Good day ladies and gentlemen and welcome to the Second Quarter 2024 Illumina Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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 Salli Schwartz, Vice President of Investor Relations..

Hello everyone and welcome to our earnings call for the second quarter of 2024. During the call today, we will review the financial results we released after the close of market and offer commentary on our commercial and regulatory activity, after which we will host a question-and-answer session.

Our earnings release can be found in the Investor Relations section of our website at illumina.com. Providing prepared remarks for Illumina today will be Jacob Thaysen, Chief Executive Officer; and Ankur Dhingra, Chief Financial Officer.

Jacob will provide an update on the state of Illumina's business and Ankur will review our financial results for Core Illumina. As a reminder, we divested GRAIL in June of this year. For a review of second quarter financial results for GRAIL and consolidated Illumina, please see our earnings release and our SEC filings.

This call is being recorded and the audio portion will be archived in the Investors section of our website. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information and Illumina assumes no obligation to update these statements.

To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Jacob..

Thank you, Salli. Good afternoon, everyone. Throughout the second quarter, I continue to meet with our customers and partners around the world. I've been hearing about all of the opportunities they're excited for and discussing the issues we're facing together in this environment.

Most importantly, it has been encouraging to see our customers and partners launch the next generation of their products. Illumina is uniquely positioned to support our customers' aspirations.

Ongoing progress in science and technology allows our customers to envision large-scale discovery programs that are now possible using multiomics and customers are more empowered to move whole genome sequencing that provides significantly more insights.

Furthermore, there's an opportunity to integrate genomics throughout the health care system to improve patient outcomes but we also have to help our customers navigate their current realities. There are still many moving elements in the global economy and we are taking a more measured view.

I'm regularly hearing that our customers feel constrained to make significant capital outlays. We also see it in delays in our sales cycle and in orders being pushed out. For Illumina, this means we balance two important jobs. Job one, is to stabilize our own base.

We're doing that through continued rollout of the NovaSeq X Series to lay the groundwork for everything our customers and we want to pursue in the future. We are also highly focused on operational excellence and optimizing the ways in which we run our business. And job two is accelerating growth.

Our strategy update next week will address Illumina's vision for the future and our strategy to execute new dimensions of technology from our R&D vault and our financial outlook for the next several years. For purposes of today's call, we'll focus on our second quarter results.

In Q2, Illumina again delivered results ahead of expectations, with Core Illumina revenue of $1.1 billion and non-GAAP operating margins of 22.2%, driven by continued execution against our strategic priorities. The ongoing transition of sequencing activity to the NovaSeq X Plus led to a significant step-up in consumables in the quarter.

We also placed another 62 NovaSeq X Plus instruments. With that said, we continue to see our customers actively managing their capital spend. As a result, for the remainder of the year, we are adding caution to our guide. We have taken a more prudent view on the instrument business to reflect the further extension of sales cycles.

But at the same time, we have a slightly stronger view on consumables. Ankur will provide further details on our adjusted guidance shortly. Turning to our regions' performance in the second quarter. Americas revenue was relatively flat year-over-year.

Europe revenue was down 5%, given the significant backlog we worked through early last year following the X launch. AMEA revenue was down 8% and Greater China was down 35%. I've been talking with you about our three key priorities. I'd like to highlight the progress made by Lumina's management team during the second quarter towards those priorities.

I'll start with driving our top line which has been focused on expanding our installed base and helping our customers maximize the potential of instruments. As I mentioned earlier, in Q2, we see up 62 NovaSeq X Plus instruments, bringing our total X Plus installed base to 469 instruments.

Customers continue to transition their projects on to the NovaSeq X Plus and we are encouraged by the corresponding increase in sequencing activity. NovaSeq X Plus average annual pull-through has topped $1 million per instrument, a milestone achievement. Moving to mid-throughput.

In Q2, we introduced the XLEAP-SBS chemistry to our NextSeq 1k/2k, P1, P2 and P3 flow cells, complementing the P4 flow cell we launched earlier this year. The XLEAP launch has exceeded our expectations. More than 60% of the 1k/2k installed base now has upgraded software, a leading indicator for adoption.

SBS chemistry delivers improved quality, greater usable reads and lower turnaround times in addition to an attractive pricing. While customers' interest in XLEAP is encouraging, translation to additional instrument uptake has been less than we expected. Our mid-throughput segment remains the most sensitive to the macroeconomic environment.

And we have seen our sales cycles continue to lengthen. This is clearly driven by constrained capital spending. Our win rates have remained stable and our pipeline has grown.

We will continue to support our mid-throughput customers through this environment and are confident that bringing XLEAP to NextSeq 1k/2k is further strengthening our leadership position around the world. Turning to our second priority, delivering operational excellence. We are thrilled to have Everett Cunningham on board as Chief Commercial Officer.

Everett is already driving a sharp customer focus across the business, with an essential underpinning of operational excellence. As I've shared, it has been my goal to align our organization in a way that will make our customers heroes by delivering the products, services and solutions that address their most pressing needs.

Following our move to combine our marketing and commercial functions, we've implemented a new commercial organizational design. We are positioning our teams to more effectively serve our customers as their partners for innovation.

Teams are equipped with a go-to-market expertise to accelerate our multiomics capabilities and commercialize and scale our software stack across research and clinical customers. This new structure will provide the alignment needed to deliver long-term results for our customers and for the business.

Additionally, earlier this year, we shared that we are implementing a portfolio optimization strategy to drive productivity improvements across our supply chain. As one recent example, we have identified a number of products that we will rationalize in an effort to increase our focus on higher profitable offerings.

We will, of course, work with our customers to provide a seamless transition to other offerings in our portfolio. We continue to make good progress towards achieving greater operating leverage this year. Moving on to my third priority which has been working to resolve GRAIL as quickly as possible.

As you know, in June, we completed the spin-off of GRAIL and GRAIL is now an independent public company. Illumina has maintained a minority 14.5% stake. GRAIL plays a critical role in the fight against cancer. And while it's no longer part of Illumina, we remain confident in its future.

We will continue to support GRAIL with our sequencing technology and suite of services. As we're continuing to deliver our process in activating our new strategy, I know we will be well positioned to move forward and lead the next era of genomics growth and discovery. Now, I'll ask Ankur to share more detail on our second quarter results and outlook..

one, lower NovaSeq X placements as compared to significant preorder launch-related shipments in the second quarter of 2023; and two, an expected decline in mid-throughput shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements.

Core Illumina sequencing service and other revenue of $143 million was up 7% year-over-year, driven by an increase in revenue from strategic partnerships as well, as higher instrument service contract revenue on a growing installed base. Moving to the rest of the Core Illumina P&L.

Core Illumina non-GAAP gross margins of 69.4% for the quarter increased 240 basis points year-over-year. This strong gross margin performance was driven primarily by a more favorable revenue mix of sequencing consumables and also, importantly, execution of our operational excellence initiatives that improved productivity and delivered cost savings.

Core Illumina non-GAAP operating expenses of $516 million were down $15 million year-over-year, reflecting reductions in head count and several other cost containment initiatives. Putting it all together, Core Illumina non-GAAP operating margin was 22.2% in Q2 2024 compared to 21.2% in the prior year period.

This came in well above our guidance of 18% as well as our expectations due to higher-than-expected revenue, better-than-expected gross margin and strides our organization has made in reducing operating expenses.

Below the operating income line, Core Illumina non-GAAP other expense of $13 million in Q2 includes 11 days of interest expense for the $750 million delayed draw term loan we drew in full on June 20, 2024. Core Illumina non-GAAP net income for Q2 was $174 million or $1.09 per diluted share. Core Illumina non-GAAP tax rate was 24.2% for the quarter.

Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million. Moving to Core Illumina cash flow and balance sheet items for the quarter. Cash flow provided by operations was $243 million. CapEx were $30 million and free cash flow was $213 million.

We ended the quarter with approximately $994 million in cash, cash equivalents and short-term investments. Moving now to 2024 guidance. While we were encouraged by our results in Q2, we see several puts and takes as we consider the remainder of the year. On one hand, our customers' capital spending remains constrained.

On the other hand, our Consumables business, especially high-throughput, driven by the transition of NovaSeq X, remains solid. We are therefore reducing our revenue expectations, especially for Instruments, for the second half of the year.

Core Illumina full year revenue is now projected to be down 2% to 3% from 2023 or down 1.5% to 2.5% on a constant currency basis. Approximately 1/2 of the decline from our prior guidance is due to our lower expectations for our business in China and broader Asia.

And the other half is a result of our reduced expectations for mid-throughput and NovaSeq X shipments. From an instruments versus consumables perspective, at the midpoint of the Core Illumina revenue guidance range, sequencing instruments revenue is now projected to decline in the mid-30s rate relative to 2023.

Sequencing consumables revenue is now projected to grow towards the upper end of the low single-digit range versus 2023. Now about the remainder of P&L. Illumina has been able to execute on stated operational excellence initiatives, delivering operating leverage above our previous expectations.

We thus are raising our Core Illumina non-GAAP operating margin guidance to a range of 20.5% to 21%. This reflects the margin expansion achieved in Q2 2024 but we are also reducing our forecasted operating expenses for the second half of the year.

We continue to make progress against our expense actions as well as several operational excellence initiatives under our internal clinical continuous improvement program.

We've now launched several new initiatives under this continuous improvement program which we expect will deliver an additional $200 million in expense savings over the next few years. We'll talk about this in more detail at the upcoming strategy update. Additionally, we expect the Core Illumina non-GAAP tax rate to be approximately 25%.

And lastly, we are introducing guidance for Core Illumina non-GAAP diluted earnings per share in the range of $3.80 and $3.95 for full year 2024. This range includes second half interest expense resulting from the $750 million delayed draw term loan we put in place in June this year.

For the third quarter of 2024, we expect Core Illumina revenue in the range of $1.075 billion to $1.085 billion. The decline from the prior year is driven predominantly by lower NovaSeq X instrument shipments given the significant backlog we worked through last year following the launch.

For the third quarter, we also expect Core Illumina non-GAAP operating margin of approximately 20%. The sequential decrease from the second quarter is primarily due to lower revenue and timing of the project spend delayed from Q2.

We expect the third quarter non-GAAP Core Illumina tax rate to be approximately 25% and Core Illumina non-GAAP diluted EPS between $0.80 and $0.90 which, again, includes the said interest expense. With that, I will now turn it back over to Jacob for his closing remarks. Thank you..

the NovaSeq X Plus which has been shipping globally since March 2023; and in NovaSeq X, our single-flow cell high through-put sequence for customers looking for a lower-cost entry point to the X Series. The X will begin shipping in Q4 of this year and will be upgradable to the X Plus.

Also in Q4, we will introduce 100-cycle and 200-cycle 25B flow cells designed for high-output counting applications such as single cell and proteomics. Additionally, our next software update for the NovaSeq X and X Plus will enable increased yield and other improvements.

I'm also pleased with the opportunities Illumina has to further enable the multiomics ecosystem. We will share more next week but one recent highlight was our acquisition of Fluent BioSciences, a company with single-cell technology that source and labels complex cell mixtures to be processed for sequencing.

Fluent's approach will make single-cell analysis available to a broader set of customers. Together with the specialized multiomics software solution from our Partek acquisition, Fluent's solution are yet another building block in our efforts to create a greater value for our customers by further integrating their workflows.

We want our customers to have the flexibility to adopt the tools that best fit their needs. Illumina will therefore remain an open NGS platform and is committed to maintaining and supporting our existing single-cell partnerships.

I'm looking forward to speaking more about our vision, our strategy and our financial outlook next week at our strategy update. This virtual event will be on Tuesday, August 13. Please make sure to register through our Investor Relations website. Thank you for joining us today. I'll now invite the operator to open for the line for Q&A..

[Operator Instructions] And our first question comes from Vijay Kumar with Evercore ISI..

Congrats on a nice execution here. Maybe, Jacob, a lot of details here in the deck. But if I just look at the guidance and tie that with your Nova X commentary, the pull-through was about $1 million. But I think there was some details about the amount of data being generated on X versus the revenue contribution.

Is the delta, sort of the pricing impact, is that how we're supposed to model this transition? So when you think about the guidance change here, I didn't see an orders number for X.

How much of this sort of change is coming from high-throughput versus mid-throughput on the instrumentation side?.

Thanks, Vijay and I appreciate your comments on the strong quarter also. Yes, so we wanted to provide a little more insights on how to better model how we see it. So we are -- we're certainly very pleased, first and foremost, with the -- we now have reached the milestone of $1 million annual pull-through on the X.

And I think the information that you also received from Ankur and Ankur can provide a little more insight here, exactly is to help you guide more on where we are, where we're going and how the pricing versus the volume impact is happening.

So, Ankur?.

Yes, sure. Vijay, so yes, as you saw, we've added some more disclosures, specifically, to help everyone think through the transition here. Let me just lay it out as I said in the script. So in terms of transition from 6k to NovaSeq X, what we're saying is roughly about 45% of the consumables volume within high-throughput is now on X.

So we're nearing roughly about 0.5 point. So in the second half of this year, if the trajectory holds, half of the volume would have moved to NovaSeq X. What I also included was that the pace of that mix is that we're seeing roughly about 5 points of mix shifting from 6k to NovaSeq X every quarter.

And if that trajectory holds, by next year, we should also get to about half of revenue coming from NovaSeq X. So that's on the trajectory. To your question around the volume growth, yes, the overall Gb sequenced was about 40%. That is across high-throughput, across mid-throughput.

And as you think about high-throughput revenue growth of about 1%, the delta is roughly the pricing and the change of the mix impact there..

And we'll move to our next question, it comes from Conor McNamara with RBC Capital Markets..

And just a follow-up to that.

So if you -- I mean, simple math, if you say volumes were up 40% and sequencing consumables were flat, roughly a 40% headwind on pricing, is that the kind of pricing headwind we should think as the 5% conversion continues? Or was it -- is it higher early on in the NovaSeq X launch? Just trying to figure out what the pricing headwind will be?.

Yes, let me address that. So it's higher early on and more of the volume moves to X, the impact of pricing continues to reduce. It's just primarily the way I'm trying to position the data.

If you go back and think about holistically, there was a transition from 6k to X would have resulted overall, all-inclusive, easily more than 60% to 70% price decline on a Gb-to-Gb basis.

And as the transition continues, our baseline continues to come down, right? So as the mix improves as we get to -- getting into the halfway volume transition point in the back half of this year. And now based on that projection, it could get to halfway revenue transition point by mid next year and the impact of price continues to go down..

And just one quick follow-up on pricing.

Are you seeing any pricing changes on the equipment side, if you had to give price? Or has that been relatively stable?.

Yes. Overall, we've seen the -- I think you're referring here to the -- NovaSeq X Plus and where we have seen pretty much stable pricing.

And that's also why we're now introducing the NovaSeq X which allows for a lower price point, for customers that are capital constrained but actually wants to get access to the NovaSeq series of instruments -- the NovaSeq X Series of instruments.

And what's beauty about that is that it allows them to, later in the period, to upgrade it to the NovaSeq X Plus to get the advantage of the both flow cells. So we expect to see some interest from customers here later this year when we launch the NovaSeq X Plus -- NovaSeq X..

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

Jacob, maybe one on the $200 million cost savings initiative, I know you want to save some of it for next week, I'm sure. But can you just talk a little bit about, first, the pacing? And then second, where you're seeing opportunities? I know from investor conversations, a lot of people have circled that R&D line.

Big question is whether you guys are willing to kind of use that as a lever, again, over 20% here? Can you just talk about, again, if there are any areas that are off limits in terms of the cost reductions? And where you're focusing on for those expense controls? It does feel like there's a lot of opportunity in the P&L.

So I'd love just to discuss that a bit..

Yes, let me start by saying that there's certainly no off-limits area. We're looking at all elements in the P&L and the $200 million is a reflection of that also. We are not -- at this point, we're not providing insights on the pacing of this. But what I can tell you is that we are looking at all elements and we'll provide more insight next week.

Just referring to the R&D and we continue to take a look at how we want to set up or how the money we're spending in R&D. But just to give you a little bit of my philosophy around R&D is that we are internally looking at each R&D project and valuing them based on tight measures, including NPV and ROIC.

And I'm using that also, as you know, I have a background in R&D and thereby, I'm not just driving by an overall number but truly just focusing on the programs that provide an overall growth for the company. But of course, it also drives shareholder value.

So we're not building on a tops-down budget and thereby, we are looking at this very, very detailed also. I think, Ankur, maybe you want to say a little bit more about kind of the....

Yes, sure. Yes, as we said, we'll likely share a little bit more details during the strategy there next week. But what we are laying out here is the steps we are taking towards a multiyear margin expansion strategy.

And we'll focus across all areas where we can lead to a structurally better and sustainable cost structure for the company in the long term. So more to come but the focus is across all opportunities across all lines..

And our next question comes from Doug Schenkel with Wolfe Research..

Maybe just cutting the model a different and simpler way as I look at the multi-quarter trend here, it seems like sequencing consumable revenue bottomed out in the fourth quarter at $687 million. It increased to just under $700 million in Q1. We're now up to just under $740 in Q2.

While you've guided instruments to be down over 30% year-over-year, it does seem like you're assuming stabilizing instrument revenue in the range of like $110 million to $120 million every quarter this year.

So assuming there's no reason to think that there's a magical material change in that as we forward -- fast forward to next year, if Instrument revenue is essentially stabilizing at these levels and Consumables are growing every quarter as the installed base expands and volume use clearly continues to grow, if I'm kind of just simplifying the math, doesn't that imply you have to return to mid-single-digit plus revenue growth next year? Or is there something I'm messing up? I'm not asking you to guide, I'm not asking you to get ahead of yourself for the Analyst Day next week.

But just mathematically, what could I be missing here?.

Doug, I think you're right in your assumption is that and what we said earlier on that, we believe that the consumer growth is the right indicator for the turn into a better performance for the company. I still think it's too early to have a detailed conversation about '25. I mean we've seen in the last few days that there's a lot of moving elements.

We have a U.S. election coming up. There are still concerns about what is happening in the Middle East. Of course, the interest rates, we will see where that goes. But of course, we are doing everything we can to get back to a much better growth trajectory than we have been on for the past few years..

Yes. And the only thing I would add, Doug, you're pointing to the right metrics. That's exactly how we're looking at that business as well. And as Jacob said, lots of moving parts here. You've seen the recent prints around the macro. So too early to call on 2025.

But the trends we are seeing on the X transition, on the high-throughput consumables, as well as the fact that the impact of pricing should continue to erode or become lower over time are all positive factors, right? This year, what we've also seen is the overall Gb output growth during the first half of the year has been very strong.

First quarter was over 35%. We're now seeing over 40%. If you look at last several years' sort of 5-year average, that was more in the 20s to mid-20s range as well. So several moving parts. The fundamentals of the business seem to be moving in the right direction but still too early to call for '25..

And our next question comes from Dan Arias with Stifel..

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

Do you think that can start to work for you as we head into next year?.

Yes. I think we continue to see, of course, that the academic environment is -- academia environment has moved faster to the X than where the clinical is and that's very -- there's a good reason for that. As you know, you have to validate your products and your assays on the X before you put it into full production mode.

What we have seen, the strategy for many of our clinical customers has been to keep their current validated products or assays on the 6k and then really been focusing on the new assays. And you've seen a few releases actually over the last few weeks on new assays coming out. So you're starting to see that happening.

We actually believe this is going to be -- most of our -- and pretty much all our big clinical customers have multiple access already in their laboratories. So we don't -- we're not foreseeing any material change or swings in transition. We think that is going to be quite stable over the next period of time.

So I'm not too concerned about certain change in trajectory..

And we'll move to our next question from Tycho Peterson from Jefferies..

I want to probe into some of the mid-throughput comments. I know you're talking about capital cash flow when rate's stable.

Can you maybe talk a little bit more as to why you don't think that's a competitive issue?.

Yes. No, we can certainly do that. And I think we have also -- first of all, I'd say that we -- as I mentioned before, we continue to take competition very seriously. But I also mentioned before that we have had competition. This is not the first competition we're seeing. Illumina had competition all the way through the lifetime of this.

That said, we're taking -- I'm taking a very different approach here and proactive stance than from what I saw coming into the company. And we're starting to see that drive meaningful impacts, both in the marketplace and culture in the company.

We do see, at least, in the mid-throughput space that with this, the most competitive intensive area that China still is an issue here. There is competitive pressure here but it hasn't really changed over the past quarters. Secondly, we are following each deal very, very closely.

And we actually have a very good insight on where we are on this right now. And if you look at it, we actually don't see any change in the win rates. We actually remain quite range-bound over the last few quarters. So we don't see any real change in this. And therefore, we are attributing the biggest part of this to the economic environment..

Okay. And then a follow-up. If you're expecting 50% of high-throughput Consumables to transition to X by mid-'25.

I guess, how much more do you expect to transition and therefore, the price pressure to work its way through the model? And should we expect 2025 to be a year that's below your forthcoming long-range plan?.

Yes. Let me just make sure we got the right number there. So from a volume perspective, we should cross the halfway mark here in the second half of '24. As in Q2, we saw the 45% of the volume to come on X. The 2025 references, half of the revenue should transition over into the X.

And with every 5, 7-point mix, the impact of the price continues to go down and the contribution of that volume into revenue continues to increase. specifically around, Tycho, 2025, we'll talk about this. There'll be several moving parts. So we'll talk about this when we get to the guidance point..

Okay. And then just a clarification before I hop off.

Is the $200 million continuous improvement program, the extent that the cost outs we'll hear about at the Analyst Day? And is that over 3 years?.

Yes, we'll provide more insight next week but we're going to come back and give you a comprehensive view of both our -- how we see the growth, how we expect our application of growth over the next few years. of course, on our margin expansion but also on our earnings power. So we'll provide all that insight next -- over a 3 years' period..

And we'll move to our next question from Subhu Nambi with Guggenheim..

And Ankur, thank you for providing that additional color on NovaSeq X and 6000 dynamics.

I had a question -- a follow-up of [indiscernible] which is offshore NovaSeq X placement, what is the mix of clinical versus research? And within clinical customers, what is the mix of new customers versus replacement? Specific to existing customers when they purchase X, are they moving existing assays to X? Or are they typically using the X for new assays, assays that tend to require deeper or virus sequencing? I asked the last part because it does seem like utilization of 6000 is fairly relevant [ph]..

Yes. Subhu, I don't know if we've specifically provided that data mix between clinical and research segmentation. We've generally said it's roughly half and half, I believe, right, Salli, in the past but not something that we're providing on an ongoing basis.

Now in terms of our clinical customers transition to X, the general approach is still around newer tests, where most of the clinical customer focus is from an X perspective is to develop newer tests on X at the time of launch and then you see the high volume. And Jacob can add more color there..

Yes, that's absolutely correct. And we're seeing mostly of these new tests being higher intensive of sequencing. So there's, of course, interest of getting more samples but sample is not the only parameter here. We're certainly seeing many of our customers looking for larger panels.

It's going to hold genome sequencing, including new insights, for example, [indiscernible] insights in your panels and so on so forth, deeper sequencing in itself. So that's what we see in the clinical space. If you look into the academia space, there's a lot going on, certainly in single cell and in other areas.

Now we're starting to see an uptick in spatial which requires much higher intensity of sequencing. So that's what we're seeing right now..

Our next question comes from Puneet Souda with Leerink Partners..

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

Yes, I think -- thanks for that. I think both. I mean, meaning that for the NovaSeq X with 1 flow cell, you can run all the applications. You can run 25B flow cell and take full power of the pricing we have for the NovaSeq Plus level of flow cells. But I would say, on the mid throughput, we certainly have an opportunity to use our pricing if we need to.

But I do think that -- but that is -- but actually, that actually provides a lot of -- we already priced that to a very, very competitive element. But I do think it's more complicated than that.

And while I certainly believe there is a lot of great members of the teams with our competitors, I think sometimes we also get caught up in very too narrow definitions of claims. So sometimes, we see interim workflow steps being just looked at from a claim perspective.

We're seeing limited applications, or even performance that is based on very limited data. And I think it pretty much, in all cases, are meeting the full computational chain from DRAGEN, that it also significantly improve the quality and reduce the overall workflow costs.

So if you take all that into consideration and even when we provide premium cost per gigabase, you will actually see that for a full cost of workflow, breadth of application and full computation power, we continue to be highly differentiated. And I actually think our customers are seeing that. I agree.

We could do a better job in communicating this but we'll spend more time next week also providing more insights on that. But also, more of the differentiations we're going to provide, both to the mid-throughput and high-throughput, by giving you examples of what we have in our R&D vault..

Okay, that's helpful. And then on the commercial org, I'm just trying to understand why is now the right time to change? I'm just trying to sort of understand what are some of the changes there? What are -- are you driving some change in the quota-bearing sales force that's out there? Some of that has worked really well historically.

You obviously have a really solid product in the marketplace.

But just wondering, what's driving that? And what are some of the changes there?.

Yes. I mean, I think what we announced already was that before Everett come in that I felt it was important to bring our marketing and our sales teams together. So if you start at the top level, when you bring those 2 teams together, you also have some synergistic effect. You will align leadership team and we have done that now on the average.

So we have 1 commercial team, so that's number one. Number 2 is that we have taken a deeper look into how do we actually get more quota-carrying people out into the field.

And how do we make sure we have even better application capabilities now when we are accelerating ourselves into multiomics and also, where we believe informatics should have an even bigger play. So this is less about changing the regions and the regional structure but more -- adding more feet on the ground, so to say..

Got it. And then the last one, if I could just ask. How should we think about the overall pull-through? It's already more than $1 million.

What's your -- what you're math suggesting where that could land eventually?.

Yes. I mean, we're certainly very encouraged that we are already now at $1 million annually for the X Series. And while we believe it's going to -- we don't think this is the exit point or the equilibrium. So we believe it can go higher. We also see customers doing much higher right now already. So we're encouraged to see where this could go.

But we don't have -- at least we're not ready to share a detailed view on where we think this could go at this point..

And our next question comes from Sung Ji Nam with Scotiabank..

Just one for Ankur. Could you maybe give us a bit more color in terms of your outlook in China and Greater China and AMEA? I think if you look at the growth trends over the last few quarters, it seems pretty stable. But just kind of curious if your guidance, I think you said that half of that is attributable to China, Asia.

And so just kind of curious what your -- how has your expectation changed since the last quarter? And if you expect a significant deterioration in those regions going forward?.

Yes. So let me start by addressing this here that I think, first of all, related to China, it's still too early to call where we are in the cycle. And from what we can see, the economy is still weak and customer continues to be constrained.

So we -- and we don't really -- as you mentioned also, we don't really see any change -- material change in the competitive intensity in China. But it's still a tough market to be in.

What I'm really excited about is that we have -- and as mentioned, I think, in the last call also, we hired our new head of Region there in China and she's been in place for a little more than a quarter.

And she is very active also in optimizing the commercial structure, as for the rest of the world, really focusing on bringing more into field from the back office.

She's also resetting partnerships and optimizing those kind of relationships and of course, continuing to consider how we are targeted in our pricing strategies for specific product groups and finally bringing IVD, more IVD products to China. So there's a lot we are doing there right now. And I think, eventually, this will turn.

But at this point, it's too early to provide deeper insights.

I think maybe, Ankur you can provide a little more insight on rest of Asia?.

Yes, let me give you just a couple more colors, specifically, because we've included that as part of our guidance. The -- our previous estimates and the expectations of China were not for a material recovery in that business.

However, if you look at the sequential build of that business, there was an implied increase even though it's still down year-over-year. The business in China over the last several -- over 6 to 8 quarters now has been weak.

In fact, if you look at all of Illumina from a year-over-year basis at midpoint, now that midpoint of my full year guidance is roughly 1.5 points lower on a constant currency basis or 2 points on a constant currency basis. A very big part, almost 2/3 of that, is all due to China.

And where our business has been quite weak, we're not seeing signs of recovery, lots of commercial action from our perspective, we're making changes in the team. But just the overall environment there right now doesn't look where I would go out and assume any kind of increase in business volumes for the rest of the year.

So kind of taken that out of the forecast and trying to derisk that..

And our next question comes from Eve Burstein from Bernstein Associates..

Great. In the last few months, we've seen both Quest and LabCorp announce or expand collaborations with one of your competitors. Can you remind us what portion of your revenue comes from those companies? And then I can imagine some reasons why those companies would act differently than other of your clinical customers.

So for example, I'm guessing that they do a higher portion of LDTs and FDA-approved tests, so they don't need as many of the X boxes. Maybe there's a more natural fit.

But why shouldn't we take this as a major sign of potential share loss in the clinical market, not just potentially a hit to revenue if and when assays shift to the X and X Plus?.

Yes. I think I suggest you speak closer to those companies about their decisions on making collaboration agreements with other parties in the NGS space. I think we are focusing on, first and foremost, provide the highest quality to our customers.

Because I think there is a little bit over rotation here on a price that goes for a very, very limited application space. And it's not really addressing what you can do for actually the patents you do today or the whole genomes.

So on the other hand, I think it's not only about providing a price, also providing a product and a solution where you have confidence in that the vendor can provide and continue to support you. So I think there's many more details that goes into this.

And we, here, at Illumina will continue to do our best to provide the best solutions but not only focusing on one single element in the workflow, the cost of sequencing but the whole cost of workflow and providing the highest quality of answers to our customers..

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

So can you talk about some of the pricing transition in XLEAP? I believe that is the -- XLEAP is on the mid-throughput is backwards compatible. I believe you said 60% adoption.

How should we think about actual total dollar impact with that pricing transition? Can you talk about this year specifically in that -- in the guidance? And I just have one follow-up. And then just one -- sorry, one further clarification they have on throughput.

Can you talk about the validation step required for clinical moving from regular? Two, actually, on that..

So first on overall, as we mentioned, we had 60% of our installed base has downloaded software. This is for what we see an indicator for that people are very interested in the XLEAP chemistry. But we also see a lot of interest, in particular, the P4. P4 flow cell has been out for a while but also now going into the P1, P2, P3 [ph].

We have a different price point, as we've also been talking about for XLEAP chemistry which is one of the interested -- interesting areas but we also have a higher quality of sequencing and higher capacity. So Ankur, maybe you can provide a little bit more insights on where we are in the transition.

But let me just talk to the validation is that, that depends on the going from XLEAP over to -- from the standard SBS chemistry on to XLEAP chemistry. It really depends on the assays. But normally, you will have to go through normal validation.

That is just when you shift to other software or [indiscernible] and you'll do that and each clinical lab will know how to do so. But there's no specific steps that is required from our end from going from one to the other.

Ankur, do you want to provide more on where we are on the transition?.

Yes. In terms of transition, XLEAP to our original -- or the previous consumables, there will be a pricing transition that will happen but it is significantly smaller and likely more proactive relative to what you've seen on the X side.

So from a modeling or going forward perspective, the volume of empty consumables as a business is a much, much smaller portion of our P&L and revenue base relative to what our ex-consumables business has. So I'm not -- from an impact on overall revenue line perspective, it will be significantly smaller..

Got it. And then just a quick follow-up on Fluent.

What's the intention there in terms of pricing? Can you drive pricing even lower than that? And in terms of pricing in bundles, have you have any thoughts to how you would do bundled pricing? And just on IP, do you feel pretty comfortable with IP? I know that's -- I believe that's an emulsion step versus a microfluidic step.

So does that protect you? I mean there's been a lot of IP in that space..

Yes. So we are certainly very excited about the Fluent acquisition. And as you also mentioned is that we, first and foremost, believe that the Fluent technology allows for a broader adoption of single cell.

So there are some -- there's certainly areas in the mid-throughput where customers can get easily into single cells and patients in high volume where actually the cost of the individual experience here, the individual cell is competitive and can certainly address that market space.

We are still too early to go into a discussion about how we're going to commercialize this. But as we mentioned before but we will, of course, go in there and present Fluent, that's a very attractive offering.

We will continue to work with all the partners and all the single cell providers in the industry and allow them to have a very, very competitive offering on our platforms also..

And we'll move to our next question with Dan Brennan with TD Cowen..

Jacob and Ankur, maybe just a clarification first and then just a question on just consumables.

On the clarification, I think you said there's really not much of a margin drag as you move actually into the mid-throughput, is that correct? Because we were under the impression, I think, actually you presented $9 per G and I guess, on-label price for NextSeq might have been something into the teens or low 20s.

So maybe you can just speak to a little bit how the margin impact flows through as your mid-throughput base adopts XLEAP?.

Yes. So I'm saying there will be a margin track. What you're looking at is the list prices but the on-market prices are likely different from where the list prices are already and then second, on the margin drag side, given the contribution that mid-throughput consumables make on our overall revenue is relatively a smaller part of my P&L.

That drag on full Illumina P&L is going to be generally manageable..

But I will also say that the R&D team has done a great job together with manufacturing to lower the price of the XLEAP chemistry. So it actually comes with a lower COGS and, thereby, less of a drag on the margins, yes..

Got it. And then I know you gave a lot of color during the presentation about volume.

But did you speak to -- and I apologize if you did a little bit more on the research first, clinical side, like revenue growth in the quarter? Like how did that break out for NGS? And any color on kind of what's assumed in the '24 guide between like research and clinical and, presumably, whatever competitive impact that is there, even though I guess you see that you're really having success winning? I would presume it's more on the research side than the clinical side.

So any color you could provide there would be helpful..

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

And ladies and gentlemen, that concludes our Q&A session. I will now hand the call back over to Salli 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 our upcoming Investor Day and other events..

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