Great. Thanks, everyone, for joining us this afternoon. I'm Vijay Kumar, the Life Science Device Analyst here at Evercore. Pleasure to have with us Illumina. We have Ankur Dhingra, CFO, and from Investor Relations, we have Salli Schwartz. Ankur, Salli, thanks for the time this afternoon.
Yeah, thanks, Vijay. Thanks for the opportunity to come talk to the investors here.
Yes. I've been waiting since morning to have this conversation.
Okay. All right.
Now, maybe just to level set, I thought, look, the third quarter was fine. I thought consumables came in a little bit better, maybe instruments a little bit softer. But from your internal models, Ankur, when you do the review, were there any surprises, anything that stood out in third quarter for you guys?
Yeah, that's a great question. Let me just frame how Q3 shook out for us, and kind of been here six months now, so that was also the second complete quarter for me as well, and I'm very pleased with the progress that we're making as a company, and with our flagship product, we're still in transition, and the company is in transformation, but I'm very happy with how the last couple of quarters have shook out, both from the transition on X, our high-throughput consumable business, the way it is progressing, as well as the operating discipline culture that is beginning to reflect within the numbers as well on the margin side, so good progress, a lot of work still to do, but that also means lots of opportunities still in front of us, and that's how we're approaching it.
On the quarter, I can tell you I'm very pleased with the overall margin expansion side of things. Coming in new, one of the questions that I always have, you spend time in different companies, but in a new company, the piece that you begin to get a sense of is how will the organization respond to call to action, right? That's the part that takes a while for you to get a sense of. And Q3, for me, was that quarter where I got a good sense of how quickly the Illumina team rallied behind the call to action instead of me getting a really significant pushback around the priorities. So that was positive. On the top-line side, we came in aggregate right at the midpoint of where we were expecting. We always work in ranges of forecast.
The consumables were stronger, especially driven by the high throughput, which was positive. We think the transition to X from 6K, we saw a much higher chunk of volume overall on X. The volume growth there was stronger. It was stronger than what we anticipated as well, which, in my view, is a net positive because my eyes set towards a goal post in the second half of 2025 when a larger chunk of transition should be complete. And then the instrumentation side was not that great. That came in below where we were expecting as well, and largely driven by macro conditions. I think the funnel, the health of the funnel, etc., has held up quite well. And as we stated, it's usually the variability on the closing of the deals, the timing, the size. Am I going to buy three Xs or I have a constraint?
I can only buy X one now, so maybe two next quarter, etc., kind of conversations where the variability continues to remain high, and it's harder to predict and remain. But the fundamental business in itself remained strong. The second piece that, again, for me, coming in second full quarter was very positive was the underlying demand for sequencing. That, to me, coming in as a CFO, there are a few things that are fundamentally you don't want. One is you have products for which there is no demand. I don't have that problem. The underlying GB demand is very robust, running at closer to 40% on the GB shipped side. And then, yeah, very strong balance sheet, very strong cash generations. As a CFO, strong underlying demand, strong balance sheet gives me a good confidence in the underlying business model.
Great. And with that, maybe we can segue into sort of the current macro environment, if you will. Some of your peers this morning have said, "Look, it's stable. It's improving. It's moving in the right direction," some combination of all of the above. How would you characterize the macro environment today versus three months ago?
Yeah, I'm more in the stable category right now. I would call it improving when I see some sustenance of improvement, at least for one to two quarters before I call it improving. There are always variations quarter- to- quarter, so still, I would say stable, and stable at a pretty low level. It hasn't been a great level to stabilize that in general, and it plays out mostly on the capital side, mostly on the instrumentation demand, CapEx. CFO is conserving the balance sheet and the cash side of things, so that's still the area. No change there, and in my view, if the conditions remain at a low level for a long period of time, calling it same as last quarter, right now, if you're constrained for a long period of time, the pain only increases. It doesn't kind of go down, but roughly similar right now.
That's helpful, and I think some of your peers around year-end budget flush, they've noted perhaps, "Look, there is some seasonality. Perhaps we're below normal seasonality." How would you characterize year-end budget flush? Is Illumina seeing any?
Yeah, as you may recall, when we guided to our Q4 this quarter, the commentary which was held was, "We've taken optimism out from our guide for any strong budget flush for the year," so we took that out of the guidance, and a big part of that was driven by the fact that even though the funnels do look robust, even though a lot of customers are talking about fleets of X purchases, not even one or two fleets of X purchases, the timing of that is harder to pin down. That variability led us to take any kind of optimism around budget flush dynamics out of our midpoint of the guidance that actually was a point guidance out of the equation. Overall, though, instruments is a smaller part of our business relative to a lot of the other players.
For us, the bigger dynamic from a consumables perspective still is underlying application demand and is continuing to make X successful, helping our customers continue to have them transition their volumes, and the discussions we're having with our customers around technology choices they're making today about the test that they have to launch in two years. That's more prominent conversations for us at this time.
Understood. You brought up funnel a couple of times, Ankur. It's been healthy. Maybe some qualitative comments on what is funnel for you? How do you classify, characterize the funnel and the state of healthiness of the funnel, if you will?
Yeah. So I do get involved. I've started getting involved, at least with our top 20, 25 customers around the choices that they are beginning to make, what are we offering to them, and also some of the early access products that we're talking about. When I think of funnel, we kind of parse it out between what is it that our top 30 customers in each region are trying to do, trying to purchase, what kind of capacity needs they will have over the next one to two years, driven by the sequencing demand and the actual usage that they're seeing today. So that's one where I get a sense of how many of these customers have an underlying GB growth that could necessitate instrument investments or newer tests that are coming online or newer trials being started that could necessitate more demand for sequencing.
That's the way I judge funnel health, look at where is that fundamental demand coming from. And then there's a long tail of customers, which is more, again, driven by underlying GB growth. The underlying GB shipped has been at 40% in the last two quarters. Last 10 years, average is 25%. Either scenario, a midpoint of that typically talks about doubling the sequencing volumes in a three-year time frame, roughly. That's pretty robust demand for me, right? So if you can manage the funnel with that kind of view, is how I look at it.
That's helpful. Salli did tell me that you do get into the details, and I think quote unquote, "This angel is in the details.
Yes.
I do remember that. China, that's been topical. Certainly, post-elections, a lot of questions. How are you thinking about China? We've had three straight quarters where I think revenues have bounced around $75 million-$80 million a quarter. Has China bottomed out, or are we seeing any incremental changes post-elections?
Okay. So, just from a contextual distinct, China, you're right, has for the last two to three quarters stabilized in that 75, 80, or say $300 million a year annualized kind of level. China business for us had been declining even sequentially, not just year- over- year, quarter- over- quarter for the last three years. So it's good to get to two to three quarters of stable business there. Now, we've made quite a few changes within our China business recently. We've strategically changed our leader in China. She comes with an excellent background from pharma, has very good deep relationships with the hospital systems, with broader genomics and the health government side of the community. So that's been very positive. She's taken a fresh look at the market.
We've made some structural changes in how we are going to our customers and what our go-to-market strategies there are. We're participating in a lot of our tenders directly, so significant difference in fundamental go-to-market strategies in China. The two factors that have impacted and has been spoken about is the competitive environment in China is different than the rest of the world. There are a lot of local players, including the big ones, but a few small ones that do jostle for a part of the market share there, and that has remained so. The intensity there continues to remain pretty strong on the competitive side, and then at the same time, if you think from a geopolitics or the government side of things, in the last four or five months or so, we've seen incremental improvement in our relationship there.
Some of the qualitative commentary could be there have been tenders or businesses that we haven't been able to participate in the past but have more recently been able to participate, and then similarly, we've seen a lot of local government support in allowing us to increase our either manufacturing or other local capabilities in China more than what we've been able to do in the past as well, so there's a macro geopolitical commentary, but at the local level, we've seen actually things improve a little bit in terms of our relationships, not to say we're out of the woods anywhere near that, but our fundamental view there is localized products, just a better go-to-market strategy is what we're going towards and see how that shakes out.
Gotcha. And if China stabilized and if we do get a stimulus benefit next year, should stimulus benefit sequencing end markets, could China be a growth market for you guys in 2025?
We would love for that to happen. I'm not banking on that so far. Even in the stimulus, we haven't seen any of the stimulus towards sequencing, right?
That's right. No, it's been more focused in other areas of life sciences and tools. Maybe there'll be some knock-on benefit, but we haven't seen anything that we've built, certainly not that we've built into our own forecasts.
Yeah. I'm still holding, at least we laid out a full strategy plan of returning to high single-digit growth by 2027. I'm not assuming any meaningful contribution from China to get to that.
Understood. That's helpful. And you did mention at the local level, relationships have improved, but what about on the comparative side? Has behavior been rational or, I guess, stable over the last six months?
Stable over the last six months. I don't see any change from a competitive intensity or any new dynamics, so to speak. There are five to six players in China that locally provide sequencing. There is now of late, more of a competition amongst themselves. I think some of the larger Chinese players are the ones that are right now potentially ceding shares to some of the newer smaller ones. But Illumina's position in terms of working with pharma as well as in the hospital chains, there is a part of the business that works with Illumina, continues to work with Illumina. And we are participating in newer tenders. That gives me confidence that we might be adding new customers as well.
That's helpful. Then maybe one last related question here on tariffs. How are we to think about a tariff scenario of 50%-60% in China? And do you have any exposure to Mexico, Canada?
Minimal exposure to China, at least direct, is very minimal. We have a fairly broad global manufacturing supply chain, but still heavily centered in the U.S. and in Singapore. Those are the two largest hubs for us: several manufacturing sites in the U.S. We don't make anything directly in China for the rest of the world. The team's been working through to look at level two, level three component supply chains, see if any part of the components are sourced out of China and has been working towards finding alternative sources for those too. We're looking at that, but yeah, not a very sizable exposure on a direct basis.
Understood, then maybe switching over to the high-throughput side of the equation. I think the analyst day, I guess the mini analyst day was extremely helpful in some of the assumptions you laid out, and part of one of those assumptions was a 25% increase on NGS activity levels growth, right, over the medium term. Right now, we are doing like 40% growth. Is 25%, is that being conservative on your part when you look at that LRP?
Yeah. So let me say, if you think about things that Illumina is doing, right, our strategic focus from a top-line perspective is to keep that sequencing activity as high as possible. That's our strategic focus. A lot of that comes from tests that are already on market from a clinical perspective, but a large part of that is coming from areas where new research is happening and transitioning into the clinical areas. If you look at the last 10-year average, Salli and team have looked at that data, that's been around 25%. Every time Illumina has launched a new high-throughput platform, we do see a bump in the sequencing activity because a lot of our customers do extra validation work to get ready for the new instrument. And that does lead to increase in some of the sequencing activity. It is hard to quantify.
I wouldn't say that from 25% to 40% is entirely because of that validation work. The overall use of sequencing in many areas has broadened, right? So I'm using 25% because that's what the last year 10-year average has been. That's the best data point that we have at this point in time. What will really drive is more towards what are the emerging applications beyond what we have today that could drive higher sequencing growth. Some of the emerging applications we could talk about is MRD is yet to play out, right? If you take a next three-year view, we're anticipating some of the MRD volumes will become accretive, at least during that strategy period, right? So that would be a good addition within the sequencing volumes. On the outside of, say, MRD within oncology, the therapy selection business in itself remains very strong and continues to drive volumes.
The early detection side probably still further out remains to be seen when the actual clinical volumes of that would show up. I think three-year period, probably not a major contributor there. The other exciting areas where we see a lot of sequencing-related development is on the single-cell side. If you think about Perturb-seq, if you think about how pharma can utilize Perturb-seq from an early drug discovery perspective, is an entirely new exciting area if you take a three- to four-year view of how there could be incremental sequencing activity from that space. So we do have meaningfully large new sequencing applications emerging over the next several years to be able to at least sustain the 10-year average. So that's how I'm thinking about it. If any of them becomes larger or sooner, we'll take the upside map. That'll be good to have.
Understood. And I know the last time when the 6K was launched, population sequencing, PopGen projects were a big deal. What activity levels are you seeing within that part of the market? And I think you guys just organized a PopSeq conference up in the U.K.
It is.
Yeah. Just give us some background on what happened, what drove that conference.
Yeah. I'll give you a few qualitative commentary on that. So the PopSeq business in general remains robust. Government's interest in including genomics information within their healthcare systems, the interest around that remains robust. I think I've said before, we're probably in discussion for almost 50-ish, somewhere give or take. Is it 40 or 50? PopSeq programs in various stages of discussion. Now, they tend to be lumpy, which for a CFO trying to forecast a business becomes problematic, but I'll still take the business. But there are several in discussion. The interesting part, which is newer, is we're in discussion with many countries, one where we've submitted a proposal where it now includes the proteomics along with the genomics for PopSeq. So the more we add from a multiomic strategy, the conversations countries and the ministries are having more with us is, what's the so what?
What value does this add, and should we just run single program? The discussions are also happening around a million patients, which used to be 50,000 patients in the past. We're saying, okay, five-year program, we want to do a million patients. How do we do that? Right? Or talking about actual software pipelines that they can use for an ongoing monitoring. So good positive evolution. It remains an attractive business. One thing I would add, which we did kind of set that at the time of our strategy day was also, was that we're also now slowly building some of these services business in a structured fashion rather than running them like large programs in the company.
And so we've hired a new SVP, and we're building out a team for this business where using genomics capabilities and providing services to our customers in unique areas that only Illumina can. I'm not competing with our customers, but areas like population sequencing, which only Illumina can, or large genomic access to data, et cetera. We're building that business as a business now. A lot of these have existed as a program-to-program approach. We're now going forward to build the capability with the government to say, if you collect this data, this is now how you integrate within the ecosystem. This is how you get to the decisions, and we can support you through the entire journey.
In terms of that conference, just to add, back when we had the Illumina Genomics Forum, which you may remember, there was a whole section at the beginning that was focused on population sequencing. One of the ideas was to get customers together so that they could learn from each other. People who had done those sorts of programs or had certain experiences could teach others who might have questions about how to go about it. That was really well received by our customer base, that sort of socialization of concepts and process.
So that coupled with what Ankur was talking about, where we have so much as a company to talk about and offer these customers that may not have even been a consideration a couple of years ago, just provided a good stimulus for, let's get everybody together again, let them socialize with each other, and then we can also spend the time to help them understand our innovation roadmap.
Understood. And then maybe one more question here on when you think about the consumables ramp. Volume is one part of the equation, right? But I think on the most recent third quarter call, you noted 35% of high throughput sequencing consumable revenues came from the X. It was perhaps running a little bit above plan. And I'm going to weave that into another question, right? I think related to that, I think some people have asked, what is this clinical cliff? Hey, clinical customers haven't transitioned, and the other shoe is about to drop. So maybe walk us through what you're seeing in the transition and whether we should be aware of any incremental factors here when we look at fiscal 2025.
Okay. Yeah. The way I'm thinking about the transition, just so the goal post I'm working towards or we're working towards, which is why we kind of transparently laid out how the transition is going, is that sometime in the second half of 2025, we want to get past at least 75% of the volume would have transitioned to X, right? Because that gets us to a point where a larger part of the volume is now benefiting from the elasticity itself, right? And you get a larger part of revenue. We're progressing very well towards that. Q3 was a step forward, a big step forward. And it's a matter of another three, four quarters or so, and we'll land somewhere there. That's the goal post I'm working towards. There will be quarter- to- quarter variations in that, right, as we saw in Q3.
The clinical side, so in Q3, we said roughly 55 of the volume.
That's right.
55% of the volume, which equates to 35% revenue, is now an X. On the clinical side, that's about 40% has already transitioned, right? Now, when we think about 2025 and the transition always includes two things. One is you're taking your current activity and moving it to X. For a lot of our clinical customers, what we have seen is they've bought fleets of Xs, and it's the new clinical trials and the new tests that they're going to launch are the ones that are on X. That's a good part of the volume on the clinical side on X as well, so in the end, till the time I'm getting to 75% or so mark from half to, that's the path I'm on. These customers will move over the next few quarters.
All the discussions that we've had with our customers, including some who have stated publicly, is a gradual transition. If they're moving their current tests, they're saying, one test in a quarter, we'll see, stabilize it, then move to the next test in the following quarter, et cetera. No one so far talked about a wholesale transition in one month, at least to us so far. I also haven't seen anyone suddenly buying 12 Xs to kind of get into the entire volume. So it'll likely be gradual, and it'll be within the run rates that we've been talking about the transition into the second half. That's how I'm approaching it.
That's helpful, Ankur, and what is the tipping point? Is that when we're 50% of high throughput consumables are coming from X, is that the tipping point when volume growth benefit more than offsets?
I can tell you we've done a lot of curves, and my team's tried to draw a lot of models to say is there a clear inflection point, but it is a curve. So there isn't a magical number that you cross and something becomes golden, which is why I've been using more of the 75%-80%, because your denominator has moved so far over that your volume growth is now substantially on the X.
Gotcha. And then maybe one on fourth-quarter assumptions around consumables. I think you noted consumable growth to moderate from third-quarter levels of high singles. Why would it moderate, right? Aren't we seeing more customers transition and as a ramp up, Q4 should come in better?
Yeah. I think somebody asked it, and they kind of called it in a different way, but the fundamental reason there from my perspective is to when you look at the year-over-year compares, we launched the 25B last year in Q4, okay? So we're getting to a point where now the early 25B launch is getting into the annualization for Q4. But more importantly, as I said during the earnings call, we do think that the number of the test volumes in Q4 because of the holidays are likely going to be lower than what we've seen in Q3. That's what I'm assuming at this point in my model. If it doesn't play out that way, we'll take it. That's mostly driven by holidays. We've also talked about relative to all the historical compares is that the shelf life for X consumables is shorter.
We commit to three to four months shelf life to our customers versus in case of X, 6K. Salli has corrected me, thank you. That is we said minimum six months. So our customers' ability to stock and manage through variability within their testing volumes was much easier in 6K. For Q4, I'm kind of forecasting to say if they are anticipating their test volumes to be lower, we will likely see lesser purchases of X consumables. They'll manage the inventory. That's what's built into the guidance.
That's helpful, and are we seeing those kind of purchasing behavior from your customers at these now?
We're not in the holidays yet.
Not in the holidays yet. Okay.
We'll see.
Perfect. I guess the other assumption was back half, you would expect to place more X systems versus first half.
That's right.
Just given the macro and commentary on capital environment, right? Just tie that with your funnel comment, right? Are you still confident of placing more systems, which would imply a sequential step up in systems in Q4?
Yeah, I'm still there. I mean, mathematically, if you just average out for the whole year, we've been selling approximately 60 X instruments every quarter this year, right? Slightly above, slightly below. So till the time I can sell more than 60, that'll still keep half to better than half one. For me, also the underlying question that I'm also trying to solve is just the go-forward capacity, right? If 60 in average is 240 on the year, right? How should I think about the normal run rate capacity going forward that our customers will need to add on an ongoing basis, right? Where does that number land as well?
Gotcha. And based on all your analyst input, the detailed math, how are we feeling about system placements for next year, right? Rates have come down, maybe macro improves a little bit, maybe China stabilized. Wouldn't it be crazy to assume maybe systems can actually grow next year?
I would love for that to happen. We'll talk about the guidance sometime in 2025 for the next year when we talk about the guidance. But hey, this year is minus 40% against the launch year shipments. The way I'm still thinking about it is I'll tell you how I'm kind of conceptualizing it or contextualizing it is 240 instruments. We've placed 528 Xs as of end of Q3. We still have about 1,700 6Ks active in the market, give or take, not precise. But the point there is that's roughly double the capacity in high-throughput sequencing over a three-year period since launch. If you peel that back with saying sequencing has been growing between 25% to 40%, let's say I'm taking that range, but either way is talking about actual sequencing activity doubling over three years as well. That's a framework that has played out in three years.
If that framework were to hold for the next three years, then somewhere in that 200-240 mark will probably be a good place to land. Now, macro will play a factor in keeping where we land. If macro turns positive, that'll certainly be net positive for all of us. Between now and when we actually give the guidance, if something materially changes, we'll talk about it then. As of now, there is no reason for me to call macro one way or the other.
That's helpful, Ankur. The, I guess, mid-throughput was something you called out on the third-quarter call. Is that macro or is that competition on the mid-throughput side, right? And same sort of question on should it get infinitely worse or better in 2025?
Yeah. So one thing, and I've stated in many meetings today, my view, competition has always been there in mid-throughput. It's not a new phenomenon. The name changes, the offering changes, but there has always been competition in mid-throughput, right? And I think most of the people who have looked at Illumina in the past know that. And there is a reason for that. Why mid-throughput is an attractive area for competition to try to step in is because high throughput requires a confidence because people are running a business on it that it is hard to break into, and low throughput requires a commercial reach that it's harder to build right out of the gate. In mid-throughput, you get a set of customers who are willing to tinker with the box.
If they already have 10 Illumina boxes, they're willing to take an 11th one from the others if it's being placed. It naturally fits into an area where most competitive companies have tried to enter into that space. Most competition in the past has eventually not been able to create a viable business model or be able to scale because everything, most of the players, the tactics they've used to get a foothold don't get to a viable business model that can scale, right? So, yet to see how that plays out over a period of time. From a business dynamics perspective, from our perspective, there are two main dynamics that are going on in mid-throughput. One is customers are shifting volume. They're testing volume out of mid-throughput into the high-throughput. That's happening.
I've now spoken to a few core lab directors who have actually talked about getting more send-out samples from biotechs in their area because they don't want to run their own labs. I've just moved down from Bay Area to San Diego. I know what the lab real estate market is like. It's hurting across the board because people were building their own labs. Everyone, when they had access to IPOs and funding, that's dried out. A lot of them are sending their samples into the high throughput. That's one big dynamic for us. I think when macro improves, as when the IPO markets improve, some of that trend will reverse. There is a lot of therapeutic companies who are developing drugs based on genomic biomarkers where ongoing stratification of patients, ongoing access to the genomic data is a critical capability, and they want to run their own labs.
So some of that business will move back towards mid-throughput as part of the macro is my thesis. The second part is around XLEAP. A good, very good adoption of XLEAP is what we are seeing. I don't think we've shared the specific percentages. I'll see if we can disclose some of those for the mid-throughput as well. But in the consumable space for mid-throughput, there is very good adoption going on with the XLEAP. Good volumes. Yes, people are taking advantage of the lower price that it offers, but the actual comments that we're getting back from our customers are very meaningful.
Gotcha. And maybe a last-minute question here on, I know you've over-executed on the margin front. How should we think about margin potential for next year? Is that another couple of hundred basis points for next year? And top line, if I'm hearing you correctly, it looks like consumables should be sustained current momentum. Hopefully, systems flat on the high-throughput side, and maybe mid-throughput, we'll have to see what the macro is. Is that like a nice summary of the moving pieces we're going to be?
We're almost writing the guidance there, trying to. On a high level, it'll be good to. We're at -3% revenue growth this year, right, at our guidance. For three years, the company hasn't grown. We certainly want to get back to growth, as Jacob said during the earnings call of returning to growth. On the margin side, and even on the revenue side, the thesis that we've laid out during the strategy day around one, stepping into high single-digit growth, and then on the margin side, the 500 basis points expansion over the next three years, both are still good guideposts that we are measuring towards ourselves in the end. We should make ratable or somewhere in that range kind of margin expansion for next year as well.
I think we'll keep making step function improvements every year on the margin side, consistent with what we've said during the strategy.
Gotcha. Fantastic. Well, that's, we're out of time, Ankur and Salli. Thank you so much for your time.
No, absolutely.
Thank you.
Appreciate it. Thanks, everyone.