Q4 2023 Illumina Inc Earnings Call

Operator: Please stand by. Good day, ladies and gentlemen, and welcome to the fourth quarter 2023 Illumina earnings conference call. At this time, all participants are in a listen only mode.

Please standby.

Speaker Change: Good day, ladies and gentlemen, and welcome to the fourth quarter 2023 Alumina 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.

Operator: 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 2023. During the call today, we will review the financial results we released after the close of markets and offer commentary on our commercial and regulatory activity, after which we will host a question and answer session. Our earnings release can be found in the investor relations section of our website at Illumina.com. Participating for Illumina today will be Jacob Tyson, Chief Executive Officer, and Joydeep Goswami, Chief Financial Officer and Chief Strategy and Corporate Development Officer. Jacob will provide an update on the state of Illumina's business, and Joy Deep will review our financial results, which include Grail. As a reminder, GRAIL must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation.

Speaker Change: I would now like to hand, the conference over to Sally Schwartz, Vice President of Investor Relations.

Sallilyn Schwartz: Hello, everyone and welcome to our earnings call for the fourth quarter and year end 2023.

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.

Sallilyn Schwartz: Our earnings release can be found in the Investor Relations section of our website at Illumina dotcom.

Sallilyn Schwartz: Participating for Illumina today will be Jacob Tyson, Chief Executive Officer enjoy deep Goswami, Chief Financial Officer, and Chief strategy and corporate development Officer.

Jacob Tyson: Jacob will provide an update on the state of aluminum business enjoyed equal to review our financial results which include grill.

Jacob Tyson: As a reminder, grill must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission, which prohibited our acquisition of grill under the EU merger regulation.

Operator: 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. However, forward-looking statements are subject to risks and uncertainties, and actual events or results may differ materially from those projected or discussed.

Jacob Tyson: This call is being recorded and the audio portion will be archived in the investors section of our website it.

Jacob Tyson: 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.

Jacob Tyson: Forward looking statements are subject to risks and uncertainties.

Jacob Tyson: Actual events or results may differ materially from those projected or discussed.

Jacob Tyson: All forward-looking statements are based on 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 its most recent forms 10-Q and 10-K. With that, I'll now turn the call over to Jacob. Thank you, Sally. Good afternoon, everyone.

Jacob Tyson: All forward looking statements are based upon current available information and Illumina assumes no obligation to update these statements.

Jacob Tyson: 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 is most recent forms 10-Q and 10-K.

Jacob Tyson: With that I'll now turn the call over to Jacob.

Jacob Tyson: Thank you Sally good afternoon, everyone.

Jacob Tyson: As you know, I joined Illumina as CEO a little over four months ago. In that time, part of my focus has been on meeting with customers to understand their priorities, hear their feedback, and develop more collaborative relationships. Our customers think highly of Illumina and our solutions, and they want to work in strategic partnerships with us to move the whole NTS ecosystem forward. Now that we have announced that we will divest GRAIL, it has been easier for our customers to plan what their future looks like with Illumina. These meetings have been instructive and inspiring.

Jacob Tyson: As you know I joined Illumina as CEO, a little over four months ago.

Jacob Tyson: At this time part of my focus has been on meeting with customers to understand their priorities here that feedback and develop more collaborative relationships.

Jacob Tyson: Our customer thinks highly of Illumina and all solutions.

Jacob Tyson: And they want to work in strategic partnerships with us to move the whole MTS ecosystem forward.

Jacob Tyson: Now that we have announced that we will divest Graeme it's been easier for our customers to plan what their future looks like with aluminum.

Jacob Tyson: These meetings have been instructive and inspiring during my recent trip to Europe, I was able to see firsthand, how we are working with our customers governments and the broader genomics community to accelerate whole genome sequencing adoption safely and more effectively and to understand rare diseases in Kansas as a part.

Jacob Tyson: During my recent trip to Europe, I was able to see firsthand how we are working with our customers, governments, and the broader genomics community to accelerate whole-genome sequencing adoption safely and more effectively, and to understand rare diseases and cancers as part of the standard of acceptance. I also learned about Germany's model project that aims to fully integrate comprehensive genomic testing into the healthcare system there, beginning in Q2 this year. Within the hallways of our headquarters and in several global offices...

Jacob Tyson: Of the standard of care.

I've also learned about Germany smelter project that aims to fully integrate comprehensive genomic testing into the health care system. There beginning in Q2 this year.

Jacob Tyson: Within the hallways of our headquarters and in several global offices.

Jacob Tyson: I have also been connecting with our talented employees, who are committed to driving innovation and continuing to build out genomics. I've also had an opportunity to engage with many of you at recent InvestorCon. These conversations are informing my leadership agenda and, importantly, have reinforced my confidence in Illumina's core business. 2023 was a dynamic year for Illumina. NovoSeq X has been the most successful high-throughput product launched in our history. We ended the year with 352 NovaSeq-X shipments, about the 330 to 340 we expected. Amid a challenging macroeconomic backdrop, we saw many of our customers remaining constrained in their purchasing. In the fourth quarter, we delivered higher than expected consolidated revenue of approximately $1.12 billion. America's revenue, which is more than half of our business, was flat year on year.

<unk> also been connecting with our talented employees.

Jacob Tyson: Who are committed to driving innovation and continuing to build out the genomics ecosystem.

Jacob Tyson: I've also had an opportunity to engage with many of you at recent investor conferences.

These conversations I'm, forming my leadership agenda.

Jacob Tyson: And importantly, having reinforced my confidence in aluminum coal business.

Jacob Tyson: 2023 was a dynamic year for aluminum.

Jacob Tyson: <unk> X has been the most successful high throughput product launch in our history.

Jacob Tyson: We ended the year with 350, toone always seek X shipments above the 330 to 340, we expected.

Jacob Tyson: Good at challenging macro economic backdrop that we saw many of our customers remaining constrained in their purchasing decisions.

Jacob Tyson: In the fourth quarter, we delivered higher than expected consolidated revenue of approximately 112 billion.

Jacob Tyson: America's revenue, which is more than half of our business was flat year on year.

Jacob Tyson: Europe revenue was up 17% year-on-year on a relatively easy prior year comparable. AMIA revenue declined 1%, although that included a 10% point impact from sanctions in Russia. Greater China revenue was down 13% year-on-year, reflecting continued geopolitical challenges and local competition in mid-scoop.

Jacob Tyson: Europe revenue was up 17% year on year on a relatively easy prior year comparable.

Jacob Tyson: EMEA revenue declined 1%, although that included a 10 percentage point impact from sanctions in Russia.

Jacob Tyson: Greater China revenue was down 13%.

Reflecting continued geopolitical genesis and local competition in mid throughput.

Jacob Tyson: As I've noted before, China and our customers there are important to Illumina. We have already taken certain pricing and other strategic actions that are beginning to yield results. We will share more specifics on our progress there over time. However, globally, we expect our customers will remain cautious.

Jacob Tyson: As I've noted before.

Jacob Tyson: China and our customers that are important to alumina.

Jacob Tyson: <unk> already taken certain pricing and other strategic actions that are beginning to yield results.

Jacob Tyson: We will share more specifics on our progress there over time.

Jacob Tyson: Globally, we expect our customers will remain cautious and for now we continue to expect 2024 results to look very similar to 2023 <unk>.

Jacob Tyson: And for now, we continue to expect 2024 results to look very similar to 2023. While some macro headlines are encouraging, we haven't yet seen that translate to increased investment in our industry and therefore have not reflected it in our guidance. Georgie will take you through more details on our guidance in a few minutes.

Jacob Tyson: While some macro headlines are encouraging we havent yet seen that translate to increased investment in our industry and therefore have not reflected in our guidance <unk> will take you through more details and our guidance in a few minutes.

Jacob Tyson: While we cannot control the external environment, the management team and I remain committed to accelerating value creation across the enterprise. As you are aware, I have laid out three key priorities that I believe will position Illumina for accelerated growth and profitability as market conditions improve. My first priority, driving our top line, is centered on continuing to grow our installed base and helping customers accelerate the utilization of these instruments in new and existing applications. I discussed earlier how pleased we are with the first year of Novosibirsk Exship.

Jacob Tyson: While we cannot control the external environment, the management team and I remain committed to accelerating value creation across the enterprise. As you are aware I have laid out three key priorities that I believe will position illumina for accelerated growth and profitability as market conditions improve.

Jacob Tyson: My first priority driving our top line is centered on continuing to grow our installed base and helping customers accelerate utilization of these instruments in new and existing applications.

Jacob Tyson: I discussed earlier, how pleased we are with the first year of <unk> shipments.

Jacob Tyson: For high throughput more broadly, across the NovaSeq X and NovaSeq 6000, we placed more than 400 instruments in 2023. In 2024, we will support this growing installed base as customers launch large projects and more sequencing-intensive applications like multiomics, liquid biopsy, and minimal residual disease or MRD. We anticipate ongoing high-throughput instrument orders throughout 2024, primarily coming from further conversion of NOVU6 6000 customs to the X, from customer fleet expansions, and long term from new to high-throughput customs. With that said, given the significant number of placements in 2023, we believe we will ultimately ship fewer high-throughput instruments in 2024. As you are aware, xLEAP SPS chemistry has been the engine for our xPlatform, delivering significant improvements in quality, turnaround time, and cost.

Jacob Tyson: The high throughput more broadly across the <unk> X and over six 6000.

Jacob Tyson: Place more than 400 instruments in 2023.

Jacob Tyson: In 2024.

Jacob Tyson: Caught this growing installed base as customers launched last prosthetics and more sequencing intensive applications like multi omics liquid biopsy and minimal residual disease or <unk>.

Jacob Tyson: We anticipate ongoing high throughput instrument orders throughout 2024, primarily coming from further conversion of <unk> six 6000 customers to the X from customer fleet expansions and long term from new to high throughput customers with that said given the significant number of placements in 2023.

Jacob Tyson: We believe we will ultimately ship fewer high throughput instruments in 2024.

Jacob Tyson: As you're aware ex sleep SBS chemistry has been the engine for our ex platform delivering significant improvements in quality turnaround time and cost.

Jacob Tyson: This quarter, we'll be making XLEAP available to our mid-throughput customers on their existing Nexi 1K, 2K instruments without having to upgrade their instruments. This offering will further strengthen our leadership position around the world and drive progress in markets such as single cell, spatial, and proteomics. As we grow Installed Base, we will remain focused on supporting our customers as they launch new projects. This will build momentum for consumables demand this year and going forward. Already, our efforts to develop this demand are paying off. In Q4, we saw higher-than-expected growth in X consumable sales following the late October launch of our much-anticipated 25B rating kit. More recently, in January, we launched the 1.5B kit, which, together with the 25B and the 10B flow cells, allows us to offer a full suite of products to Novacek X consumers.

Jacob Tyson: This quarter, we will be making ex leap available to our mid throughput customers on the existing next eat one K two K instruments without having to upgrade their instruments.

Jacob Tyson: This offering will further strengthen our leadership position around the world and drive progress in market, such as single cell spatial and proteomics.

Jacob Tyson: As we grow installed base, we remain focused on supporting our customers as they launch new projects.

Jacob Tyson: This will build momentum for consumables demand this year and going forward.

Jacob Tyson: Already our efforts to develop this demand is paying off in Q4, we saw higher than expected growth in <unk> consumables sales. Following the late October launch of our much anticipated 25 BP reagent kit more recently in January we launched a 1.5 be kit, which together with the <unk>.

Jacob Tyson: Five b and <unk> flow cells allows us to offer a full suite of products to the <unk> X customers.

Jacob Tyson: While we will continue to see customers reduce their inventories of NovaSeq 6000 consumables as they transition to the X, building put through on the NovaSeq X will drive our overall high throughput consumables growth this year. Now, turning to my second project. I'm focused on delivering operational excellence by applying greater rigor throughout our P&L while sustaining innovation and growth. We have launched a multi-year effort focusing on improving our margins through greater productivity and pursuing additional areas for cost savings. In January, we took an additional action to further optimize our global workforce. Over the past year, we have made cumulative role reductions totaling approximately 12%.

Jacob Tyson: While we will continue to see customers reduced their inventories of <unk> 6000, consumables as a transition to the X building.

Jacob Tyson: Building pull through on the <unk> X will drive our overall high throughput consumables growth this year.

Speaker Change: Turning to my second priority.

I'm focused on delivering operational excellence by applying greater rigor throughout our P&L.

Speaker Change: While sustaining innovation and growth.

Speaker Change: We have launched a multi year effort focusing on improving our margins through greater productivity and pursuing additional areas for cost savings.

Speaker Change: In January we took an additional action to further optimize our global workforce over the past year, we have made.

Speaker Change: Cumulative role reductions totaling approximately 12%.

Jacob Tyson: Our most recent actions included an adjustment that realigned with our late 2023 portfolio optimization effort. You'll see us continue to take steps to not only manage our near-term costs but also to build our agility to deliver more sustained growth and margins over time. Illumina is taking a highly disciplined approach to support our customers, employees, and partners and to deliver shareholder return in a range of macroeconomic environments. Moving to my third product, which is working to resolve GRAIL as quickly as possible. Since joining Illumina, I've made it an imperative to move with speed on grade. In December, we announced that we would divest grade with a goal of finalizing the terms of the transactions by the end of the second quarter this year, and will continue to pursue Parapath. The divestiture will be executed through a third-party sale or capital markets transaction consistent with the European Commission's divestiture order. To date, we have been able to make swift progress. Grails from 10 has been confidentially filed with the SEC.

Speaker Change: Most recent actions included adjustment that realigned with our late 2020 threep portfolio optimization efforts.

Speaker Change: You will see us continue to take steps to not only manage our near term cost, but also to build our agility to deliver more sustained growth and margins over time.

Speaker Change: Illumina is taking a highly disciplined approach to support our customers employees and partners and to deliver shareholder returns.

Speaker Change: Throughout a range of macroeconomic environments.

Speaker Change: Moving to my third priority.

Speaker Change: <unk> is working to resolve Grail as quick as possible.

Speaker Change: Since joining illumina I've made it an imperative to move with speed on Grail in December we announced that we would divest grade with a goal of finalizing the terms of the transactions by the end of the second quarter. This year.

Speaker Change: We will continue to pursue parallel path.

Speaker Change: The divestiture will be executed through a third party sale or capital markets transaction consistent with the European Commission's divestiture order.

Speaker Change: To date, we've been able to make swift progress.

Speaker Change: Sales from 10 has been confidentially filed with the SEC advisors actively moving the process forward on both sale and captive market path.

Joydeep Goswami: Our advisors are actively moving the process forward on both sale and capital markets. The special committee of the board that we established in Q3 continues to help ensure this process moves forward efficiently. I'm encouraged by the momentum we've entered 2024 with, and I'm committed to seeing our initiative through. For now, I'll ask Jadid to share more detail on our results for 2023 and our outlook for 2024. Thank you, Jacob.

Speaker Change: The Special Committee of the board that we established in Q3 continues to help ensure this process move forward efficiently.

Speaker Change: I'm encouraged by the momentum we've entered 2024 with and I'm committed to seeing our initiatives through for now I will ask Judy to share more detail on our results for 2023 and our outlook for 2024.

Judy: Thank you Jacob I'll start by reviewing our consolidated financial results followed by segment results for core Illumina and Grail, and then conclude with my remarks on our current outlook for 2024 I'll be discussing non-GAAP results, which includes stock based compensation.

Joydeep Goswami: I'll start by reviewing our consolidated financial results, followed by segment results for Core, Illumina, and Grail, and then conclude with my remarks on our current outlook for 2024. I'll be discussing non-GAAP results, which includes stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and in the supplementary data available on our website. In the fourth quarter, consolidated revenue of $1.12 billion was up 4% year over year, both on a reported and constant currency basis. Consolidated revenue was flat from the third quarter of 2020. Non-GAAP net income was $22 million, or $0.14 per diluted share, which included dilution from Grail's non-GAAP operating loss of $152 million for the quarter.

Judy: 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.

Judy: In the fourth quarter consolidated revenue of one $1 billion to $1 billion was up 4% year over year, both on a reported and constant currency basis consolidated revenue was flat from the third quarter of 2023.

Judy: non-GAAP net income was $22 million or <unk> 14 cents per diluted share, which included dilution from <unk> non-GAAP operating loss of $152 million for the quarter.

Joydeep Goswami: Non-GAAP EPS exceeded our expectations, driven by higher revenue and gross margin and lower operating expense for the quarter. Our non-GAAP tax rate was 55.4% for the quarter and 41.8% for full year 2023 compared to 29.3% in Q4 2022 and 26% for full year 2022. Although both periods reflect the impact of R&D capitalization requirements, the impact to our effective tax rate in 2023 was more significant due to our lower earnings. In addition, our non-GAAP tax rate for both years includes a meaningful impact from the consolidation of Grail's philosophy. Absent the impact of GRAIL, our full-year 2023 core tax rate would have been in the mid-20s. Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million.

Judy: non-GAAP EPS exceeded our expectations driven by higher revenue and gross margin and lower operating expense for the quarter.

Judy: Our non-GAAP tax rate was 55, 4% for the quarter and 41, 8% for full year 2023, compared to 29, 3% in Q4, 2022, and 26% for full year 2022.

Judy: Although both periods reflect the impact of R&D capitalization requirements the impact to our effective tax rate in 2023 was more significantly due to our lower earnings in.

Judy: In addition, our non-GAAP tax rate for both years include a meaningful impact from the consolidation of Grail losses.

Judy: Absent the impact of Grail, our full year 2023 core tax rate was in the mid twenties.

Judy: Our non-GAAP weighted average diluted share count for the quarter was approximately $159 million.

Joydeep Goswami: Moving to segment results, core Illumina fourth-quarter revenue of $1.1 billion was up 3% year over year on both a reported and constant currency basis and included an anticipated reduction of approximately five percentage points from two primary categories. One, the decrease in COVID surveillance and the effect of sanctions in Russia that together represented approximately three percentage points. And two, the year over year reduction in China revenue that represented approximately 2%. Despite these impacts, core Illumina revenue exceeded expectations due to stronger than projected NovaSeq X placements and uptake in X consumables, with strong early demand for the 25-bit flow cell that launched in Q4. Core Illumina sequencing consumables revenue of $687 million was flat year over year. However, stronger than expected, NovaSeq X consumables purchases were largely offset by the anticipated reduction in NovaSeq 6000 consumables and the impact of the pricing transition.

Judy: Moving to segment results.

Judy: Core Illumina of fourth quarter revenue of $1 1 billion was up 3% year over year on both a reported and constant currency basis and included an anticipated reduction of approximately five percentage points from two primary categories. One the decrease in Covid surveillance and the effect of <unk>.

Judy: Actions in Russia that together represented approximately three percentage points.

Judy: And to the year over year reduction in China revenue that represented approximately two percentage points.

Judy: Despite these impacts core illumina revenue exceeded expectations due to stronger than projected <unk> X placements and uptake and X consumables with strong early demand for the 25 <unk> flow cell that launched in Q4.

Judy: Core Illumina sequencing consumables revenue of $687 million was flat year over year.

Judy: Stronger than expected and obviously X consumables purchases were largely offset by the anticipated reduction in obviously 6000 consumables and the impact of pricing transitions as customers continue to adopt and obviously ex <unk>.

Joydeep Goswami: Customers continue to adopt the NovaSeq. Total sequencing consumables revenue was also impacted by COVID, Russia, and China factors that I previously noted, as well as the continued impact of macroeconomic conditions on customers' purchasing behavior. COVID surveillance contributed approximately $4 million in total revenue in Q4 2023 compared to $20 million in Q4 2022. Turning to sequencing activity, total activity on our connected high and mid throughput instruments grew 46% year over year in the quarter, following the 29% year over year growth we reported in Q2. Sequentially, Q4 sequencing activity grew 13% from Q3. As a reminder, we believe this data is a useful reference that shows the general activity trends across our installed base and is directionally correlated with revenue over time.

Judy: Total sequencing consumables revenue was also impacted by Covid.

Judy: Sure and China factors that I previously noted as well as the continued impact of macroeconomic conditions and customers' purchasing behavior.

Judy: Corporate surveillance contributed approximately $4 billion in total revenue in Q4 of 2023 compared to $20 million in Q4 2022.

Judy: Turning to sequencing activity total activity on our connected high and mid throughput instruments grew 46% year over year in the quarter. Following the 29% year over year growth we reported in Q3.

Judy: Sequentially Q4 sequencing activity grew 13% from Q3.

Judy: As a reminder, we believe this data is a useful reference that shows the general activity trends across our installed base and is directionally correlated with revenue overtime.

Joydeep Goswami: Sequencing instruments revenue for Core Illumina of $161 million grew 10% year-over-year in Q4, driven primarily by NovaSeq-X, which more than offset the decline in NovaSeq-6000 shipments. However, growth in high-throughput instruments was partially offset by the expected decline in mid- and low-throughput shipments due to capital purchase and cash flow constraints that continue to impact our customers' purchasing behaviors, as well as local competition For NovaSeq X, we exited Q4 with 390 orders since launch. Our shipments of 79 NovaSeq X instruments in Q4 brought our total installed base to 352. While we expect most of our NovaSeq 6000 customers to transition to the NovaSeq X over time, we are still very early in this transition. As of the end of 2023, our net installed base for NovaSeq 6000 was approximately 1,770 inches.

Judy: Sequencing instrument revenue for core alumina of $161 million grew 10% year over year in Q4, driven primarily by Nova seek ex which more than offset the decline in overseeing 6000 shipments growth in high throughput instruments was partially offset by the expected decline in mid and low throughput shipments due to capital.

Judy: Purchase and cash flow constraints that continue to impact our customers' purchasing behaviors as well as local competition in China.

Judy: For <unk>, we exited Q4 with 390 orders since launch our shipments of 79 overseeing X instruments in Q4 brought our total installed base to 352 instruments, while we expect most of our <unk> 6000 customers to transition to the <unk> X over time, we are still very early.

Judy: In this transition.

Judy: As of the end of 2023, our net installed base for <unk> 6000.

Judy: Proximately 1770 instruments, which reflects approximately 110 instruments that had been deactivated between 2017 and 2023.

Joydeep Goswami: This reflects approximately 110 instruments that were deactivated between 2017 and 2023, the majority of these were in 2023 due to customer transitions to NovaSeq-X. We expect this to increase in 2024 as customers continue to ramp up utilization of NovaSeq X. Additionally, going forward, we will be reporting our annual instrument install base figures on a net basis, which counts for instruments that have been decommissioned or inactivated since launch. The information included on this slide includes additional details to help you with your modeling.

Judy: Majority of these were in 2023 due to customer transitions and obviously X. We expect this to increase in 2024 as customers continue to ramp up utilization of CTX.

Judy: Additionally, going forward, we will be reporting our annual instrument installed base figures on a net basis, which counts for instruments that had been decommissioned or inactivated since launch the.

Judy: The information included on this slide includes additional details to help you with your modeling we will be posting this presentation to our Investor Relations website following our prepared remarks.

Joydeep Goswami: We will be posting this presentation on our investor relations website following our prepared remarks. Core Illumina sequencing service and other revenue of $152 million was up 16% year over year, driven primarily by an increase in revenue from strategic partnerships and higher instrument service contract revenue on a growing installed base. Moving to the rest of Core Illumina PNL, Core Illumina's non-gap gross margin of 64.7% for the quarter decreased 260 basis points year over year, primarily driven by the mix of lower margin strategic partnership revenue, lower instrument margins due to the NovaSeq X launch, which is typical with a new platform introduction, and increased field services and installation costs, partially offset by lower. Core Illumina non-GAAP operating expenses of $507 million were down $21 million year-over-year, primarily due to continued expense reduction initiatives and lower performance-based stock compensation expense.

Judy: Core Illumina sequencing service and other revenue of $152 million was up 16% year over year, driven primarily by an increase in revenue from strategic partnerships and higher instrument service contract revenue on a growing installed base.

Judy: Moving to the rest of <unk> our P&L.

Judy: Core Illumina non-GAAP gross margin of 64, 7% for the quarter decreased 260 basis points year over year, primarily driven by the mix of lower margin strategic partnership revenue lower instrument margins due to the <unk> X launch, which is typical with a new platform introduction and increased field services and.

Judy: <unk> costs, partially offset by lower freight costs.

Judy: Core Illumina non-GAAP operating expenses of $507 million were down $21 million year over year, primarily due to continued expense reduction initiatives and lower performance based stock compensation expense year over year.

Joydeep Goswami: As a result of these factors and higher revenue, core Illumina non-gap operating margin was 18.5% in Q4 2023 compared to 17.8% in Q4 2022. Transitioning to financial results for Grail, rail revenue of $30 million for the quarter grew 30% year over year driven primarily by adoption of Rail non-gap operating expenses total $167 million and increased $1 million a year over. Moving to consolidated cash flow and balance sheet items Cash flow provided by operations was $224 million, capital expenditures were $51 million, and pre-cash flow was $173 million.

Judy: As a result of these factors and higher revenue core Illumina non-GAAP operating margin was 18, 5% in Q4 2023 compared to 17, 8% in Q4 of 2022.

Judy: Transitioning to financial results for Grail.

Judy: Rail revenue of $30 million for the quarter grew 30% year over year, driven primarily by adoption of gallon rail non-GAAP operating expenses totaled $167 million and increased $1 million year over year.

Judy: Moving to consolidated cash flow and balance sheet items for the quarter cash.

Judy: Cash flow provided by operations was $224 million.

Judy: Capital expenditures were $51 million in free cash flow was $173 million, we did not repurchase any common stock.

Joydeep Goswami: We did not repurchase any common stock. We ended the quarter with approximately $1.05 billion in cash, cash equivalents, and short-term investments. Moving now to 2024. As Illumina continues to move as quickly as possible to resolve GRAIL, given the uncertainty around the specific timing and impact of the GRAIL divestment, the company is focusing its 2024 financial outlook on Core Illumina. Our guidance does not assume any impact of the potential divestment of GRAIL in 2024.

Judy: We ended the quarter with approximately $1.05 billion in cash cash equivalents and short term investments.

Judy: Moving now to 2020 for guidance.

Judy: As Illumina continues to move as quickly as possible to resolve grail, given the uncertainty around the specific timing and impact of the Grail divestment. The company is focusing its 2024 financial outlook Encore alumina.

Judy: Our guidance does not assume any impact for potential divestment of Grail in 2024.

Joydeep Goswami: Upon the completion of the divestment, we will provide non-GAAP EPS guidance for the full year 2024. As Jacob mentioned, our outlook assumes the current challenging macroeconomic environment persists in 2024, and tighter funding and budget pressures continue to impact our customers' purchasing decisions. We expect full year 2024 core revenue to be approximately flat from 2023, reflecting the following offsetting factors.

Judy: On the completion of the divestment, we will provide non-GAAP EPS guidance for the full year 2024.

Judy: As Jacob mentioned, our outlook assumes the current challenging macroeconomic environment persist in 2024, and tighter funding and budget pressures continue to impact our customers' purchasing decisions.

Judy: We expect full year 2024 core revenue to be approximately flat from 2023, reflecting the following offsetting factors.

Joydeep Goswami: We expect core Illumina sequencing instrument revenue to decline in the high teens year over year, driven primarily by a decrease in Novacek X instrument placement. The reduction reflects the expected transition in our adoption curve to early majority customers from early adopters and the lower backlog entering 2024 compared to 2023. We also expect capital and cash flow constraints to continue to impact purchasing behavior and moderate instrument placements in 2024.

Judy: We expect core Illumina sequencing instrument revenue to decline in the high teens year over year, driven primarily by a decrease in <unk> X instrument placements. The reduction reflects the expected transition in our adoption curve early majority customers from early adopters and the lower backlog entering 2024.

Judy: Compared to 2023.

Judy: We also expect capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements in 2024.

Joydeep Goswami: We expect core Illumina sequencing consumables revenue to grow in the low single digits year over year, driven primarily by modest growth and high-throughput consumables, as increased NovaSeq X consumables purchases and sequencing volume outpace the expected decline in NovaSeq 6000 consumables and the impact of the pricing transition. Moving to annual pull-through. Going forward, we will be calculating and providing pull-through figures based on the instrument's net installed base. As I mentioned previously, supplemental information is included in our earnings presentation to help with modeling, and will be posted to our investor relations website following our preparation. Importantly, this does not change reported revenue in any way.

Judy: We expect core Illumina sequencing consumables revenue to grow in the low single digits year over year, driven primarily by modest growth in high throughput consumables as increase and obviously X consumables purchases and sequencing volume outpaced the expected decline and obviously 6000 consumables and the impact of pricing transitions.

Judy: Moving to annual pull through going forward, we will be calculating and providing pulse who figures based on the instruments net installed base as I mentioned previously supplemental information is included in our earnings presentation to help with modeling, which will be posted to our investor Relations website. Following our prepared remarks importantly, this does not.

Judy: Change reported revenue in any way.

Joydeep Goswami: We expect annual pull-through for NovaSeq 6000 of approximately $700,000 to $800,000 per system in 2024, as customers continue to transition sequencing volume to NovaSeq X. We expect annual pull-through for NEXEQ 1K2K in the range of $80,000 to $130,000 per system in 2024, which primarily reflects the impact of customers transitioning to XLEAP chemistry as it becomes available on NE We expect annual pull-through for MiSeq in the range of $30,000 to $40,000. We expect the remainder of our pull-through ranges to be in line with historical guidance. We expect core Illumina total sequencing revenue to be approximately flat year over year. This includes intercompany sales to Grail of approximately $30 million, which will be eliminated in consolidation.

Judy: We expect annual pull through for <unk> 6000 were approximately 700000 to $800000 per system in 2024 as customers continue to transition sequencing volume to <unk> X.

Judy: We expect annual pull through for next eight <unk> in the range of 80 to $130000 per system in 2024, which primarily reflects the impact of customers transitioning to <unk> chemistry as it becomes available on <unk> <unk>.

Judy: We expect annual pull through for <unk> in the range of 30 to $40000. We expect the remainder of our pull through ranges to be in line with historical guidance.

Judy: We expect core Illumina total sequencing revenue to be approximately flat year over year. This includes intercompany sales to grail of approximately $30 million, which are eliminated in consolidation.

Judy: We expect core Illumina non-GAAP operating margin of approximately 20%.

Judy: Our operating margin expectations reflect the benefit of our continued gross margin improvement and expense reduction initiatives offset by normalization of our performance based compensation as well as the impact of inflation and market based merit increases.

Joydeep Goswami: We expect Core Illumina's non-gap operating margin of approximately 20%. Our operating margin expectations reflect the benefit of our continued gross margin improvement and expense reduction initiatives, offset by normalization of our performance-based compensation, as well as the impacts of inflation and market-based merit increases. For the first quarter of 2024, we expect core Illumina revenue in the range of 1.03 to 1.04 billion dollars, reflecting a year over year decrease of three and a half to four and a half percent driven predominantly by the following factors.

Judy: For the first quarter of 2024, we expect core alumina revenue in the range of 1.03 to 1.04 billion.

Judy: Reflecting a year over year decrease of three five to four 5% driven predominantly by the following factors.

Judy: We expect lower Nova seek ex instrument shipments year over year, given that we are entering 2024 with a more modest backlog compared to the significant preorder book, We entered 2023 following the launch of <unk> X.

Joydeep Goswami: We expect lower NovaSeq X instrument shipments year over year given that we are entering 2024 with a more modest backlog compared to the significant pre-order book we entered in 2023 following the launch of NovaSeq X. We expect the increase in NovaSeq X consumables purchases year over year to be largely offset by the anticipated reduction in NovaSeq 6000 consumables and the impact of pricing transitions consistent with We expect an increase in sequencing service and other revenue year over year driven by strategic partnership initiatives and higher instrument service contract revenue on a growing installed base. For the first quarter, we expect a core Illumina non-gap operating margin of approximately 18%. Lastly, for the first quarter, we expect core Illumina non-GAAP net other expense of approximately $12 million, with the year-over-year increase driven primarily by lower interest income on our lower cash balance following the repayment of our convertible notes in mid-2020.

Judy: We expect the increase in obviously X consumables purchases year over year to be largely offset by the anticipated reduction in <unk> 6000, consumables and the impact of pricing transitions.

Judy: <unk> with the trend we saw in Q4.

Judy: We expect an increase in sequencing service and other revenue year over year, driven by a strategic partnership initiatives and higher instrument service contract revenue on a growing installed base.

Judy: For the first quarter, we expect core Illumina non-GAAP operating margin of approximately 18% lastly for the first quarter, we expect core Illumina non-GAAP net other expense of approximately $12 million with the year over year increase driven primarily by lower interest income on our lower cash back.

Judy: <unk> following the repayment of our convertible notes in mid 2023.

Judy: I will now turn it back over to Jacob for his closing remarks. Thank you.

Thanks, Joe Jeep before we close and move to Q&A I want to discuss what I believe success looks like both this year and the years ahead.

Jacob Tyson: Illumina has the opportunity to truly drive the next generation sequencing ecosystem forward.

Jacob Tyson: We will deepen our relationships with our customers and seek a greater ways to collaborate and partner with them to drive greater adoption of MTS.

Jacob Tyson: I will now turn it back over to Jacob for his closing remarks. Thank you. Thanks, Jadib.

Jacob Tyson: Our goal is to make our customers the heroes in their labs and to support them as they expand their work in genomics and <unk> in turn this will help capitalize our market, leading innovation and continue to differentiate illumina and maintain our industry leading position across research.

Operator: Before we close and move to Q&A, I want to discuss what I believe success looks like both this year and the years ahead. Illumina has the opportunity to truly drive the next generation sequencing ecosystem forward. We will deepen our relationships with our customers and seek out greater ways to collaborate and partner with them to drive greater adoption by NGOs. Our goal is to make our customers the heroes in their labs and to support them as they expand their work in genomics and multi-omics. In turn, this will help capitalize on our market-leading innovation and continue to differentiate Illumina and maintain our industry-leading position across research and clinical markets. We will also continue to drive innovation that is focused on our customers' products.

Jacob Tyson: And clinical markets.

Jacob Tyson: We will also continue to drive innovation that is focused on our customers' priorities. This include involving our sequencing platform and delivering greater sample to answer solutions.

Jacob Tyson: There is an opportunity to further integrate customers' workflow to build our share of wallet as we create greater value for our customers.

Jacob Tyson: Our comprehensive strategy work is well underway and we will share more with you later this year.

Jacob Tyson: I am excited to be part of Illumina. His leadership team that is driving our unmatched core business forward.

Thank you for joining I'll now invite the operator to open the line for Q&A.

Operator: These include involving our sequencing platform and delivering greater sample-to-answer services. There is an opportunity to further integrate customers' workflows to build our shared wallet as we create greater value for our customers. Our comprehensive strategy work is well underway, and we will share more with you later this year. I'm excited to be part of Illumina's leadership team that is driving our unmatched core business forward. Thank you for joining us.

Speaker Change: Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.

Speaker Change: You are joining us today, you say speaker phone. 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.

Speaker Change: Welcome to reenter the queue. If you have additional questions again star one to Sigma was question Star one.

Operator: I'll now invite the operator to open the line for Q&A. Thank you. If you would like to signal with questions, please press star one on your touchtone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Speaker Change: Our first question will come from Doug Schenkel with Wolfe Research.

Doug Schenkel: Hey, good afternoon, everybody and thank you for taking the questions I wanted to ask.

Doug Schenkel: Just about 25, 25, BP chip release and.

Operator: As a reminder, please limit yourself to one question so that we can accommodate as many analysts as possible. You're welcome to re-enter the queue if you have additional questions. Again, use star 1 to signal with questions.

Doug Schenkel: What youre seeing in the field and trade the early part of the year.

Doug Schenkel: As you know 25 be reduces the cost per genome for about $200, but it also requires customers to have enough samples.

Doug Schenkel: And our first question will come from Doug Schenkel with Wolf Research. Hey, good afternoon everybody, and thank you for taking the questions. I want to ask just about the 25 bit, 25 bit chip release and what you're seeing in the field entering the early part of the year. As you know, 25B reduces the cost per genome to about $200, but it also requires customers to have enough samples to run to fully use up the flow cells. So what have you seen in the first few months of availability? You know, what's the spending on X consumables?

Doug Schenkel: One to fully use output flow cell.

Doug Schenkel: What are what are you seeing in the first few months of availability.

Doug Schenkel: What what spending on X consumables.

Doug Schenkel: How does that trend relative to Q3.

Doug Schenkel: Are you seeing signs in the field that sample access is not a problem SEC folks move to the 25 day. Thank you.

Speaker Change: Thanks, Doc and no that was nice one question there. So let me let me start by saying that we've been very pleased with the pickup of the 25 since the launch in late November in fact, it kind of.

Speaker Change: Performed over our expectations and have been very well received with our customers. So we continue to expect that this will continue to really drive the ex performance, but also of course, it's completely now unleash the full performance of the instrument and thereby we also expect that the that the 25 b the availability of the 75 beeville.

Jacob Tyson: You know, how did that trend relative to Q3? And are you seeing signs in the field that sample access is not a problem, you know, as you see folks move to the 25-D? Thank you. Thanks, Doc.

Jacob Tyson: And no, that was a nice question there. So let me start by saying that we've been very pleased with the pickup of the 25B since its launch in late November. In fact, it kind of is, but we are seeing that they have big enough projects to load this process. Yeah, and just maybe one quick add right: about 40% of our former customers so far have adopted the 25 B. And our next question will come from Puneet Souda with LearRink Partners. Yeah, hi, Jacob, Josie, thanks for taking the question.

We'll have more customers to jump onto the X back in here.

Speaker Change: I think we are seeing customers being able to loaded of course many of them are still doing validation work, but we are seeing that they have a big enough.

Speaker Change: <unk> to Lotus.

Speaker Change: <unk>.

Speaker Change: Yeah, and just maybe one quick add right about 40% of our X customers. So far have adopted to 25 be correct.

Speaker Change: And our next question will come from Puneet <unk> with Leerink partners.

puneet: Yeah, Hi, Jacob.

puneet: Joe Thanks for taking the question so.

Puneet Souda: So maybe just following up on that point, I mean, sort of help us just understand how you get to the low single-digit growth rate this year, there's obviously 25 B, there's reductions that are happening from just the X installs cost per gigabase is lower, China continues to be challenging, and then the market backdrop is challenging, too. So maybe talk to us a little bit about sort of how you continue to have confidence in the sort of low single-digit sequencing consumable growth rate. And I would really appreciate it if you could provide us some context and details about Grail as well, what's the progress there, any level of interest that you're finding. And what are you contemplating spending on the Grail this year? Thank you so much.

Maybe just following up on that point, I mean sort of help us just understand how do you get to the low single digit.

puneet: Growth rate. This year. There is obviously 25 b theres reductions that are happening in <unk>.

puneet: From just the X installed cost for database as lower China continues to be challenging and then the market backdrop is challenging too. So just maybe talk to us a little bit about sort of how do you.

puneet: Continue to have confidence in the sort of a low single digit sequencing consumable growth rate.

puneet: Really appreciate it if you could provide us some context around and details around grill as well, what's the progress there.

puneet: Level of interest that you are finding.

puneet: <unk>.

puneet: What are you contemplating for spend on Grail. This year. Thank you so much.

Jacob Tyson: All right, thanks for that, Puneet. And let me start with the latter part of this question about the Grail. And then I will have Jordi chime in on our expectations here at Consumer Scope. But as I mentioned, you know, we are very pleased with the announcement that we made here in December that we are now divesting Grail. And I'm actually very pleased with the progress so far. We have our advisors really moving ahead and are in contact and in conversations with the relevant parties. We are continuing to run a dual track.

puneet: Alright, thanks for that Puneet and let me start by the latter part of this question is about Grail, and then I'll have Joe deep chairman.

puneet: On our expectations here on consumables growth, but as I mentioned, we are very pleased with the announcement that we made here in December.

puneet: Divesting grain because youre in.

puneet: I'm actually very pleased with the progress so far we have our advisors really moving moving.

puneet: Moving ahead and in connection and in conversations with the lowland parties, we are continuing to run a dual track.

Jacob Tyson: Of course, it can be a capital market initiative or it can be a transaction. And so we still expect to be on track with the timeline we were previously talking about, that we would have all the terms finalized by the end of Q2. So we are at this point, we are not talking about the, since we are expecting to finish up with Greylist here, we're not having any guidance on the expenditure for Greylist. Yeah, and to address your question about the low single-digit consumables, let me start by saying we were very encouraged by the uptake of the 25B and 10B flow cells that we saw in the fourth quarter. We're also very pleased to see the elasticity, the growth in underlying sequencing activity being driven by X customers, right? So both of those are good.

puneet: We of course can be a capital market.

puneet: Indicative or it can be a transaction.

puneet: And so we still expect to be on track with the.

puneet: With the time that we were previously talking about that we would have be able to have all the terms finalized by end of Q2.

puneet: So we are at this point.

puneet: We are not talking about that since we are expecting to finish up with grain. This year, we are not having any guidance on the expenditure for greater this year.

puneet: Yeah and to address your question about the the low single digits consumables growth, but need so let me start by saying we were very encouraged by the.

puneet: Uptake of <unk>.

puneet: The 25 and can be flow cells that we saw in the fourth quarter. We're also very pleased to see the elasticity.

puneet: Growth in underlying sequencing activity being driven by X customers rates of both of those are good we saw that.

Joydeep Goswami: We saw that uptick in sequencing activity now for the second quarter in a row. So again, it's broad-based, it's both research and clinical customers, and it's quarter-on-quarter and year-on-year growth. So what's offsetting that, you know, expected growth in X consumables, as you rightly pointed out, is the expected price transition as customers move from the NovaSeq 6000 to the X. This is very similar to the price transition that you saw when you were moving from HiSeq. And then, of course, some of the expected, again, reduction in 6K consumables as customers switch from one platform to the other, right? So that is the really big piece on what's leading to the lower or the low single-digit growth rate and consumables in 2024.

puneet: Optic on sequencing activity now for the second quarter in a row. So again, it's it's broad based it's both research and clinical customers and its quarter on quarter and year on year growth.

Speaker Change: So what's offsetting that.

Speaker Change: Expected growth in X consumables as you rightly pointed out is the expected price transition is as customers move from that obviously 6000 to the exodus is very similar to the price of transition that you saw when you were moving from HiseQ2.

Speaker Change: And then of course some of the expected again, a reduction in fixed get consumables as customers switch from one platform to the other right. So those that is the really big.

Speaker Change: Piece on on the whats leading to the lower or the low single digit growth rate in consumables in 2024.

Speaker Change: And our next question will come from Vijay Kumar with Evercore ISI.

Vijay Muniyappa Kumar: And our next question will come from Vijay Kumar with Evercore ISI. Hey guys, thanks for taking my question. And I had a two-part question on this Grail. For this Grail, I know it was a confidential S-1.

Vijay Muniyappa Kumar: Hey, guys. Thanks for taking my question and.

Vijay Muniyappa Kumar: I had a two part question.

Vijay Muniyappa Kumar: On the grille I know it was a confidential S. One.

Jacob Tyson: When will that be made public? And the reason I ask is that Grail's operating losses were 700 million last year. It's really hard to foresee a capital market transaction with those kind of spend levels, so I'd be very curious to see what the S-1 assumptions are on Grail. And on conceivable pull through 700 to 800,000, no, 6,000. Is there like a cadence, perhaps Q1, we're starting at the low end, and is the assumption that we exit Q4 at the high end of that range? Yeah, so let's start with a great question. And obviously, we'd like to provide as much information to all of you as possible. Right now, as you say, the filing is confidential.

Vijay Muniyappa Kumar: When.

Vijay Muniyappa Kumar: Will that be made public and the reason I ask because the grilles operating losses were 700 million last year.

Speaker Change: It's really hard to.

Speaker Change: Foresee a capital market transaction with those kind of spend levels.

Speaker Change: I'd be very curious to see.

Speaker Change: What the S. One assumptions are on.

Speaker Change: And then on consumable pull through 700 to 800000 on 6000.

Speaker Change: Is there like a cadence perhaps Q1, we're starting at the low end then.

Speaker Change: Is the assumption, we exit Q4 at the high end of that range.

Speaker Change: Yes, so let's start with the with the Great question and obviously, we'd like to provide as much information to all of you as possible right now as you say the the filing is confidential and I don't think it will be public available before.

Jacob Tyson: And I don't think it will be public available before very late in Q1, maybe dripping into Q2 here. So I think that's where we are at with this. But as soon as it's available, we'll make sure you know. And then, Vijay, I want to be sure you were you're asking about next week 6000, sorry, NovaSeq 6000 pull through numbers and how they modulate through the year. Correct. Is there an assumption that we start at the low end and exit the year at the high end or above the high end of the range? No, there isn't.

Speaker Change: Very late in Q1, maybe dripping into Q2 here. So I think thats, where we are at this but as soon as it's available to make sure you know.

Speaker Change: Okay, and then Richard I want to be sure you were you're asking about next week 666000 pull through.

Speaker Change: Numbers and how they how they modulate through the year.

Speaker Change: Correct or is there an assumption we start at the low end and exit the year at the high end or above the high end of that range.

Richard: No there isn't I think again pull through I will reemphasize is a calculated number so it's more of the total amount of consumables are sold in any quarter divided by the number of.

Joydeep Goswami: I think, again, pull-through, I will reemphasize, is a calculated number, so it's more of, you know, the total amount of consumables sold in any quarter divided by, you know, the number of, now, the active installed base in the quarter, right? So, we don't have an assumption in terms of quarterly spread on that. And our next question. Dan Arias, Afternoon guys, thanks for the questions.

Richard: Now the active installed base in the in the quarter right. So and we don't have an assumption in terms of quarterly spread on that.

Richard: And our next question will come from Dan Arias with Stifel.

Dan Arias: Hey, guys. Thanks for the questions Jacob <unk>, Jordan <unk> on the 6000 to X transition and just sort of thinking about the clinical side of things you know a big part of that bucket are these commercial labs that are watching their own margins pretty tightly and trying to find ways to be more efficient so.

Jacob Tyson: Jacob or Joydeep, on the 6000 to X transition, and just sort of thinking about the clinical side of things, you know, a big part of that bucket are these commercial labs that are watching their own margins pretty tightly and trying to find ways to be just more efficient. So are you sensing that maybe you could see X adoption faster than in a normal environment in order for those folks to take advantage of the cost savings? It seems like they're incentivized to do that, but I also know that the clinical wheel spins slowly, so I'm just not sure whether that's a factor for them.

Dan Arias: Are you sensing that maybe you could see ex adoption faster than maybe in a normal environment in order for those folks to take advantage of the cost savings.

Dan Arias: Seems like Youre incentivized to do that but I also know that the.

Dan Arias: The clinical wheel, it's been slowly so I'm just not sure whether that's a factor for them.

Speaker Change: Yes of course it is relevant.

Jacob Tyson: Yeah, of course, it's a relevant hypothesis to come in with. What we have seen is that most of our clinical customers are using the opportunity with a lower cost on X to actually expand the depth of sequencing, providing bigger panels, and so on. So what we're seeing is that most of the current panels continue to run on the Nova 6 6000 and thereby continue to also drive volume there. And then they are right now validating many of the new assays or the new assays that might not have been possible in the 6000 due to cost and so on to be on the X. So we're quite encouraged about that.

Speaker Change: Relevant hypothesis to come in with what we have seen is that most of our clinical customers using the opportunity with the lower cost of next to actually expand the depth of sequencing, providing bigger panels and so on so what we are seeing is that most of the current panels continued to run on the <unk> 6000, and thereby continue to also drive.

Speaker Change: Volume there and then they are right now validating many of the new assays are the new assays that might not have been possible in the 6000 due to the.

Speaker Change: The costs and so on to be under on the on the X. So.

Jacob Tyson: We've also seen several of our speciality labs customers now order tens of Nova Seq X, so I'm encouraged that we will see a lot of a lot of volume here going forward on that. And our next question will come from Subbu Nambi with Guggenheim. Hey, thank you guys.

Speaker Change: Encouraged about that we've also seen several of our of our.

Especially also lapsed customer now order tenths of of <unk>. So I'm encouraged that we will see a lot of a lot of volume here going forward on this.

And our next question will come from Subaru Namby with Guggenheim Securities.

Subbu Nambi: Thank you for taking the question. You spent about a billion on R&D in 2023. Relative to 2010-19, your revenue has grown at 6% CAGR. However, R&D has grown 12% CAGR. Why can't you reduce R&D spend in dollar terms from current levels over the next one or two years? Can you outline where the spend is allocated?

Subaru Namby: Hey, Thank you guys. Thank you for taking the question.

Subaru Namby: You spent about a billion on R&D in 2018.

Subaru Namby: 2019 revenue has grown at second quarter.

However, R&D is doing terrific.

Subaru Namby: Why thank you reduced R&D spend in dollar terms from current levels over the next one or two years.

Speaker Change: Danielle language.

Speaker Change: Allocating.

Danielle: Yes. Thank you.

Jacob Tyson: Yeah, I think you're right that we continue to believe that there's a lot of innovation that is required and, thereby, investment into R&D in order to drive the whole NGS ecosystem forward. As I said, one of the things that I was really excited about is the pipeline of innovation that we have in running right now, and thereby, also, there will be a lot of innovation coming out from Illumina over the next period of time here. And we continue to believe that we are in the early stages of the whole opportunities here in NGS, but also in Nuteomics, and thereby, we continue to make investments in that.

Danielle: You're right that we continue to believe that there's a lot of innovation that are required for that by investment into R&D in order to drive the whole MTS ecosystem forward.

Speaker Change: We as I said one of the things what I said previously it's one of the things that I was really excited about is the.

Speaker Change: Is the pipeline.

Speaker Change: Innovation that will that we have in running right now and thereby also that will be a lot of innovation coming out from illumina over the next period of time here.

Speaker Change: And we continue to believe that that beyond the early stages of offer up the whole opportunities here in NDS, but even also Luciano <unk> and thereby we continue to make investment into that you're also right that there has been an increase in R&D and we certainly looking too.

Joydeep Goswami: You're also right that there has been an increase in R&D, and we're certainly looking to change that trajectory over time. We still believe that a high level of investment is required, but you will see here over the next year that the percentage spend on R&D versus revenue will start to come down. Just to add, Subbu, I think we have made reductions in R&D over the last year. But it's been very strategic in terms of specific aspects of the portfolio that we had considered as much longer-term payoffs or more risky. And we have also, our overall R&D includes spend in certain areas like medical affairs, et cetera, that we were doing to support customers. And as they have matured, we have been able to pull back on investment there without affecting innovation.

Speaker Change: Change that trajectory over time, we still believe that.

Speaker Change: High level of investments required, but you will see here over the next year that the percentage spend in R&D versus revenue will start to come down.

Speaker Change: And just to add so but I think we have made reductions in R&D over the last year, it's been very strategic in terms of specific aspects of the portfolio that we had.

Speaker Change: Considered as longer much longer pay up time of payoffs or more risky.

Speaker Change: We are also our overall R&D includes spend in.

Speaker Change: Certain areas like medical affairs et cetera that we were doing to support customers and as they have matured right. We have been able to pull back on investment there without affecting innovation yep. Okay.

Mason Carrico: And we'll take a question from Mason Carrico with, Thank you. Hey guys, thanks for the question. So, for high-throughput customers who have already purchased an X, could you talk about the conversations you're having around potential fleet expansions? I mean, what portion of those opportunities, whether it's orders or shipments, have already come through, and how many, you know, remain an opportunity this year? Yeah, I think I mean, we certainly see a lot of our high-end customers or high volume customers that started buying one or two NovaSeq X are starting to consider purchasing more instruments. So they're using the first few Xs to validate as they find, and then they want to expand into using the additional Xs to actually run in production, but very few customers have still gone into production mode.

Speaker Change: And we'll take a question from Nathan <unk> with Stephens.

Speaker Change: Okay.

Nathan: Hey, guys. Thanks for the question so.

Nathan: For high throughput customers, who who have already purchased and asks could you talk about the conversations you're having around.

Nathan: Potential fleet expansions I mean, what portion of those opportunities, whether it's orders or shipments have already come through.

And how many remain an opportunity this year.

Speaker Change: Yes, I think I mean, we certainly see a lot of our high end customers to high volume customers that started buying.

Speaker Change: One or two <unk> is starting to.

Speaker Change: <unk>.

Speaker Change: Purchasing more instruments. So they are using the first few weeks to validate the assay and then they want to expand into into use the additional access to actually run in production, but very few customers have still gone into production mode, and thereby that's a real big opportunity in front of us I think that less than.

Jacob Tyson: And thereby, there's a real big opportunity in front of us. I think that less than less than half of our high volume customers have purchased an X so far. So I think there's still a lot of opportunities there, but I've also mentioned some of the high volume customers that have purchased one or two have now put orders in for 10 instruments. So I think we're still in the very early stages, and there should be a lot of opportunities here, both in 24 and 25, to drive more placements. Yeah, I'll just add, we weren't expecting to see that before the launch of the 25B flow cell, right? So really, you're in the very early innings there, and we do expect to see those fleet expansions come in during this.

Speaker Change: Less than half of our.

Speaker Change: The high volume customers have purchased.

Speaker Change: Purchased and so far so I think there's still a lot of opportunities there, but but as also mentioned some of the high volume customers that have purchased one or two have now put orders in for for 10 instruments. So so I think we still in India very early stages and there should be a lot of opportunities here both in 2025.

Speaker Change: Two to drive more placements, yes, I'd, just add that we werent expecting to see that before the launch of the <unk> flow cell right. So really you're in very early innings, there and we do expect to see those fleet expansions come in and in this year.

Jacob Tyson: And we have a question from David Westenberg. Piper Sin, right, thank you for taking the question. I'm actually going to hit on some of the competition coming in with a couple different things we saw at AGBT, for example, a combination of space and sequencing on one platform. How do you see that stacking competitively? Would you pursue a strategy like that?

Speaker Change: And we have a question from David Westenburg with Piper Sandler.

David Westenberg: Alright. Thank you for taking the question I am actually going to hit on some of the competition coming in a couple of different things. We saw at HPT. For example combination of spatial and sequencing on one platform. How do you see that stacking competitively would you pursue a strategy like that and then on all tomorrow in the $100 genome.

David Westenberg: And then on Ultima and the $100 genome, you know, some of the specs look significantly better than they did a couple years ago. You know, how do you feel stacked up against the $100 price and, you know, with some of your key bells and whistles? Thank you very much.

David Westenberg: Stacks looks significantly better than it did a couple of years ago.

David Westenberg: How do you feel stacked up against the $100 price.

David Westenberg: With some of your key bells and whistles. Thank you very much.

Jacob Tyson: Yeah, thanks, Dave. And of course, we are tracking, of course, everything that is happening on the market, and we take our competition very seriously. But I think you've also heard me on the multiomics place.

Speaker Change: Yeah, Thanks, Dave and of course, we are we tracking of costs everything that is happening on the market and we take all competition very seriously, but I think you've also heard me on.

Speaker Change: On the multi Omics place you I think you've heard me speak multiple times about <unk>. So we have an intention also to be in that space. I think we've been all talking about moving forward at the starting point with proteomics here with our relationships with the <unk>.

Jacob Tyson: I think you've heard me speak multiple times about multiomics. So we have an intention also to be in that space. I think we've been out talking about moving forward as a starting point with proteomics here with our relationships with Stomalogic. But I think you can see that actually, we believe that there are many more modalities that can be available on the instrument.

Speaker Change: The melodic.

Speaker Change: But I think you can see that that actually we believe there is many more modalities that can be available on the instruments. So.

Jacob Tyson: So I think what Illumina is doing is that we will go out and provide that insight when we're ready to put something in the market, and speak less about it when it's more in the future. Secondly, you know, we feel with the NovaSeq X, where we come out with a very attractive price point for a lot of different applications and not only a few ones. So I think we feel that we have a very attractive solution. But I also remind you that it's not only the cost per sequencing anymore that is relevant, but you also need to look at the whole cost of the whole workflow, how many manual steps you have, how much waste you have, how much instrument spending, and so on.

Speaker Change: I think the what.

Speaker Change: Where we are where illumina is doing is that we would go out and provide that insight can be ready to put something in the market and speak less about it when it's more in the future.

Speaker Change: And secondly, we feel with the Novo <unk> X, where we come out with a very attractive price point.

Speaker Change: For a lot of different applications in not only a very few ones. So I think we feel that we have a very attractive solution, but I also remind you that debt.

Speaker Change: It's not only the cost per sequencing that anymore that is relevant but also you need to look at the whole cost of the whole workflow. How many manual steps you have how much waste you are.

Speaker Change: Instrument spending and so on so I think if you dig into the details you will actually realize that illumina has that very attractive and very differentiated platform.

Jacob Tyson: So I think if you dig into the details, you will actually realize that Illumina has a very attractive and very differentiated platform. And we'll take a question from Connor McNamara with our Hey guys, thanks for taking the questions; I appreciate it. Just a financial question on margins, you got 18% in Q1 and 20% for the whole year, so how do we think about the cadence of the margin progression? And I guess the same on tax rate, you talked about the mid-20s for a core Illumina tax rate; how should we think about that in 24? So the tax rate again, you know, is something that should be, you should expect to be, you know, relatively constant as you go into and again for core Illumina into 2024. And this is, again, core Illumina, right? We are not giving guidance this year yet on the consolidated number.

Speaker Change: We'll take a question from Conor Mcnamara with RBC.

Conor Mcnamara: Hey, guys. Thanks for taking the questions I appreciate it.

A financial question on margins, you're guiding to 18% in Q1 and 20% for the whole year. So how do we think about the cadence.

Conor Mcnamara: The margin progression and I guess same on tax rate just you talked about a mid twenties for the core level of tax rate, how should we think about that in 'twenty four.

Speaker Change: Yes, so the tax rate again.

Speaker Change: Something that that should be you should expect to be.

Speaker Change: Relatively constant as you go into and so again for core Illumina into 2024.

Speaker Change: And this is again core alumina right, we're not giving guidance this year yet on the consolidated number.

Connor McNamara: In terms of the operating margin cadence, again, you know, that typically does go up, you know, as gross margins tend to go up as we move into greater volume through the year. In terms of operating margin, you will see a decrease potentially in Q2 as merit and the other, you know, inflation-related aspects come into play. But then, you will see after that, a quarter and a quarter increase as we move into the rest of the year. And then, of course, you know, I think on the sorry, just one other thing, right? I know there's been some movement in terms of the R&D capitalization piece, but you know, that is something we're monitoring very carefully. It has passed the House, but it still needs to get through the Senate and the president's signature.

Speaker Change: In terms of the operating margin cadence again that is typically that does go up.

Speaker Change: As the gross margins tend to go up as we move into into greater volume and through the year.

Speaker Change: In terms of operating margin you will see a decrease in.

Speaker Change: And potentially in Q2 as the the merit and the other <unk>.

<unk> related aspects coming into play, but then you will see after that quarter on quarter increase as we move into the rest of the year.

Speaker Change: And then of course, you know I think on the sorry, just one other thing right I know theres been some.

Speaker Change: A movement in terms of the R&D capitalization piece, but that is something we're monitoring very carefully it has passed the house, but it still needs to get through the Senate and the President's signing if we get that you can expect a further improvement in the tax rate, but we are not building that into our <unk>.

Joydeep Goswami: If we get that, you can expect a further improvement in the tax rate, right? But we are not building that into our assumptions at this, And our next question. The Bulletproof Executive 2013, Go Ships! Hi, thanks for taking the question. Just on the MRD assay under development with Janssen, I was wondering if you might be able to comment whether that's a tumor-informed or tumor-naive approach or something different altogether, and whether there might be potential for that to be developed into an IVD assay in the future for clinical applications.

Speaker Change: <unk>.

Speaker Change: Assumptions at this point.

Sung Ji Nam: And our next question will come from sung <unk> Nam with Scotiabank.

Sung Ji Nam: Hi, Thanks for taking the question just on the <unk> assay under development with Janssen was wondering if you might be able to comment whether that's a tumor informed her tumor nave approach or something different altogether.

Sung Ji Nam: And whether that might have whether there might be potential for that to be.

Sung Ji Nam: Developed into an IBD assay in the future for clinical applications.

Jacob Tyson: Thank you. Yeah, thanks for the question. So again, to remind everyone, the approach that Illumina has is quite unique. It's a whole genome-based MRD assay.

No.

Speaker Change: Yeah. Thanks for the question so again too.

Speaker Change: Remind everyone be approached that Illumina has is quite unique its a whole genome based.

Speaker Change: MRV assay.

Joydeep Goswami: You know, it is initially a tumor-informed assay, but it does have the potential, with more data and, you know, behind it, to at some point move into a tumor naive assay, right? In terms of being, you know, capable of being IBD, of course, as you know, we have invested very heavily in platforms and technologies and infrastructure that allow us to move assays to be IBD when the time is right

Speaker Change: It is initially a tumor informed assay, but it does have the potential with more data and.

Speaker Change: Behind it.

Speaker Change: At some point move into a tumor nave right.

Speaker Change: In terms of being capable of being IBD of course as you know we have invested very heavily in platforms and technologies and infrastructure that allow us to move.

Speaker Change: Assays to be IBD, when the time is right right. So right now the agreement we have with <unk>.

Jacob Tyson: So, right now, the agreement we have with pharma has been mainly to explore this in various forms, but we can move into IBD when the time is right. Well, let me also add that we have no intention of providing that through a clear lab, a commercial clear lab. We do have our clear lab, which is, of course, running very few samples, but we're not going out and commercializing it through our clear lab. In fact, we're very interested in working with customers and partners to continue to. And we'll take our next question from Patrick Donnelly with, Hey, guys, thanks for taking the questions. Joy D, maybe a quick one for you.

Speaker Change: With pharma has been mainly to explore this in various forms but we can go move into IBD. When the time is right.

Speaker Change: I'll also add that we have no intention of providing that through our CLIA lab.

Speaker Change: Our commercial CLIA lab, we do have our CLIA lab that of course is running very few sample is probably not going out and commercialize it through our CLIA lab in fact, we very interested to work with.

Speaker Change: Customers and partners to continue to develop this.

Speaker Change: And we'll take our next question from Patrick Donnelly with Citi.

Patrick Donnelly: Hey, guys. Thanks for taking the questions.

Patrick Donnelly: Maybe a quick one for you and the follow up would be it would be probably more for Jacob but just on the gross margin piece can you talk about <unk> stepped down a little bit came in a little light, where we where can you just talk about anything that impacted that <unk>. The right way to think about the progression there throughout 'twenty four and then on the gross margin kind of pricing initiatives Jacob how you're thinking about.

Patrick Donnelly: And the follow-up would probably be more for Jacob. But just on the gross margin piece, can you talk about, you know, a 4Q step down a little bit came in a little light where we were. Can you talk about anything that impacted that 4Q, the right way to think about the progression there throughout 24?

Joydeep Goswami: And then on the gross margin kind of pricing initiatives, Jacob, how are you thinking about just the price side? Again, I know someone mentioned AGBT competitors are making noise, they're saying they're seeing discounting in the market, particularly on kind of the mid throughput side. So just curious, as you've taken a look here, what you're thinking about on the pricing side. Thanks.

Patrick Donnelly: Just the price side again, I know someone mentioned hebt competitors are making noise going saying theyre seeing discounting in the market, particularly on kind of the mid throughput side. So just curious as you taken a look here what youre thinking about on the pricing side. Thanks guys.

Jacob Tyson: Yes, Patrick, in terms of the sequential decrease in fourth-quarter gross margin, there are several factors there, right? First, revenue was lower. So that has an impact, obviously, in terms of, you know, just absorption of fixed costs. We also did have a higher than expected X, you know, contribution. And that, coupled with, you know, more of the partnership revenue, which tends to be lower margin driven, all affected our gross margin numbers. And then lastly, I will say there was a shift from 6K consumables to X consumables.

Speaker Change: Yes, so Patrick in terms of.

Speaker Change: Sequential decrease in fourth quarter on gross margin.

Speaker Change: There are several factors there right one revenue was lower so that has an impact obviously in terms of.

Speaker Change: Just absorption of fixed costs. We also did have a higher than expected X.

Speaker Change: Contribution and that that coupled with.

Speaker Change: More of.

Speaker Change: Of the partnership revenue, which tends to be lower margin driven all affected our gross margin numbers and then lastly, I will say there was a mix shift from 6K consumables to X consumables and that also had an impact on our overall.

Joydeep Goswami: And that also had an impact on our overall gross margin number for Q4. I will say, and this leads into your question to Jacob, we have made a lot of progress in 2023 in terms of COGS productivity, and we started seeing the benefits of that. As we rolled out of 2023 and into 2024 as well, and beyond. Yeah, when coming into the company here, Patrick, and looking into pricing and how we are thinking about pricing going forward, first, I will say that Illumina is presenting a premium product, and thereby, I think also our customers are seeing that we can command a premium price in the industry. But I think more importantly is that only talking about cost per gigabyte is probably too simplistic for most of our customers.

Speaker Change: Gross margin number for Q4 I will.

Speaker Change: I will say and I think it leads into your question Jacob we have made a lot of progress in 2023 in terms of.

Speaker Change: Cogs productivity and we started seeing the benefits of that as we rolled out of Q2 thousand 23 and into 2024 as well and beyond.

Speaker Change: Yeah.

Speaker Change: And then coming into the company here, Patrick and looking into pricing and how we are thinking about pricing going forward first I will say that illumina is presenting a premium product and thereby.

Speaker Change: I think also our customers are seeing that that we can command.

Speaker Change: Our premium pricing in the industry, but I think more importantly is that.

Speaker Change: Only talking about cost per gigabit is probably too simplistic for most of our customers. They are they are more interested in the cost for the whole for sample to insight for the whole workflows and and as Pos, including <unk> automation, but probably even more importantly informatics.

Joydeep Goswami: They are more interested in the cost for the whole, for sample to insight, for the whole workflow. And that, of course, includes sample prep automation, but probably even more importantly informatics, which is also a key cost driver for our customers. So really, with the Dragon platform and what we have in our comprehensive informatics offering, we can actually provide the customer with a very cost-attractive solution.

Speaker Change: Which is also a key cost driver for our customers, so really with the Dragon platform and what we have in our comprehensive informatics offering we actually can provide the customer would be a very cost attractive.

Speaker Change: Solution. So so therefore the thing about just talking cost per Gigabases is kind of the.

Jacob Tyson: So therefore, the thing about just talking cost per gigabyte is kind of maybe the old way of looking at it, and the future way will look a little more comprehensive. So I feel really good about that where we are. And that said, we will now in mid-throughput with the XLEAP SPS chemistry be available. We are coming out with more attractive pricing, quality, and more capacity on our 1K and 2K instruments. So I'm really excited about that.

Speaker Change: Maybe the old way of looking at in the future way will look a little more comprehensive.

Speaker Change: So I feel really good about that <unk>.

Speaker Change: And that said, we will now with in the mid throughput with the ex leap.

Speaker Change: <unk> chemistry available. We are we are coming out with a more attractive pricing quality and more capacity on our <unk> instrument. So I'm really excited about that and again driving the activity based on that new price points. So you will see us really.

Eve Bernstein: And again, driving elasticity based on that new price point. So you will see us really move the needles on many more elements than just one pricing element. And our next question comes from Eve Bernstein with Bernstein Research. Hi there.

Speaker Change: Move the knots on many more elements that just one pricing element.

Speaker Change: Okay. Our next question comes from Bruce <unk> with Bernstein Research.

Joydeep Goswami: Thanks a lot for taking the question. I wanted to ask about next seat placements. So there, you ended the year with 885 placements, and that's comfortably above where you were pre-pandemic, but it's also below where you've been for the last two years. So how much of this do you attribute to just changing needs, obviously, post-pandemic? How much do you attribute to the capital purchase and cash flow constraints that you talked about? And how much do you attribute to competitive dynamics, which you also talked about? And then how should we think about what normalized demand here looks like going forward? Yeah, so I think the major factors are, I would put two, maybe three, right? And then there's a sub factor.

Bruce: Hi, there thanks, a lot for taking the question.

Bruce: I wanted to ask about next seat placement.

Sir you ended the year with 885 placements and that's comfortably above where you were pre pandemic, but it's also a low rate been for the last two years.

Bruce: So how much of this do you attribute to just changing needs obviously post pandemic.

Bruce: How much do you attribute to the capital purchase in cash flow constraints that you talked about and how much do you attribute to competitive dynamics, which you also talked about and then how should we think about what normalized demand looks like going forward.

Bruce: Yes, so I think the major factors I would put our two.

Bruce: Two maybe three years and then there's a sub factors sort of.

Joydeep Goswami: So the major factors, as you rightly pointed out, coming out of COVID in 21 and 22, we had a real uptick in the amount of mid throughput instruments and low throughput instrument sales, right? And that has normalized a little bit as, you know, the COVID threat, thankfully, has decreased. We also, at the same time, did see some of the macroeconomic conditions that led to more conservatism as our customers and, you know, more conservatism in the purchases of capital. The third factor in mid-throughput, especially was China, right? So if you're looking at an overall number, we did get impacted in China for competition and for macroeconomic reasons, as we have repeatedly stated in our 2023 earnings calls. As far as competition goes, I mean, clearly, that was a factor in China, but that does not seem to be a huge factor in the rest of the world, right?

Bruce: The major factors as you rightly pointed out coming out of Covid in 'twenty, one and 'twenty two we had a real uptick in the amount of mid to mid throughput instruments and low throughput instrument sales rate and that has normalized a little bit as you know.

Bruce: Colby Thankfully is reduced we also at the same time did see in 2023 some of the macroeconomic conditions that led to more conservatism is at our customers and more.

Bruce: Conservatives and the purchases on capital come through.

Bruce: Third factor in Metro, but especially it was also China right. So if youre looking at an overall number we did get impacted in China for competition and for macroeconomic reasons as we have repeatedly stated in our 2023 earnings calls.

Bruce: As far as competition goes I mean, clearly that was a factor in China, but that does not seem to be a huge factor in.

Bruce: In the rest of the World and we did see our.

Joydeep Goswami: And we did see our, you know, we track our competitive win rates fairly closely. We did see that stabilize in Q3 and in Q4. And moving on to Dan Brennan.

Bruce: We track our competitive win rates fairly closely and we did see that stabilizing in Q3 and Q4.

Bruce: And moving on to Dan Brennan with TD Cowen.

Dan Brennan: Great. Thanks for the questions guys.

Dan Brennan: On the X pull through we would come out of probably around $1 million in the fourth quarter and.

Dan Brennan: Great. Thanks for the questions, guys. On the X pull through, you know, we would come up with around a million dollars in the fourth quarter.

Dan Brennan: And some quick math, we arrive at something like maybe 850000 in 2024, so any any comment on those numbers that they seem reasonable and if so could you just speak to like what would drive that.

Jacob Tyson: Thank you. So, thanks, Dan. And I think you've done more math than we have at this point since it's still way too early in the very early innings here to start to look at pull through from the X.

Dan Brennan: The assumption for that kind of kind of sequential step down. Thank you.

So thanks, Dan and I think you've done more math on that than we have at this point since it's still way too early in the early innings here to start to look at pull through from the X. So.

Joydeep Goswami: So, we haven't really done that math as of yet, and we will provide that math when we think we are more in a stable situation where it makes sense. Any other comments on that?

Speaker Change: So we haven't really done that math as of yet and we will we will provide that month. When we think we are mining in a stable situation, where it makes sense.

Speaker Change: Any other comments on that no I think I'll reiterate look it is early I think Jacobs stated earlier that many customers are just going through validation, especially on the 25 bps. So I.

Joydeep Goswami: No, I think you know, I reiterate, look, it is early. I think Jacob stated earlier that many customers are just going through validation, especially on the 25 B. So I will disagree with them that we haven't done the math, but the math is not relevant.

Speaker Change: I will disagree with them that we havent done the math, but the math is not relevant and we don't want to confuse when this stabilizes right. We will absolutely come out with a number but so far what we have seen has been encouraging to us.

Jacob Tyson: And we don't want to confuse you when this stabilizes, right? We will absolutely come out with a number. But so far, what we have seen has been encouraging. And we have a question from Dan. Thank you. Jacob, I'm curious if you could elaborate further on the health of your diagnostics markets following your customer listening tour. And with the looming FDA regulation of LDTs, how does that impact demand for your products or not? Yeah, no; I think that's a good question.

Speaker Change: And we have a question from Dan Leonard with UBS.

Dan Leonard: Thank you.

Dan Leonard: Jacob I'm curious if you could elaborate further on the health of your diagnostics markets. Following your customer listening tour and with looming FDA regulation of <unk>.

Dan Leonard: How does that impact demand for your products or not.

Dan Leonard: Yes, no I think Thats a good question and something also I really was eager to understand better coming into alumina as you know I have a background in IBD and I have a lot of passion for our cancer diagnostic, but really fighting cancers, and I think how we how we think about it of course there'll be serve a lot of clinical customers out there that is using.

Jacob Tyson: Something also I really was eager to understand better coming into Illumina. As you know, I have a background in IBD, and I have a lot of passion for cancer diagnostics, but really fighting cancers. And I think how we think about it, of course, that we serve a lot of clinical customers out there that are using the Illumina ecosystem and building companies on top of that, primarily in the LTT space. And then we have our own offerings in other LTTs but in other places, also IBD, especially the TSO500 and the NRPT and other places. And if you look at our TSO500 business, it's been growing really fast over the last period of time. It's more than 100 million now, and we expect to have high double-digit growth also this year, and we don't see any end to that right now.

Dan Leonard: The illumina ecosystem and built.

Dan Leonard: The company is on top of that primarily into the OTT space and then we have our own offerings in other LPG, but in all of our plays also IBD on especially the <unk> 500, and the <unk> and other places where and if you look into our Tfl 500 business. It's been growing really fast over the last period of time and it's more than 100 million.

Dan Leonard: And we expect to have a high double digit growth also into into this year and we don't see any end to that right now so I'm really I'm really bullish around where we can bring that.

Jacob Tyson: So I'm really bullish about where we can take that. And we are, of course, looking into a strategic review right now on how that fits into the overall core business strategy. But clearly, we would also like to play in that space going forward. Wasn't there another, wasn't a second part of that question?

Dan Leonard: And we of course looking into our strategic review right now on how does that fit into the overall.

Dan Leonard: Core business strategy, but clearly we would also like to play in that space going going forward.

Dan Leonard: It wasn't in other words on the second part of that question.

Dan Leonard: Regulation impact or the yes, okay. So I think the second part about the impact of regulation I mean of course, we are monitoring that very.

Jacob Tyson: The second part was the impact of the regulation. Of course, we're monitoring that very deeply right now, and there is, of course, again, a conversation with our customers, and we're helping some customers make sure they're ready for that. The larger customers can, of course, go through a single-site PMA, which helps them, but there's also changes maybe in the leveling of the different classes – so some of the Class 3 products are considered being brought down to Class 2 products right now. It's still kind of on the table for consideration, but if that happens, that will certainly also reduce the requirements for getting through clinical trials and so on.

Dan Leonard: Very deeply right now and Thats of course again, a conversation with our customers can be helping some customers to make sure they're ready for that our larger customers cannot costs go through in a single site PMA, which helps them.

Dan Leonard: But thats also a changes maybe in the in the leveling up of different so some of the cost free products are considered being brought being brought down to class II products right now, it's still kind of on the table for consideration, but if that happens that will certainly also reduce the requirement for getting through clinical trials and so on so I think there's still a lot of <unk>.

Jacob Tyson: So I think there's still a lot of moving parts, but what I can tell you is that I think Illumina is very well positioned to support the markets going forward, almost independent of where FDA is landing on the market. I just add, Jacob, that, you know, we are about the only company that has, even in our RUO products, ISO 13485 classification on all our instruments and most of our consumables, and we have, obviously, the path to IVD should our customers want it, right? So we're well positioned to serve whichever direction they want to go in. And our next question will come from Kyle. Yeah, thanks for the questions.

Dan Leonard: Element, but what I can tell you is that I think illumina is very well positioned to support.

Dan Leonard: The market is going forward almost.

Dan Leonard: Almost independent of where the FDA is landing on this one.

Speaker Change: Just add Jacob.

Jacob Tyson: We are about the only company that has even in our audio products ISO $13 45 classification on all our our instruments and in most of our consumables and rehab obviously the paths of IBD should our customers want it right. So we're well positioned to serve whichever direction. They want to go in.

Jacob Tyson: And our next question will come from Carl Mixon with Canaccord.

Carl Mixon: Hey, guys. Thanks for the questions just fallen guidance. So it seems like you probably had the opportunity to kind of establish catalogue that was softer than what you said in November Chris that a low bar and <unk> kept the range, though risks clearly remain.

Kyle: Just following guidance. So, um, it seems like you probably had the opportunity to kind of establish analog that was softer than what you said in November. You could have set a low bar.

Jacob Tyson: You kept the range, though. Risks clearly remain. How much, like, visibility or confidence do you have? And how much conservatism are you kind of baking in compared to prior years? And you listed some, but what are the most material swing factors and kind of risks that we should consider in one cue and then first half or second half?

Carl Mixon: How much visibility or confidence do you have and how much conservatism are you kind of baking in compared to prior years and you listed some but what are the most material swing factors and kind of risks that we should consider and <unk> and then first half versus second half if I can just ask one for you George.

Joydeep Goswami: And if I could just ask one for you, Joy, deep on 6000 pull through the 700, 800 K seems like possibly aggressive compared to how I see the kind of decline in its years post 6000 launch. So, just kind of walk through what you're thinking about in terms of the decline, I guess, or deterioration in the 6000 folder. Thanks. Let me address the 6,000 piece first; maybe an easier one, right?

Carl Mixon: 6000 pull through the 700 800, K seems like possibly aggressive compared to how I see kind of decline next year is posted 2000 launch. So just kind of walk through what you are talking about in terms of the decline I guess or deterioration in 6000 border.

So let me address the 6000 piece versus maybe an easier one right. So remember when hiseQ1.

Joydeep Goswami: So, remember when HiSeq was introduced, well, NovaSeq 6,000 was introduced, we didn't have as many clinical customers, right? So now we have about 50% of our core revenues coming from clinical customers who have validated assays, right, where you're not going to change platforms in the short term. So the overall reduction in pull-through will be more mitigated compared to what you saw with HiSeq.

Carl Mixon: And obviously 6000 was introduced we didn't have as many clinical customers rates are now we have clinical about about 50% of our.

Carl Mixon: <unk> revenue is coming from clinical customers, who have these validated assay is right, where youre not going to change platforms in the short term so that.

Carl Mixon: Overall.

Carl Mixon: A reduction in pull through will be more mitigated compared to what you saw with hiseq.

Jacob Tyson: Jacob, do you want to comment on the overall guidance, or do you want me to? You can continue. Okay. Overall, we have repeatedly said we see this as a prudent approach to the overall forecast, and while there have been some signs in some markets that the macroeconomic conditions might be turning, we have not assumed this in our forecast, and the only place we have been pessimistic, and, of course, has been in China, right, where the recent news also seems to corroborate that prediction.

Carl Mixon: Jeremy you want to comment on the overall guidance. We wanted me to continue okay. So I think overall look.

Jeremy: We have repeatedly said right we see this as a prudent approach to.

Jeremy: The overall forecast rating and while there have been.

Jeremy: Some signs in some markets that the macro economic conditions might be turning we have not assumed this in our forecast and the only place we have been.

Jeremy: Pessimistic and of course has been in China, right, where the.

Jeremy: The recent news also seems to corroborate that that.

Jeremy: That piece.

Joydeep Goswami: As far as the puts and takes are concerned, it's a lot about adoption of the X, right? So we're spending an inordinate amount of time making sure that our X customers can transition quickly, can adopt and get on with their assays as quickly as possible. And we will continue to do that. And, of course, if the markets pick up, we are very well positioned then to benefit from any of the upsides. On the flip side, it's, you know, further macroeconomic headwinds that further reduce our customers' ability to bring on the X or to spend on consumables will affect us as well. Jake, I don't know if there's anything else you want to add. I think we're good.

Jeremy: As far as the puts and takes.

Jeremy: It's a lot about adoption of Dx right. So we're spending an inordinate amount of time, making sure that our X customers can transition quickly can adopt and get on with their assays as quickly as possible and.

Jeremy: And we will continue to do that and of course, if the if the markets pick up we are very well positioned to benefit from any of the upsides on the flip side of that.

Jeremy: Further macroeconomic headwinds that.

Jeremy: That further reduce our customers' ability to bring on the AG or to spend on consumables.

Speaker Change: Affect us as well Jacob I don't know if there's anything else you wanted to but I think we go.

Jacob Tyson: And our next question will come from Rachel Van Stel with JP. Good. Good afternoon.

Speaker Change: Yes.

Speaker Change: And our next question will come from Rachel <unk> with J P. Morgan.

Rachel Van Stel: Thanks for taking the questions. I just want to follow up on Patrick's question earlier; you mentioned that the gross margin line in 4Q is lighter due to that consumables mix shift from 6000 to the X. So can you just walk us through that dynamic a little bit more? Is this just a function of the axis ramping so there's less volume leverage at this point?

Rachel: Great. Good afternoon can take one more question.

Rachel: I'll, let you answer on Patrick's question earlier, you mentioned that the gross margin line in parts. It was later Judy that considerable mix shift in <unk>. So can you just walk us through that dynamic a little bit more is this just a function of the actual ramping so theres less volume leverage at this point or is there something where as consumables are structurally lower margin and then how.

Joydeep Goswami: Or is there something where X consumables are structurally lower in margin? And then how should we think about that consumables mix impacting gross margin throughout 24 hours as well? Yeah, so the first easy part is, you know, we've said all along that we had designed the X and X consumables so that at scale, they would, we would expect the margins to be comparable to, to X consumables at scale. What you're seeing is, of course, early on in the adoption, you're going to see the consumables margins be lower because we haven't fully scaled up. And as we move through twenty four, you will see that, you know, more or less normalized now, as you go into twenty four, overall gross margins will be, you know, have several factors, right? So one, we will have a little bit of a benefit from the lower placement of instruments.

Rachel: Should we think about that consumables mix impacting gross margin throughout 2020 as well.

Speaker Change: Yes, so first easy partners.

No. We have we have said right all through rate that we had designed the <unk> consumables that at scale right. They would we would expect the margins to be comparable to.

To X consumables at scale.

Speaker Change: What youre seeing is of course early on in the in the adoption youre going to see the consumables margins be lower we haven't fully scaled up and as we move through 'twenty four you will see that.

Speaker Change: More or less normalized now as you go into 'twenty for overall gross margins will be.

Speaker Change: Several factors right for one.

Speaker Change: We will have a little bit of a benefit from from the from the lower placement of instruments. As he said, we've said that we do expect that to decline a little bit more consumables that will lead to an increase in gross margin. We also.

Joydeep Goswami: As you said, we said right there that we do expect that to decline. So we'll have more consumables, and that will lead to an increase in gross margin. We also will benefit from, you know, some, some uptake in terms of all the actions we have taken to improve productivity. So those are the two largest things that will serve to improve our gross margins as we get into twenty.

Speaker Change: We'll benefit from.

Speaker Change: Some uptick in terms of.

Speaker Change: All of the actions we have taken to.

Speaker Change: To improve Cogs productivity. So those are the two largest things that will.

Speaker Change: So have to improve our gross margins as we get into 'twenty.

Sallilyn Schwartz: Thank you. And that concludes our Q&A session. I will now hand the call back over to Sally Schwartz. Thank you for joining us today. As a reminder, a replay of this call will be available in the investor section of our website. This concludes our call, and we look forward to seeing you at upcoming conferences and other events. Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day! BF-WATCH TV 2021... The Ultimate Parody Site!

Speaker Change: Thank you.

Speaker Change: That concludes our Q&A session I will now hand, the call back over to Sally Schwartz.

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

Sallilyn Schwartz: Thank you that does conclude today's conference. We do thank you for your participation and have an excellent day.

Sallilyn Schwartz: [music].

Sallilyn Schwartz: Okay.

Sallilyn Schwartz: Okay.

Sallilyn Schwartz: Okay.

Sallilyn Schwartz: [music].

Sallilyn Schwartz: Yes.

Sallilyn Schwartz: Yeah.