Illumina, Inc. (ILMN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Second Quarter 2026 Illumina Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to Head of Investor Relations, Conor McNamara.

Hello, everyone, and welcome to Illumina's Second Quarter 2026 Earnings Call. Today, we will review our financial results released after market close and provide prepared remarks before opening the line for questions and answers. Our earnings release is available in the Investor Relations section of illumina.com. Joining me today are Jacob Thaysen, Chief Executive Officer; and Ankur Dhingra, Chief Financial Officer. Jacob will begin with an update on Illumina's business, followed by Ankur's review of the financials. We will be discussing certain non-GAAP financial measures and a reconciliation to GAAP can be found in today's release and in the supplementary data on our website. Unless otherwise stated, all growth rates are presented on a year-over-year reported basis. Organic growth adjusts for the impact of currency and acquisitions and Rest of World organic growth also excludes Greater China due to our inclusion on China's unreliable entity list. This call is being recorded, and the replay will be available on our website. It is our intent that all forward-looking statements 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 SEC, including our most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Jacob.

Thank you, Conor, and good afternoon, everyone. We had a great first half of 2026, including another strong quarter in Q2, and I couldn't be prouder of what the Illumina team delivered. Revenue grew at the fastest rate since I joined the company, driven by increasing demand for Illumina's technology as customers expand clinical applications. Our deep relationships with leading U.S. clinical customers and large installed base reinforce the durability of our position in these markets. Margins also came in above our guidance despite higher-than-expected costs. I want to thank our teams for their focus and commitment to our customers and shareholders. Our first half results puts us in a strong position as we look ahead. We are raising our 2026 guidance for revenue growth and profitability while remaining committed to executing against our long-range targets. Today, I'm going to focus on 3 areas: our performance in the quarter and the trends we are seeing across our end markets. How we're expanding the value of our platform through new workflows and multiomics capabilities and the progress we are making against our long-term strategy and financial targets. Let me start with how the quarter came together. Rest of World organic revenue grew 8.1%, above the high end of our guidance and demand for NovaSeq X remained high more than 3 years after launch with more than 95 placements in the quarter. Together with disciplined expense management, this translated into both margin and EPS above guidance. Clinical markets, which represent approximately 65% of sequencing consumables revenue remained our primary growth driver. Rest of World clinical growth was broad-based across regions and applications with particularly strength in our U.S./Canada region. Strong instrument placements over the past 3 quarters are expanding customer capacity and will support consumable growth for many quarters to come. Placements will vary from quarter-to-quarter, but demand remains elevated. In research and academic markets, results improved from Q1, but customers remain cautious as they navigate funding uncertainty. We saw some signs of improvements late in the quarter, but it's too early to call a recovery. These customers remain an important source of innovation and help drive clinical adoption over time. Our expanding multiomics portfolio give customers more ways to analyze biology and broadens how we can support these markets over time. Let me turn next to innovation. Our strategy is to deliver the highest quality insights for the lowest end-to-end cost. The updates we made this quarter advance that goal by expanding what customers can do on NovaSeq X and increasing the value of the Illumina ecosystem. Within core sequencing, NovaSeq X remains central to our approach. Customers are investing in the platform, not only for what it enables today, but because they see a clear path to use it for years to come. The road map we laid out earlier this year gives them confidence that the X will continue to support their workflows over time, helping sustain demand for the platform. We recently launched our whole genome MRD research workflow, a tool designed to help customers shorten assay development timelines and lower development costs. The solution runs on NovaSeq systems and is now in early access with select customers. Beyond core sequencing, we're expanding our multiomics offerings, consistent with the strategy we laid out in 2024. This summer, we expanded our portfolio with the launch of the StrataMap Spatial, our sequencing-based spatial workflow. This launch broadens our capabilities in spatial biology and gives researchers another way to study tissue biology through the Illumina ecosystem. We are also seeing sustained proteomics momentum following the close of our SomaLogic acquisition. Our newly branded SomaScan and SomaSeq offerings are generating strong interest and helping customers connect proteomics and genomic insights. And in BioInsight, we're expanding our data and insights offerings to help pharmaceutical customers advance AI-enabled drug discovery. BioInsight brings together sequencing, perturbation tools, compute power and AI to build high-quality multiomics data sets and interpretation tools. These capabilities can deepen understanding of disease pathways, infer causality and enable more predictive biological models. One of the first key BioInsight initiatives is the Billion Cell Atlas, a genome-wide perturbation data set that deepens understanding of disease biology and generates data for AI models. We are producing this data at an unprecedented scale and with the quality and consistency needed to support biological discovery. With over 300 million cells delivered to date, biopharma interest continues to grow. We have started booking revenue from our Billion Cell Atlas, and we added 3 new partners subsequent to quarter end, bringing our total to 6. While still early, these milestones are an encouraging sign of the opportunity ahead. Later this year, we look forward to sharing additional BioInsight updates as we expand how customers can use biological data to accelerate discovery. Turning to our improved 2026 outlook. We are increasing our full year revenue outlook to reflect both our Q2 outperformance and our expectations for the remainder of the year. The momentum we are seeing, especially from our clinical customers, gives us greater confidence as we enter the second half. We now expect full year Rest of World organic revenue growth greater than 5%. We expect the pace of growth in the second half to remain broadly consistent with the first half, although the mix will shift. Consumables revenue will continue to grow from a higher installed base, while instrument growth moderates against tougher comparison following several quarters of elevated NovaSeq X placements. The expanding NovaSeq X installed base will also add further consumables growth beyond 2026 and support our path towards high single-digit revenue growth in 2027. We're also raising our EPS outlook, reflecting Q2 outperformance, higher revenue expectations and continued expense discipline. Ankur will provide the details in his remarks. Our updated guidance reinforces our progress towards the long-term financial targets we laid out in 2024, and we remain focused on achieving them. We operate in a healthy market with significant untapped opportunity. By continuing to deliver innovative technology that improves customer workflows and expands the capabilities, we expect to maintain our leadership as the market evolves. With 3 consecutive quarters of growth, we enter the second half from a stronger position. Our teams are energized by the response to our recently launched end-to-end workflows. That interest confirms that we are solving the right problems and reinforces our innovation priorities. We're also strengthening the team leading this work. We recently welcomed Michael Sullivan and Julie Coletti to our management team, adding deep commercial and legal experience as we scale the business. We are equally pleased to welcome David King and Dan Skovronsky to our Board. Their experience across health care, diagnostics and R&D will be valuable as we advance our clinical and innovation priorities. I want to thank the entire Illumina team for their focus and commitment and our customers for the trust they place in us. With that, I'll hand it over to Ankur to walk through the financial details before we move to Q&A.

Thank you, Jacob, and good afternoon, everyone. I will walk through our second quarter financial results, provide additional color on revenue, expenses, earnings, the balance sheet and capital deployment and then discuss our updated outlook. Before I get into the details of the financial performance, let me provide a high-level view of how the second quarter played out. For Q2, our revenue and earnings results came in ahead of our expectations and guidance. Revenue grew 8% on an organic basis ex China. Margins were ahead and EPS of $1.31 grew 10% year-over-year, and we placed more than 95 Xs. Now turning to the details. During the second quarter, Illumina's revenue of $1.16 billion was up 9.5% year-over-year and 6.5% on an organic basis, with currency and acquired revenue together contributing approximately 3 percentage points to our reported growth rate. Rest of World organic growth rate was 8.1%. Sequencing consumables revenue of $775 million was up 5% year-over-year on both reported and organic Rest of World basis. High throughput volume drove most of the revenue growth as the NovaSeq X installed base continues to expand and pull-through increased year-over-year. Sequencing consumables revenue in clinical markets grew 15% ex China, with the U.S./Canada region continuing to grow above 20%. We saw slower growth in Europe, Middle East and Latin America region, largely due to ongoing near-term dynamics in the region. First half growth was approximately 17%, a slight acceleration versus the second half of 2025, reflecting continued adoption of sequencing-based diagnostics and more sequencing-intensive applications. We are raising our growth outlook in clinical markets towards the high end of our prior guide and now expect mid-teens growth for the year. Sequencing consumables in research and applied markets declined 7% Rest of World and year-to-date trends have remained consistent with our outlook entering the year. Though we were encouraged by the trends in the quarter, including 9% revenue growth quarter-over-quarter, we believe it's still too early to predict the timing of an end market recovery and continue to expect mid- to high single-digit declines for research and applied consumables in 2026. We made further progress in the quarter transitioning customers to the NovaSeq X. As of Q2, approximately 83% of volumes and 59% of revenue had transitioned to the platform. Despite continued transition dynamics, sequencing consumables posted strong growth. Approximately 78% of clinical volume is now on the X, and we continue to expect clinical volumes will reach 80% to 85% conversion by the end of 2026. On sequencing activity, total sequencing gigabase output on our connected high and mid-throughput instruments once again grew more than 30% year-over-year with clinical growth well above that. Sequencing instruments revenue of $125 million was up 31% year-over-year in Q2 on both reported and Rest of World organic basis, driven by increased sales of NovaSeq X and the MiSeq i100. We made significant progress with our supply investments in the quarter, allowing us to place over 95 NovaSeq X instruments in Q2 as demand remains strong for the platform, especially among some of our largest clinical customers, where we saw several multiunit capacity expansion orders, including for start of new clinical trials. We also placed over 10 NovaSeq 6000 units as some consumers plan to remain on that platform for years to come. Sequencing service and other revenue of $154 million was up 14% on both a reported and Rest of World organic basis. As Jacob mentioned in his prepared remarks, we are gaining traction in our Billion Cell Atlas program, resulting in higher data revenue from biopharma customers. Microarrays and other revenue of $105 million was up 21% reported and included SomaLogic revenue, which continues to track towards the high end of our deal expectations. On Rest of World organic basis, microarrays and other revenue declined 4%. Moving to the rest of the P&L. Non-GAAP gross margin of 68.2% came in slightly better than our expectations, especially given product mix from the relatively high sales of instruments in the quarter, and we also absorbed higher freight and memory costs in this quarter. Non-GAAP operating expenses were $530 million and include SomaLogic expenses. In addition, we had approximately 60 basis points of deferred compensation this quarter, which is EPS neutral with offset in other income. Non-GAAP operating margin was 22.5% for the quarter, above our guidance, driven by higher volume and as team did an excellent job in absorbing increased inflationary effects. Looking below the line, non-GAAP net interest and other expense was $8 million in the quarter. Our non-GAAP tax rate was 20.5% and average diluted shares were approximately 153 million, reflecting continued share buybacks. Altogether, non-GAAP EPS of $1.31 per diluted share grew approximately 10% year-over-year and approximately 13%, excluding the dilutive impact of acquisitions. Moving to cash flow, the balance sheet and capital allocation for the quarter. Cash flow provided by operations was $201 million for the quarter, which is below the usual trend due to timing of tax payments and higher inventory as we secured supply for critical components for next few quarters. Capital expenditures were $39 million and free cash flow was $162 million. We repurchased 0.9 million shares of Illumina stock for approximately $122 million at an average price of $129.07 per share. At quarter end, we had approximately $1.8 billion remaining under current share repurchase authorizations, and we intend to continue to repurchase shares opportunistically. We ended the quarter with approximately $1.17 billion in cash, cash equivalents and short-term investments. $1.99 billion in total debt and a leverage ratio of approximately 1.6x gross debt to last 12 months EBITDA. Overall, we had a great second quarter and first half of 2026, allowing us to raise our full year guidance and reinforce our confidence in the progress we are making towards our long-term targets. Now turning to our full year 2026 guidance, starting with revenue. We're raising our Rest of World organic growth guidance greater than 5%, up from our prior range of 2% to 4% and raising our reported revenue guidance by $50 million at the midpoint to $4.60 billion to $4.64 billion. This reflects the Q2 beat and also our increased expectations for the second half of the year. We are also expecting to come in towards the high end of our previously stated guidance for sequencing consumables and instruments. For Rest of World organic sequencing consumables growth, we now expect mid-single-digit growth, including mid-teens growth in clinical and mid- to high single-digit declines in research. This reflects a modest revenue benefit from our outperformance in X placements over the last 2 quarters. So most of that benefit will come in 2027 as our clinical customers typically take at least 6 to 9 months to reach normalized consumables pull-through levels. Sequencing instruments are now expected to grow low single digits Rest of World organically in 2026. Demand for NovaSeq X remains robust, and we expect unit placements to remain at elevated levels in the second half of the year with some moderation in year-over-year growth rates. We are maintaining our operating margin guidance of 23.4% to 23.6%. With our higher revenue expectations for the year, this equates to diluted EPS guidance of $5.30 to $5.40, an increase of $0.12 at the midpoint versus our prior guide and a year-over-year growth of 11% at the midpoint and 14% ex acquisitions. Moving to Q3 2026 guidance. We expect Rest of World organic revenue growth of approximately 4.5% and reported revenue of $1.14 billion to $1.16 billion, non-GAAP EPS of $1.33 to $1.38 and non-GAAP operating margin of approximately 24%. This equates to approximately 150 basis points of margin expansion sequentially driven by higher consumable mix and the increased benefit of cost actions and improved efficiency. Our solid half 1 performance and rapidly growing clinical installed base provide a strong setup for continued consumable growth for years to come. We're seeing an increase in X Placements to meet increasing volume demand, which will help accelerate consumable revenue growth as recent placements come online. In addition, we are beginning to see revenue contributions from our Billion Cell Atlas and our growing customer interest in our multiomics portfolio. And we still believe new products will add 1 to 2 points of growth next year. Taken together, we continue making progress towards our 2027 financial targets. In closing, I want to thank the Illumina team for their continued focus and disciplined execution throughout the quarter. We are off to a great start in 2026, and I'm extremely encouraged by the progress we have made in returning Illumina to long-term sustainable revenue and earnings growth. Thank you for joining our call today. I will now invite the operator to open the line for Q&A.

[Technical Difficulty]

[Technical Difficulty] installs in the second half. And just given the backdrop of the clinical growth that you're seeing here, it appears there's really no clinical cliff. I mean you're cruising through it. You're already above 5%, as you pointed out, for guide for this year. So why should we not contemplate something higher than a high single-digit revenue growth for 2027 that you outlined before?

Well, Puneet, thank you very much for those comments, and we are definitely also very pleased with the performance we had in the quarter. And first and foremost, I truly believe and I'm very convinced that the growth and the momentum we see in the clinical market will continue for years to come. And the elevated placement we have had in the first half of the year speaks to that. As you know, when we place instruments, eventually, we'll start to see the consumables run on those instruments, and that will drive continued growth. We -- as we laid out, I think, 18 months ago, we laid out a logic around 50 to 60 placements per quarter. And we have clearly, over the last few quarters here have been running stronger than that. And that really speaks to the -- what is happening in the clinical space right now. So while we do see some moderations back up and down from each quarter, we still believe that the elevation will continue into second half of the year. So we feel good about that. But there will, of course, be a little bit ups and downs in that. Talking about the clinical cliff, I agree, it's not a cliff. It's a wave, and we are surfing it as you are saying. We think there's a lot of momentum there. And yes, I think there's a good opportunity from -- for continue that momentum. Talking about '27 right now at this point, I'm still very committed to delivering on the high single-digit growth, but we will continue to focus on building a very, very strong value proposition to our customers, and then we see where it takes us.

Your next question will come from Tycho Peterson with Jefferies.

Wondering if you could address a couple of things, the sequential slowdown in clinical consumables. And one of the debates we've been having with investors is as the customers transition to X, are you over-earning on consumables because at some point, the 6000 get decommissioned. So how do you think about kind of that potential headwind as customers running both in parallel eventually wears off?

Yes, Tycho, thank you for that. And I will start by the latter one, is that we continue to see that we have an expansion of volume on the X, and we continue to see quite a number of 6000 is being in action for running the current assays. In fact, we did see some customers actually purchasing a few 6000 this quarter to continue their operations. So of course, eventually, they will move over to X, but we don't see that as -- it's a standard part of the business. We have seen that evolution also from fundamentally HiSeqs. It's only a few quarters ago, we still had HiSeqs running in our portfolio. So I don't think that, that is -- will be considered any true headwinds for us. And from the clinical performance, the momentum continues to be high. And as Ankur was mentioning, we continue to have strong confidence, and that's why we are raising our guide for the clinical consumable growth up to mid-teens, which is improvement from what we looked at in the beginning of the year. If you look into the details of the 20% growth we had last quarter down to 15% now. I mean, first of all, it's still very strong. But we still continue to see U.S. running faster than 20%. So that momentum is really strong. There's been some in and outs in -- especially in the Middle East and Latin America. I think we all know the situation in the Middle East, and that is impacting at least short term, the growth rate. So I wouldn't put more into it than that. But I think the headline here is that mid-teens growth is strong and is still beyond what we started the year with and is still very much driving high single-digit growth for us for next year towards that.

Your next question will come from Vijay Kumar with Evercore ISI.

Congrats on a nice print here. Just on -- if I take a step back on the performance in the quarter, can you walk us through on phasing in the quarter? Were there any one-offs? Because when I look at your guidance for third quarter, right, 4.5% Rest of World, why is that stepping down from 8%? Why is 8% not sustainable? And sort of what are you assuming for AI-related revenues? Or is that a theme that could be a bigger theme for the stock when you look at the medium term?

Yes, Vijay. So again, thank you. And we are very excited about the placements we're doing right now, which we also believe is elevated. This is not a one-off, but we do see that many of our clinical customers are investing into the future. They're building out the installed base. They're getting ready for the volume that they can see in their funnel. So we are seeing that right now. And there's a little bit of a compare that in the first part of last year, the installed base or the placements of instruments were a little bit different than the second half. We started to see the momentum slowly starting in second half. And that's why you will see the compares in the instrument is a little bit different. We actually expect that the consumable will continue to be strong. In fact, we do believe that, that momentum will continue to step up and will be the main growth driver into next year. So that is the main driver for that. If you look at AI, yes, I mean, we are very excited about what we're doing with BioInsight. We have now delivered more than 300 million single cell to our customers in the Cell Atlas. We have added 3 more pharma partners. So we now have 6 pharma partners. And in the end, what the customers are very excited about is that, that data can help really, first and foremost, create insight, direct insight to their drug discovery programs. But on top of that, which is really where there can be power in this is that it starts to be the foundation for strong AI models of biology that will start to be predictable in how you think about biology. So this is something we're excited about. It's still early days. We are making money already from day 1 on this, both on top line and bottom line. But I think there is a significant opportunity over the next period of time on that.

Your next question will come from David Westenberg with Piper Sandler. Our next question will come from Mike Ryskin with Bank of America.

Maybe I'll just follow up on that 3Q, 4Q pacing through the rest of the year question. It is a little bit of a surprising step down for the third quarter. But then even more importantly, 4Q has guided a little bit higher than we would have had. Is there anything unusual in terms of seasonality that you're anticipating? Maybe you can talk about any purchasing in the quarter. Obviously, you've had a lot of boxes placed. You talked about the backlog last quarter, if there was any stocking or anything like that. And also kind of tied to that, I know you've got an extra week in the fourth quarter. Just remind us what impact that's having on your revenue assumptions for 4Q and then also on margins and EPS just to make sure we're modeling that correctly.

Thanks, Mike. And again, I want to start with the headline here is that the momentum we've had here in the first half, I think, is going to speak to the opportunity ahead of us. We, as I saying, the -- our clinical customers are building out their installed base now to really be ready for the growth that they're seeing. And so instead of looking at a step down, I actually think that Q2 was very, very strong. And Q3 always is a little bit lower than Q4. So I think that's a normal phasing for us. So I'm not too worried about that. I think this comes in as we expected. But overall, I see the underlying trend being strong. So -- but Ankur, let's get your view on this.

Yes. Thanks, Jacob. The -- Mike, in terms of thinking about phasing Q3, Q4, think about it as usual seasonality from Q3 where Q4 usually is our largest quarter for the year and expect it to remain so. And then the second part of your question about the extra week. Yes, we have 1 extra week this year in Q4, which would largely be a consumables story. You would expect maybe 0.5 point or so of revenue contribution that could come from that extra week in terms of run rate days. The -- and that's part of the thinking. Now going back to a slowdown comment. Overall, from our perspective, the business is holding very well. The consumables growth story is the one that's remained steady through the year. And the variability is almost always around the instrument placements. We do expect elevated level of instrument placements to continue in the second half of the year. But you know that, that elevated level started in the second half of the year last year.

Our next question will come from Dan Leonard with RBC.

A follow-up question on the clinical growth rate. So can you discuss the breadth of the growth you're seeing in clinical, just given that the U.S. grew greater than 20%, I think you mentioned your largest clinical customers were especially strong when it came to instruments. I want to understand how narrow versus broad that strength is. And then separately, can you talk about whether you've seen any shift in application mix from those customers over the past couple of quarters here?

Yes. Thanks, Dan. And so let me start by just positioning it again. I mean, overall, clinical, the opportunity in the clinical space, really shifting NGS into health care is still in front of us. I think there is a huge opportunity for really becoming standard of care in health care over the next period of time. So I think overall, I'm very excited about that. And I think that will drive the momentum in that space for many quarters and many years to come. But the performance we have continues to be broad-based. Obviously, there are some ins and outs in this. But if you look at the regional level, as you mentioned, U.S. continues to be the main driver of the growth here. But all the other regions, except China, is still growing very nicely. If you look from an application perspective, oncology continues to lead the pack here. And if you look in oncology, we are seeing a shift towards now MRD starting to drive momentum. But still from a dollar perspective, the therapy selection is still the bigger one. But MRD is coming and later, we will see MCED also start to be a real contributor to this growth. But that -- we don't really see that really in the number today. The rare diseases and screening -- NIPT screening and so on is still growing very nicely, but oncology is the lead of the pack at this point. But again, broad-based, but right now, driven mostly out of -- still the leading out of U.S.

For our next question, we'll return to the line of David Westenberg with Piper Sandler. Yes, I'm not hearing you yet, David. All right. We can move down the queue. We'll take our next question from Subbu Nambi with Guggenheim.

A couple of questions on memory cost, prices are still rising and allocations continue to be strained. How are you thinking about the trajectory into second half, especially with the stronger 4Q instrument placements and into 2027, particularly as you integrate more GPU-based compute for next-gen product? And I have a follow-up.