while keeping their current validated products on older technology. They do not foresee any major changes in this trend and believe that competition is not a major concern, though they take it seriously and are taking a proactive approach to addressing it.

The speaker discusses the competitive pressure in the mid-throughput space in China and states that there has been no significant change in win rates. They also mention that 50% of high-throughput Consumables are expected to transition to X by mid-2025, which will decrease price pressure. They clarify that the $200 million continuous improvement program will be discussed at the upcoming Analyst Day, where they will provide more insight on their growth plans.

During a recent conference call, Ankur Dhingra, the CEO of a company, provided insight into their margin expansion and earnings power over the next 3 years. A question was asked about the mix of clinical and research customers for their NovaSeq X and 6000 dynamics, as well as the utilization of the 6000 by existing clinical customers. Dhingra stated that the mix is roughly half and half between clinical and research customers, and that most clinical customers are using the X for newer, more intensive tests. The company's president, Jacob Thaysen, added that many customers are interested in larger panels and deeper sequencing for their tests.

The speaker discusses the current state of the academia space and the increasing use of single cell and spatial sequencing. They also mention the potential for cost reduction in the mid-throughput market and the competitive pricing of the NovaSeq X. However, they caution against narrow definitions of claims and emphasize the importance of considering the full computational chain and workflow costs.

The speaker discusses the company's differentiation in terms of cost, workflow, and computation power, and acknowledges the need for better communication. They also mention changes in the commercial organization, such as merging the marketing and sales teams and adding more quota-carrying personnel to focus on multiomics and informatics.

The speaker, Jacob Thaysen, is encouraged by the company's annual pull-through of $1 million for the X Series. He believes it can go higher, but is not ready to share a detailed view on where it could go. The next question is from Sung Ji Nam, who asks about the company's outlook in China and Greater China and AMEA. Thaysen responds that it is still too early to call where they are in the cycle and the economy is still weak. He also mentions that they have hired a new head of Region in China.

The speaker discusses the company's efforts to optimize their commercial structure, reset partnerships, and focus on targeted pricing strategies in China. They also mention a weak business environment in China and a lack of expected recovery in the near future. The speaker then responds to a question about competitors by mentioning recent collaborations between Quest and LabCorp and one of the company's competitors.

The question is about the pricing transition in XLEAP and the impact it will have on total revenue. The speaker asks for clarification on the adoption rate and whether it will affect the guidance for this year.

The speaker discusses the interest in XLEAP chemistry and the transition from standard SBS chemistry to XLEAP chemistry. They mention that 60% of their installed base has downloaded the software and that there is interest in both the P4 and P1-P3 flow cells. They also mention that there will be a pricing transition for consumables but it will have a smaller impact on revenue compared to the ex-consumables business. They clarify that there is no specific process for validation when transitioning between the two chemistries.

The company is excited about the Fluent acquisition and believes it will lead to a broader adoption of single-cell technology. They are not yet discussing how they will commercialize it, but will continue to work with partners to offer competitive pricing. In response to a question about consumables, the company clarified that there will not be a significant margin drag as they move into mid-throughput, and the on-label price for NextSeq is in the teens or low 20s.

Illumina expects a margin track and predicts that the on-market prices will differ from the list prices. The contribution of mid-throughput consumables to overall revenue is relatively small, so the drag on the company's P&L will be manageable. The R&D team has successfully lowered the price of the XLEAP chemistry, resulting in lower COGS and less of a drag on margins. The company is seeing healthy growth in both the research and clinical sides of the business, but does not typically provide a breakdown of revenue between the two. A replay of the call will be available on the company's website.

This summary was generated with AI and may contain some inaccuracies.