ILMN - NASDAQ

Good day ladies and gentlemen, and welcome to the First Quarter 2025 Illumina Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Blanchett, the Interim Head of Investor Relations.

Hello everyone and welcome to Illumina's first quarter 2025 earnings call. Today, we will review our financial results released after market close and provide commentary before opening for Q&A. Our earnings release is available in the investor relations section of illumina.com. Speaking today are Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will provide an update on Illumina 's business, followed by Ankur's review of the company's financials. All financial information shared on this call relates to core Illumina. For historical consolidated financials, please refer to our earnings release and SEC filings. Please note that all revenue growth rates discussed during the prepared remarks are presented on a constant currency basis to exclude the impact of foreign exchange fluctuations. We encourage you to review the GAAP reconciliation of our non-GAAP measures, which can be found in today's release and in the supplementary data available on our website. This call is being recorded and the audio will be archived in our investor section of our website. It is our intent that all forward-looking statements regarding the financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. 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 our most recent forms 10Q and 10K. With that, I now turn the call over to Jacob.

Thank you, Brian, and good afternoon everyone. Before we begin, I want to take a moment to recognize our former chair of the board of directors, Steve MacMillan, for his leadership in strengthening Illumina’s position in genomics innovation. His contributions have positioned us well for the significant opportunities ahead. I look forward to working closely with our new chair, Scott Gottlieb, as we advance our mission, execute our strategy, and progress the omics ecosystem. I'm also pleased to welcome Keith Meister to the board. His deep investor experience in genomics and strong track record of driving shareholder value will be invaluable as we build our momentum and deliver on our strategic priorities. Despite the macroeconomic challenges we have faced over the past few months, we have a good start to the year. Thanks to the Illumina team's continued focus on execution and operational excellence, we delivered Q1 revenue and EPS at the upper end of our guidance range. Illumina is a resilient franchise with multiple drivers of near and long-term growth, and there is a lot to be encouraged by this quarter. Our NovaSeq X instruments continue to perform well, exceeding our expectations with another quarter of over 60 placements in Q1, following more than 90 placements in Q4. The X transition continues to progress well, particularly among clinical customers, reaffirming both the value we provide and the resilience of the clinical markets. We also saw a sequential increase in X and overall high throughput consumables, a clear indicator that this key growth driver continues to gain traction and demonstrate elasticity. Our innovation pipeline remains unmatched. We are advancing the multi-omics ecosystem and every day our technologies enable customers to generate insights that were previously not possible. With this foundation, we've focused on achieving our long-term financial goals. We continue to execute on our strategy to deliver high single digit revenue growth and 500 basis point margin expansions by 2027, excluding our Greater China region, which has been affected by the recent regulatory developments. At the same time, we are navigating a dynamic environment with discipline and urgency. Developments around China, U.S. funding uncertainty, and global trade dynamics have introduced new pressures for our customers. These are important concerns and we are taking clear actions to address them. But these are transitory challenges that will not define Illumina's long-term success or our leadership in advancing the genomics revolution. In light of this, we are revising our guidance to reflect both the headwinds and the proactive steps we are taking to protect earnings. I will now walk through each of these factors and Ankur will provide more details in his remark shortly. In China, our ability to export sequencing instruments has been restricted. We now expect lower revenue from the region in 2025, driven by minimal instrument placements. To provide greater clarity on the fundamentals of our global business, we will issue distinct guidance for the Greater China region and the rest of the world until the situation is resolved. We continue to engage with the regulatory authorities in China on potential solutions to support a sustainable long-term presence in the market. And we will keep you updated on any material developments as the situation evolves. In the U.S., ongoing uncertainty in research funding is weighing on our customers and affecting purchasing timelines. We are working closely with our customers to help them navigate this environment, offering flexible solutions to sustain their research projects and drive continued genomic innovation. In March, we took decisive actions to address the impact of China and the research environment by executing a global incremental $100 million cost reduction program. As of this call, we've already implemented the necessary actions to realize the full savings in 2025, reinforcing our disciplined approach to operational execution. Since our last update, the U.S. government enacted a baseline import tariff of 10% with significantly higher rates for certain countries. These tariffs are increasing cost for Illumina. To address this, our teams are actively working to minimize the impact through supply chain optimization, cost measures, and pricing actions. With these actions underway, we expect to partially offset the impact in 2025. And at current level, our aim is to more fully mitigate the impact in 2026. The Illumina team is navigating these external pressures carefully and strategically, ensuring that our core business and our commitment to our customers and to advancing innovation remains strong and unaffected. We have made significant progress in delivering competitively differentiated innovations that keep our customers at the forefront of discovery. Our multi-omics roadmap, a growing portfolio of omics and sequencing applications, is key to advancing the ecosystem and in helping us achieve our long-term targets. I will share a few examples. In February, we announced our new spatial offering featuring a significantly larger capture area, higher resolution and greater sensitivity than existing technologies. This powerful solution will enable researchers to analyze millions of cells per experiments, increasing the likelihood of identifying rare cell populations. These advancements open new possibilities for research applications that were previously unattainable. This offering will integrate seamlessly into Illumina’s end-to-end workflows and connect with Illumina connected multi-omics, our new tertiary analysis solution, powered by [Partex] [ph] intuitive data visualization technology. We have begun early access, and early customer feedback has been very positive, emphasizing our spacious solutions accessibility without the need for special equipment purchases, and how it streamlines a previously complex analysis and interpretation process. We plan to release our new spatial offering in 2026. Also tied to our multi-omics strategy, we recently announced a new single-cell offering for CRISPR research with applications in an oncology, immunology and drug target discovery. Our new Perturb-Seq solution will allow researchers to study how genetic changes affect single cells at scale, accelerating drug discovery, and advancing our understanding of complex diseases. This is the next evolution of [indiscernible] technology, which we acquired last year. By capturing both CRISPR, guide RNA, and messenger RNA transcript from the same cell, our solution will enable researchers to perform genome-wide CRISPR screens at marking leading costs, providing deeper insights with greater efficiency. The solution is expected to launch later this year. Additionally, our innovation pipeline remains on track. Our proteomics solution, developed in collaboration with Standard BioTools, is an early access, and we are looking forward to our commercial launch in the first half of 2025. Our constellation mapped reads and 5-base genome technologies are already in early access, with full commercial launches on track for 2026. We are excited about these innovations. With advancing multi-omics while empowering our customers with deeper insights than ever before. The core of Illumina is strong, and our growth projections ex-China on track as we deliver on our strategy. I'll now ask Ankur to share more details on our results and outlook for 2025, and we'll go from there directly into Q&A.

Thank you Jacob and good afternoon everyone. I will give you an overview of first quarter financial results and provide more color about our revenue, expenses, earnings, and developments on our balance sheet, and then speak about our outlook going forward. Before I get into the details of the financial performance, let me provide a high level view of how the first quarter played out relative to our expectations. In Q1, despite the dynamic environment, team Illumina delivered a quarter of excellent execution. Enabling us to deliver financial results towards the high end of our guidance. Revenue was flat year-over-year at top end of our guidance, and EPS at $0.97 was also towards the top end of the range. Now, let me provide you with details of the financial performance. First quarter revenue of $1.04 billion was down 1.4% year-over-year on an as-reported basis. This included 1.2 points of headwind from foreign exchange and constant currency revenue was roughly flat. Excluding China, revenue was slightly up year-over-year on a constant currency basis. Sequencing consumables revenue of $696 million grew approximately 1% year-over-year, driven by strength in high throughput consumables and the continued transition of high throughput sequencing to X. During the second half of the quarter and correlated with uncertainty around NIH and other research funding levels, we started to see our customers, especially in research and academia, be slightly more conservative in consumable purchases. We estimate this phenomena impacted consumables growth by approximately 1 point year-over-year. Despite this, the sequencing activity on the connected instruments remains strong. We typically see a seasonal increase in ordering activity in Q1, including long-range purchase commitments, leading to building of backlog. We report that as performance obligations in our 10Q. And this ordering activity was stronger than the last couple of years and encouraging sign for the rest of the year. Now about the X transition, which continues to progress well. In Q1, roughly 68% of high throughput gigabases shipped and approximately 43% of high throughput consumables revenue was on the NovaSeq X series. Greater than 80% of high throughput gigabases shipped to our customers in research markets is already on NovaSeq X series. And now over 50% of clinical volumes are also on X. We continue to make progress in the framework we previously disclosed. That in the second half of 2025, approximately 50% of high throughput revenue and approximately 75% of GB shipped will be on the NovaSeq X series. With continued strong underlying sequencing volume growth and strong adoption of X, over time, the price effect of lowered mix of 6K consumables fades away, and a much larger part of high GB growth translates to revenue growth. About sequencing activity, total sequencing GB output on our connected high and mid throughput instruments grew at a rate of more than 30% year-over-year, with robust growth from both clinical and research customers. Sequencing instruments revenue of $109 million was approximately flat year-over-year in Q1, with a higher than expected number of X series instruments shipped in high throughput and the successful launch of the MiSeq i100 in our low throughput portfolio. The clinical transition to NovaSeq X continues as approximately 60% of Xs placed in Q1 were to clinical customers. As you know, early in March, our ability to export instruments into China was restricted. We had in-country inventory to ship our instrument orders in Q1. Sequencing service and other revenue of $142 million was down approximately 5% year-over-year in line with expectations, mainly due to the timing of certain strategic partnership revenues last year related to the AGD consortium. Excluding those, our core services and informatics business grew in the mid single digits. Moving to the rest of Illumina P&L. Non-GAAP gross margin of 67.4% for the first quarter increased 30 basis points year-over-year. Margins were slightly lower than anticipated as we saw a higher mix of instruments business. In addition, we're in the process of rolling out software upgrades for our high throughput instruments, which is improving their performance. As part of this upgrade, we're also pulling forward some of the routine instrument service, which has had a higher cost impact than we had assumed. The vast majority of the upgrades should be completed by Q2. Our manufacturing cost actions continue to make good progress. Non-GAAP operating expenses were $489 million. This reflects our ongoing focus on cost optimization and prioritizing key growth investments. During the quarter, we initiated additional actions to reduce our full-year expenses by $100 million and realized a partial benefit in Q1. Given these cost reduction initiatives, we do not expect the typical seasonal rise in OpEx that occurs post Q1 to repeat in 2025 and expect OpEx to be flat to slightly down for the remainder of the year. The $100 million in cost actions to be realized in 2025 are inclusive of certain stock-based compensation changes and represent over $225 million in total run rate reductions when fully annualized over the next 4 years. Non-GAAP operating margin was 20.4% in Q1. Looking at our results below the line, non-GAAP other expense, which is largely comprised of net interest expense, was $15 million and non-GAAP tax date was 22%. And our average diluted shares were approximately 159 million, 1 million lower than last quarter, driven by share re-purchases, net of dilution from employee equity awards. Altogether, non-GAAP EPS of $0.97 per diluted share came in at the high end of our guidance range. Moving to cash flow and balance sheet items for the quarter. Cash flow provided by operations was a robust $240 million. As a reminder, our annual cash bonus is paid out in Q1. Capital expenditures were $32 million and free cash flow was $208 million. In Q1, we re-purchased approximately 1.73 million shares of Illumina’s stock for $200 million at an average price of $115.74 per share. These re-purchases were completed in February. We ended the quarter with approximately $1.24 billion in cash, cash equivalents, and short-term investments. In gross leverage of approximately 1.8x gross debt to last 12 months EBITDA. Now, moving to guidance for the year 2025. As you may have seen in the press release, we are updating our guidance to reflect the impact of recent changes in the geopolitical environment. We remain confident in the continued strong position of our business and underlying growth in sequencing demand. However, the overall environment remains dynamic and we are providing estimates of known changes as of today and reflecting these impacts in our guidance. As it relates to our business in China, we will now be providing guidance separately for Greater China region. This will allow for visibility into the evolution of our business in China, as well as that the over 95% of our business in 2025 outside Greater China is making significant progress towards our long-term financial targets. Starting with revenue, we are reducing our revenue guidance for Greater China by $125 million at the midpoint in connection with export restrictions on instruments and the projected impact on the remainder of our China business. For the rest of the world, we're lowering our revenue guidance to reflect the effect of 2 items. First, reducing revenue by 2% to 4% quarterly, weighted more towards our research customers due to a constrained funding environment. Partially offset by second approximately 1% of additional quarterly growth driven by clinical customers as we've seen strong instrument placements over the last couple of quarters. The net impact of these 2 items is approximately $60 million over the next 3 quarters. In addition, we're taking pricing actions that provide incremental revenue benefit primarily in the back half of the year. FX favorability relative to our previous guidance adds about $25 million to our projected reported revenue. All put together for the rest of the world, this represents revenue growth of 1% at the midpoint. More about China. We are in active dialogue with the regulatory authorities for a long-term resolution. We're taking a pragmatic view in our guidance and have taken expense actions to offset the impact on our earnings, both for this year and on a cumulative basis going forward. The guide assumes $165 million to $185 million in full-year revenue in the Greater China region, of which $72 million was recognized in Q1, and $60 million is projected for Q2 of 2025. And only $43 million of contribution at midpoint in the second half of the year. To the extent that is a positive resolution in China to represent additional upside to this guidance. Now shifting into our product assumptions. Excluding the Greater China region, we expect sequencing consumables growth between flat and 2%, driven by strong sequencing activity, especially with our clinical customers. For sequencing instruments, we are assuming that our customers will continue to manage their capital investments closely. We expect demand for NovaSeq X instruments to remain relatively constant. And low throughput growth driven by placements of the MiSeq i100, which is being received very well. We expect sequencing instruments excluding Greater China to be roughly flat year-over-year. Now moving to EPS. As you may recall, our revised EPS guidance in March, which maintained EPS of approximately $4.50 took into consideration the reduction in Greater China region revenue. And the impact from our more constrained funding environment, as well as new actions we initiate to help protect our earnings growth. Our new EPS guidance additionally takes into consideration the developments thereafter, and the primary factor lowering our guidance is the new tariff environment. For Illumina, the estimated gross cost of tariffs for 2025 is approximately $85 million. The largest part of this relates to goods shipped from our manufacturing facility in Singapore to the U.S. The remainder relates to parts and subassemblies imported to our manufacturing operations in the U.S., as well as Illumina products sold into China. For Q2, given the inventory effects, we will see a partial period impact, And a $30 million to $35 million impact in the following quarters. Our current guidance does not assume any incremental tariffs, including any counter tariffs from the EU or other countries. We're taking several actions across supply chain optimization, pricing, and enacting other expense measures to fully mitigate the impact of these tariffs. These actions take time, and we will realize an incremental benefit from these actions in 2026. For 2025, we are expecting to mitigate roughly half of this tariff impact and hence reducing the EPS at midpoint by $0.25 from the revised guidance provided in early March. In addition to our ongoing focus on reducing costs, we also plan to continue to repurchase shares under our previously approved share repurchase authorization, which has $1.2 billion remaining at the end of the quarter. These repurchases should provide a small in-year accretive benefit to EPS. Embedded in our FY25 EPS guidance is a contribution from Greater China of approximately $0.35. For comparison, in FY24, we estimate Greater China EPS to be approximately $0.76. Our rest of the world EPS this year at midpoint of guidance would be $3.90 growing at a rate of 15% over similar compared last year. As I mentioned before, the expense actions we triggered in March will give us incremental benefit going forward, and drive earnings growth irrespective of the outcome in China. Bringing it all together, our updated guidance for the year reflects revenue in the range of $4.18 billion to $4.26 billion, a decline in the range of 3% to 1%. And excluding Greater China, a range of flat to 2% growth. We expect a non-GAAP operating margin of approximately 21.5% to 22%, an expansion of 45 basis points at the midpoint versus 2024. The net impact of tariff related items is a reduction of 125 basis points in operating merchant. We're also lowering our non-GAAP tax rate, which is now expected to be approximately 22%. This results in an EPS guidance range of $4.20 to $4.30. Now moving to the second quarter of 2025. For the second quarter, we expect total revenue range between $1.04 billion to $1.06 billion. This includes revenue in Greater China region between $55 million and $65 million. And revenue outside the Greater China region in the range of $980 million to $1 billion or down between 2% and 3% year-over-year, driven predominantly by a decline in certain strategic partnership revenues and the research market dynamics I've spoken to. We are only applying the pricing actions to new orders. Therefore, there will be minimal benefit in Q2. We expect non-GAAP operating margin of approximately 21% and non-GAAP earnings per share in the range of $1 to $1.04, both of which include the estimated $15 million in direct cost impact due to tariffs. Our guide like before implies a stronger half 2 contribution versus half 1, which is premised on both continued improvement in consumables growth with transition of X and also the effect of just triggered expenses and pricing actions whose contributions increase in half 2. In closing, I would like to acknowledge the perseverance and commitment of all the Illumina employees amidst an increasingly dynamic environment. I remain confident in the path forward and Illumina Team's ability to execute towards our near-term and long-term financial targets. Thank you for joining our call today. I will now invite the operator to open the line for Q&A.

[Operator Instructions] Our first question will come from Doug Schenkel of Wolfe. Please unmute your line and ask your question.

Hey guys, good afternoon and thank you for all of the detail. At a simple level, I think investment in Illumina here requires a belief that revenue growth will start to rebound sooner than later, meaning hopefully next year. And that margins will expand to something above 25%. You're doing what you can do to control costs. That's been commendable. I think where most of the questions reside right now are on the top line growth outlook. So, you did a lot to help us with that already, but I'm hoping you might be able to help us in a few different ways. So, on the quarter, outside of China, what was your total clinical revenue growth and what was your total research growth and then kind of building off of that, as we think about guidance for the year, what are you assuming by end market? It seems like you might be assuming a double digit decline in the research end market and still kind of mid single digit plus growth on the clinical side. And then the last thing is in China it's going to be down to 4% of sales based on your guide, which is down significantly from 10% 2 years ago. That said, you know, if 4% goes down from there next year, it still could be a headwind in a period where we're hoping that things start to improve. Are there other things you're contemplating to manage that risk as we think about not just 2025, but beyond?

Thanks, Doug. And there were certainly a few questions here. So, let me start here and then I'm sure Ankur needs to help me also on remembering all the questions. But first and foremost, we see a very resilient business. I think Illumina has shown over the last period of time that even in very strong headwinds, we're still able to actually have a lot of activities out there. There's a lot of sequencing activity which is a part of the underlying logic of going back to high single-digit growth that we believe we will step into over the next few years. There's nothing -- from that perspective outside of China, we're not seeing a significant change from a strategic perspective on what we told you already this summer, which is all about transitioning to the X, and with that, when we transitioning over, we will see that the volume that we are seeing in the market will translate more deeply into revenue growth. And we are stepping into this in [2025 year] [ph] where we have -- where we are on our track to deliver at least 50% of the revenue on the X, on high throughput on the X by the second half of this year, and then we will see the revenue come after that. So, we feel still good about that. We do believe that we are still intact from the strategic framework and right now, we're saying ex-China, because we will see how China goes. You're absolutely right that this year in 2025, we are -- will be approximately 5% if we don't see a change in the in the current situation in China. And obviously, we're also expecting that there will be a further decline into 2016 if we don't see any change. But it is important to state also that the cost actions we took here in a few weeks ago, has an impact of $100 million this year, but as Ankur also mentioned, will have a total fully analyzed value over the next few years of more than $200 million. And thereby, we are -- have made the actions to fully compensate for whatever will happen in China over the next period of time. So, I think that's important. And thereby, we also see that the $4.25 EPS is the new base for us to grow based on our strategic framework -- from double-digit to teens growth. So, I think I just want to start by re-committing to our strategy; but, obviously, right now, we are looking at the ex-China business, which is 95% of our business. So, Ankur, maybe you can provide a little more insight on what we have anticipated from our growth rate perspective.

Yes, Doug, I'll address the research versus clinical question both for the near term, what's contemplated in the guide, et cetera. So, as you look at Q1, in context, everyone knows the changes in the geopolitical environment there. When you look at our clinical versus our research business, in Q1, our clinical business has continued to demonstrate the strength, where we've talked about very strong X placements carrying over from Q4 going into Q1 as well. When I look at our consumables business in clinical, it grew mid-single digits. And as you know from our guide detail, we are -- we have increased our expectations from the clinical business for the remainder of the year as well, where we continue to see very good demand. We continue to see very good adoption of the tests that are on market as well as newer tests that we are anticipating would be coming into the market for the latter part of the year. The research side, which has seen more challenging times in the last few months, our research business was down [indiscernible] consumables in the mid to high single-digit range. And as we think about the remainder of the year, given that the changes in the research environment started happening somewhere in the middle part of the quarter, as we look at it going forward and as we look at the conversations that we've had with our research customers, especially in the academia and the government side has more challenges given from 2 factors: one, that their funding environment is constrained. And second, because of the tariffs, there will be some inflationary impact coming from many directions. So, that dual impact will continue through the year. So we've lowered our expectations from the research market for the rest of the year. Our guide now assumes a mid-double digit, like close to 15-ish percent decline, especially in that [ANG] [ph] space for the rest of the year. So, more than what we've seen in Q1, both for full quarter impact as well as some of the additional impacts that that business would see. So, stronger clinical, but yes, research expecting it to be weaker.

We'll move next to Dave Westenberg with Piper Sandler. Please unmute your line and ask your question.

Hi, thank you very much for taking the question. So, I want to just hit on some of the consumables in mid-throughput and low-throughput. I'm assuming it could be one of maybe 3 things, either switching to X directly or indirectly through a service provider, some sort of competitive headwind or maybe just kind of a lack of funding? Maybe there's some other variables, but I would assume those would be the 3. Would you be able to kind of quantify on a kind of percentage basis, which is happening here is -- and I'm just thinking about this in terms of elasticity absorption when I'm talking about that first variable versus the second variable, which is obviously kind of worse news. And the third variable, obviously, shutting down, which might be transitory due to kind of funding. So, it would be great to hear if you could kind of quantify that? And then just a real quick thing about the conservatism on the guide here. Ankur, I believe you said that you had more commitments from customers like -- is like a contract commitment. Just want to know if I understood that correctly, because it would give us some comfort in the guide. I think you said that, I just want to confirm that you actually did say that.

Yes. Thanks, Dave. Let me start by addressing the overall market in the mid and low throughput. And first and foremost, we are super excited about the MiSeq i100 that we launched here -- very late last year and we are seeing continued momentum in that market. So, we're very excited about that. And the MiSeq i100 has been very well received, and we continue to see a lot of interest coming in and we have a very strong order book on the MiSeq i100 to low throughput, really excited about that and a lot of momentum currently. In the mid throughput, and we've talked about that over -- I would almost say since I came in here is that overall, we have seen that in difficult market conditions, this is a segment that is more challenged than the high throughput. And the reason is that the mid throughput is less so of a production environment, but more of an environment where you have other research segment or a small you could say clinical account that might not have the volume to fill up on a high throughput and thereby, it's not used to the same level and the same rigor as you have in the high throughput, which is small and manufacturing kind of logic. So therefore, also, you're seeing when there's constraints in this environment, this is the place where you might push out an acquisition or a purchase of an additional instrument, you might actually decide to shift over to a service provider where we will still get the flow of the [indiscernible] of the consumables. So, the overarching signal is the same as we have said before, is that that's why this market overall is more constrained than the high throughput market. Also a reminder is that we did put the [indiscernible] chemistry in approximately a year ago, and we are seeing a lot of grade. We have seen a huge part of our customers shifting to the [X] [ph] chemistry because it is a better chemistry and provides more -- a better price point for customers but also importantly, high quality and provides actually a higher capacity with the sequencer. So of course, we're also going through and price rebalancing in this space. So I think those are the 2 main drivers for the weakness in the mid-throughput space. Granted, there's also more competition here. I think I mentioned that before. And of course, especially in China, where we've seen strong competition, obviously, with the situation we have in China. That is, of course, a very weak point for us right now, at least on the instrument placements. On the other hand, I will say that from what I can see from the research that's come out is that we have actually performed very well in China versus our closest competitor there. So overall, it's a challenging environment, but I think it's much more macro than it is a competitive environment. I think there was another question maybe Ankur can dive in more.

So about the performance obligations and the backlog build. So, we contextualize that as a seasonal item usually in Q1, Illumina does see a fair lease. This is the time when a lot of our long-range contract negotiations and renewals happen. And we report that number as performance applications in our 10-Q. So, you should take a look at that. And my comment there is about this year, we have seen those order bookings, long-range order bookings to grow pretty significantly. Actually, our performance obligations are up double digits year-over-year and has grown much better than what we've seen in the last couple of years.

Our next question comes from Jack Meehan of Nephron. Please unmute your line and ask your question.

Thank you and good afternoon. Jacob, Ankur, I was wondering with the tariff dynamics going on in the market at the moment, whether you thought that might have influenced in the demand in the first quarter? And then I don't know if you're willing to share anything since Liberation Day, just how customers, just from a demand perspective, whether the announced tariffs have influenced any purchasing behavior at all?

Thanks, Jack. And I would say, for Q1, we haven't seen any -- we didn't see any specific change in behavior from our customers related to the tariff situations. And I don't think we've seen the same here in Q2. We have seen a little bit of pull-in in China, I think from a concern about what would happen in China. But for the rest of the world, I don't think we’re seeing anything materially. So that has not been an impact on the quarterly progression in the quarter.

But as you know, just to add there is that at least for the rest of the year, we are certainly anticipating as that as the impact of tariff becomes more better known and start showing up in the cost that there will be some impact and have accordingly taken our guide down.

Our next question comes from Vijay Kumar of Evercore. Please unmute your line and ask your question.

Hey Ankur, Jacob, thanks for taking my question. Just one on the revenue guidance assumptions, if you don't mind. The prior guidance was up low singles. And I think the current guidance, updated guidance is down low singles, maybe a change of 300, 400 basis points. When I look at your change in China assumption, so it feels like almost all of it came from China reduction. So I'm not sure where the research -- Ankur, when said research, you're resuming down 15%, how that's being baked into and the offset, is clinical really like did it change versus the prior assumption? Like where is the offset coming from if research to change?

Yes, let me start and have Ankur again dive deeper into the numbers here. But overall, we did anticipate already when we came out with our March forecast that we had already expected that would both be an impact from China and from the NIH funding. So, we had that already built in. So that was the overall expectations in it. Obviously, at that point of time, we said that there was various outcomes we’ve been expecting. And so now we're providing the full details of this. Overall -- so that's the high-level direction we are taking. We feel we have a good sense for now where the academic and government is going. And as Ankur was mentioning, at this point, we are expecting that it will continue with a 15% decrease, and that's the main driver for it. On the other hand, we see actually that our clinical customers are showing up stronger here in Q1. So, we anticipate and we're seeing that in our numbers also that the clinical business is more robust and stronger than -- and we're really pleased with that right now.

Yes. At the highest level, Vijay, to add a little bit more detail is that, yes, the biggest part of the change is in China, that we have separated it out. For the rest of the world, the puts and takes are that the research business is down. We said roughly about, if you take a midpoint, about 3 percentage points. And all I'm talking about is the rest of -- the remainder 3 quarters. So the annualization will be what it will be, but about 3 points lower, so that's roughly about $90 million, so to speak, on the research and tariff-related impact. We are seeing clinical stronger, both in terms of our continued X placements as well as the units that we're anticipating will come live. So, clinical provides roughly about 1 point offset. And then we're talking -- spoken about mitigating actions relative to tariffs and part of that includes certain pricing actions. And I'm anticipating roughly about 1 point of contribution from there as well. So that's mostly the puts and takes. There's also a small component from FX, which relative to our last guide, has become less unfavorable. So guide-to-guide, it's now more favorable, and that's adding about 0.5 point to the reported growth, not in the constant currency, but on the reported side.

That’s helpful, thank you guys.

We'll move next to Tycho Peterson with Jefferies. Please unmute your line and ask your question.

Hey, thanks. Ankur, I want to stress test your kind of assumptions around price here. It sounds good. I'm just curious where in the portfolio you think you can take price. Obviously, you've got competitors including one giving away free sequencing. So just talk a little bit about your confidence that you can actually start to push higher pricing?

Yes. So let me start there, and then we can have Ankur go into some more details also. But overall, I think Illumina has a long history, of course, of continuing to drive down pricing, and we will continue to, of course, ensure that our customers have competitive pricing, and we can facilitate competitive pricing. But on the other hand, also, in these environments, you want to also -- and the customer wants to work with companies that will be here in years from now. And therefore, we have a prudent approach to both our pricing strategy and, of course, also how we can go out and offer really innovative projects to our innovative solutions to our customers. So, we feel and with this situation with the tariffs coming in, obviously, we would love to mitigate as much as possible, and we're working on mitigating as much as possible to have as little as impact to our customers. But at this point, as you can see also, we do have -- we believe it was correct, and we did a lot of analysis and seeing what the number and how much we could put in. And obviously, nobody likes a price increase. I mean I don't like that personally. No customer is going to like that. So, we recognize that this is -- have impact on our customers, but we feel good about that we will be able and our customers will understand is that Illumina is for the long term. So, if you work with us and we work through this tough time also, we will get out on the other side and continue to be driving innovations to our customers and make them successful. If you want to give your sequencing wafer free, I can guarantee you don't have a business in a few quarters.

We'll move next to Conor McNamara of RBC Capital Markets. Please unmute your line and ask your question.

Hey guys, thanks for all the color on the tariff impact, really appreciate that. But just to expand a little bit on the competitive front, are you seeing customers delay or defer equipment purchasing in anticipation of current or any future product offerings from competitors?

Yes. No, that's a great question. It's something we have heard a few times now also is that we continue to be in a competitive space here. We actually think we're doing really well against our competition. But as we also know, there were a new announcement coming out here a few weeks ago, which I will call a technology overview. It was not a product launch. And with all technology overview, it's easy to impress. It's very difficult to satisfy our customers. So, I think right now, there is some excitement around this. You can go out there and make a lot of promises. But in the end, it comes down to that every day, you have to deliver again and again and again. And I think especially in tough times, customers will go to a company that can provide and the -- and where you have certainty of deliverables -- delivering, but also that we can make sure that you can be successful in whether you are a clinical customer or whether you're a research customer. So, we feel really good about that. But we have not seen, at this point of time, any disruption due to any customers that we have seen have delayed decisions based on potential technology that, to be frank, we don't know yet what it is. And I don't think our customers know exactly what that new technology will be. It's a brand new technology. It will take time to prove that, all technologies have to go through the -- almost the verification through the academic research space, but they will go out, they will do some -- their paper, they will do their analysis, their research on it, and it will take time. There are all these [indiscernible] and technologies. This is not an easy space. This is not a mature market and it will take time. So, we'll see how it goes, but right now, there's no impact.

Thanks for that color.

We'll move next to Mike Ryskin of Bank of America. Please unmute your line and ask your question.

Great, can you guys hear me?

Yes, we can Mike. Hi.

Great, thanks for taking the question. You spent a lot of the call talking about China and what's changed and your views on China for the rest of the year. You talked about academic and government headwinds this year. How do we think about both of those markets going into 2026? And what I mean by that is, if you're going to be doing $15 million, $20 million, $25 million per quarter in China in 3Q, 4Q, does that go to zero in 2026? Or do you think that's a sustainable level from which maybe you can start to grow again? And same thing on [ANG] [ph], if we look at what's happening in the U.S. on NIH and things like that, it doesn't seem like this is a temporary headwind. It's just taking a step back and looking at next year and the year after, these are 2 pivotal markets. Where do you think they go from here after the headwinds seen this year?

Yes. Thanks, Mike. And I agree with you that we are spending way too much talking about China, that is 5% of our business, and we're also likely talking way too much time on some headwinds in NIH, where we have very strong markets that continue to grow strongly, especially in the clinical market. And by the way, in Europe, which continues to be a very, very strong performance for us. So I agree. We are spending -- all of us spending way too much on a very small part of our business. And we are a very resilient business that continues to drive a lot of activities out there and generating fantastic cash flow. So, let's just start there. China, as Ankur is mentioning, we are working, of course, with the Chinese authorities to see whether we can find a solution to this. But we have taken the access right now -- in the case that we won't be able to have a long-term sustainable business in China, we will still be able to compensate that with the cost measures we are taking. We are -- as you can see in our numbers, we are expecting at this point, the China business, to continue to decrease in revenue in the second half of the year. And if there's nothing that will change in our conversations with the regulators there, of course, it will continue to reduce in 2026. But we are very still hopeful. We believe China is an important market. And we -- I had the opportunity here last week to actually -- to spend time with some of our Chinese colleagues. And it's very clear that the Chinese customers really want us to continue in this market. And we really want to help them continue to be successful. So, we don't know at this point, but we are doing everything we can to rectify the situation. But if not, we have taken the cost structure. So the academia and government, yes, there is headwinds right now. I truly believe that everybody will -- many politicians, both in U.S. and rest of the world sees that the academic research is pivotal in order to drive the industry forward, not only the academic research, but of course, being the funnel into pharmaceuticals and of course, the medical science overall. So, I do believe this is a short-term or temporary headwind and will come out on the other side stronger. Here, the 21st century is the century [indiscernible], and this is a hiccup, and we will have strong performance going forward in this space.

Our next question comes from Kyle Mikson at Canaccord. Please unmute your line and ask your question.

Hey guys, thanks for the question. Just on the investigation to GRAIL recently, it looks like the SEC is set to close that. If that were to happen, would that give you more freedom to move into larger acquisitions or deals that involve buying clinical labs with big market opportunities such as MRD? And then taking this to fact, it's been almost a year since that divesture. Has that actually helped you accelerate core Illumina? It kind of seems like on the surface like maybe not given the performance, but you have more attention on the pipeline now. So, just would love to hear your thoughts on that.

Hey Kyle, sorry, we didn't hear the second part of your question?

On the -- just it's been a year almost since the divestiture. Has that actually helped you accelerate core Illumina?

Yes. So let me start by the first thing and saying we are, of course, very pleased that the SEC investigation is done and there were no findings, which we also expected. So, we're very pleased to have this behind us. We continue to, of course, look at opportunities from value-added bolt-on acquisitions, and we are -- we continue to monitor the space. Of that, we, of course, very disciplined in where we believe we can see opportunities, but we also are generating a lot of cash every year. So, it gives us flexibility to look at different things. I think I can say confidently that MRD is likely not the space we will be looking into for the time being. Ankur?

Yes. So thanks for adding that, Jacob. Clearly, very good balance sheet, very pleased with what our cash flow generation has been now 3 quarters since GRAIL generating over $1 billion of cash. I was also very pleased with our Q1 results, where despite some of the research at the market the way it was. And despite paying out annual bonus out of the quarter, we generated over $200 million in cash as well. So, very pleased, puts us in a very, very good position. As you know, we've also bought back roughly $200 million worth of shares during the quarter. But our primary focus remains on growth, bolt-on M&A. And there are several technologies, which we think can take advantage of our size, our scale as well as our large installed base, which is where our primary focus is. And hopefully, there will be some that we will be able to actually move on. At the same time, as we've said, don't intend to keep accumulating cash either. And as I stated in my script, we will continue to for the rest of the year, keep buying back some shares opportunistically as well.

And let me just clarify my comment on MRD. I think there's a huge opportunity in MRD, just not from an M&A perspective from Illumina as well, yes.

And our final question comes from Rachel Vatnsdal with JPMorgan. Please unmute your line and ask your question.

Thank you for taking the question. This is [Martha] [ph] on for Rachel. In terms of our mitigation actions for tariffs that you've discussed, can you talk about which actions have already been implemented and which ones still like are to be implemented? And then how do you expect that to impact your EPS pacing for the rest of the year? And then a quick clarifying question. Are you assuming any 4Q budget flush at this point?

Yes. So from the tariff perspective, obviously, this has only been -- even though it feels a long time, it's only been a few weeks before we have -- all of us have gotten a hands around what the tariff situation is. And of course, it's still a movie that is playing. So of course, it is a flexible or it's a moving target right now. But as far -- from what we can see today, and I think that's what I'm also mentioning is that our current view is that the impact for 2025 is going to be approximately 85 million and be able to offset that approximately half of that. Most -- we are both looking at changing some of our supply chains. Obviously, we're working with a lot of our suppliers itself, but also thinking about where we're manufacturing. We have -- most of our manufacturing is happening either in Singapore and U.S., and we actually -- and that's set up, it can be optimized, but at this point, we're not looking to make substantial changes in that footprint. But we have already been out taking actions also on a pricing perspective. And so we feel good about the actions we've taken today, and we will continue to optimize on our footprint going forward in our supply chain.

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