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

Good morning, everyone. Welcome to RBC Capital Markets 2024 Global Healthcare Conference. I'm Conor McNamara, the life science tools and diagnostics analyst at RBC. It's my pleasure to welcome Illumina to our conference. With me on stage are Ankur Dhingra, new CFO of Illumina; and Salli Schwartz with Investor Relations.

Thank you, Conor.

Thank you for joining us. Ankur, you've just joined Illumina. Maybe just -- could you give us some background on you? What attracted you to Illumina? And yes, let's start there.

Yes. So I've been -- well, there's a lot to like in Illumina, and I view this as an excellent opportunity overall based on where Illumina is today. But as a background, I spent 18 years at Agilent Technologies, so I have been very much from the industry. I was CFO of the Life Sciences business within Agilent. So did watch Illumina over the last decade, decade and a half, doing all the cool stuff that they've done with the genomics. And thereafter, I was CFO within the molecular diagnostics industry, so did use Illumina products within our laboratory and actually launched a test using that technology. And from there, I was a CFO in a biopharma company where we were using some of the sequencing at a little bit lower scale, but still using sequencing for the purpose of profiling the tumors of the patients that were in our clinical trials. So did see the size of change that Illumina has brought the overall genomics revolution. So watching from outside, it was great to see what happened. And then when the opportunity came by and I evaluated it, there were multiple factors there, right? Just the -- as I thought about it and thinking about how much more that can be done, not just in genomics, but broadly in the multinomics space, it still seems like a sizable opportunity and that Illumina is very well positioned to capitalize on it, provided they do the right things. And then second, of course, the CEO is a big factor. So Jacob and I worked together back in Agilent. I was his CFO and he was the President of the Life Sciences industry. So when I talked to him at length about the opportunity and what he was trying to do, that seemed exciting. And the strategy the way he was laying out for me seemed like the right thing to do. And he's wicked smart. I have a lot of respect for him. So those two factors combined kind of made this pretty much a no-brainer.

Great. Well, thank you for that background. And just your first 30 days at Illumina, you started after the end of the quarter. Can you just walk through how involved you were with -- how you thought about guidance and where guidance stood, granted you started after the quarter?

Yes. Is there a better way to compress the learning curve?

Yes, sure...

Joined at the end of the quarter and take you through the earnings. So -- but jokes aside, I walked in -- I joined in the middle of April, the quarter was already done. So I was very much deeply involved both in terms of going through the earnings process, in terms of development of the guidance, in terms of taking it through the Board, the audit committees and whatnot. So pretty intense, tight 3 to 4-week process to come in front of all of the investors and lay out the earnings as well as the guidance for the year. And I was, I can say lucky, because in some of my previous jobs, we didn't have the previous CFO available even as an adviser. So in some ways, having enjoyed Joydeep around was -- as an adviser, was positive, that he was there, but very, very deeply involved.

Okay. And just based on your experiences, both at Agilent and where you worked following Agilent, just as you look at Illumina today, are there any low-hanging fruits that you can come in and implement very quickly, things like process or audit and I think on the ERP side? Just anything that you see that it was like, hey, this is something that I can bring to the table on day one?

Yes. So great question. And I see lots of fruits, some low-hanging, some a little bit higher-hanging that will take a little bit of developing the muscle to get to. But lots of opportunity. Listen, the way Jacob has outlined the 3 priorities of the company, and he's spoken openly about it in terms of driving the top line growth, driving operational excellence as well as resolving GRAIL. And the team is making good progress around it. We're getting close towards the time line that we have communicated towards GRAIL. But in terms of operational excellence, which is going to be a strong part of my wheelhouse as well as thinking about where the next [ ranges ] of growth would come from, I see opportunities in the ops excellence side across all of the lines of P&L, right, at the gross margin within R&D as well as in the SG&A space, lots of opportunity. As you look at our Q1 earnings, you are beginning to see some of the proof point in our numbers, the margin expansion of 190 basis points, you saw the OpEx now reducing year-over-year, which means that the actual -- the executive leadership team is very well aligned and energized towards those key priorities. They're working on it. And when I've come in and started questioning or throwing ideas, they've been lapped up very quickly where the team says, hmm, and thought about that, let's go after it. So that focus on execution to move the results quickly is high in the team. They're very well energized around it. So yes, lots of opportunity, and a team that's just going after those.

Okay, great. And you touched on GRAIL and the Q1 results, which we'll come back to -- just, if I just think about one other high-level question, is there anything that you're going to -- that you've thought about changing from a reporting perspective as far as either segments or the amount of information that's given? Because there's areas like clinical versus research, there's high throughput versus low throughput. And you get those questions every quarterly call. So have you thought about just changing what types of revenue segmentation you give or any metrics that you'll give on an ongoing basis?

Yes. Let me make some high-level comments. I haven't gone in that level of depth yet or form my opinions very specifically about changes there, but I'll tell you how I think about it and how do I -- what's my philosophy on that, and I'll welcome Salli to add a few more comments into that as well. But generally, my intent would be to lay out a level of detail that is commensurate or required to understand the main drivers of our business as well, be able to explain to you if we are putting certain strategies in place, then how are we measuring them. And to the extent we can shine the light on any metrics that will help the investors understand them better, we will continue to do so. I've looked at the disclosures from the past at Illumina, and I've looked at what some of the other companies do. Illumina has been fairly open about the extent and the depth of metrics that they have been providing. So philosophically, I see a good alignment in terms of the intent to disclose and help people understand where the performance is coming from. So that's the approach. I think I'll let Salli add more.

Sure. So a few things on the details as you mentioned, Conor. So on clinical versus research, one thing we've been asked a number of times is just how that -- how that was in the quarter, and the clinical sequencing and consumables revenue in the quarter was up high single digits. So I know that's something that a lot of people are tracking. I just wanted to share that and help you understand that piece. Also, with regard to the NovaSeq X sales, so we've historically given in some cases, a clinical versus research split in terms of where the shipments are going out. And so last year, we had about 35% of the shipments go to clinical customers. The first quarter was roughly in line with that as well. One more on pull-through, because you asked about that. We gave ranges in February for all the different instruments that we typically give, and we were very well in line across all of our instruments with those ranges that we previously gave. So just for your modeling purposes and to help with some of those details.

Great. Now you mentioned the strength of Q1. So you beat your guidance for Q1, you beat -- above on the top line and on the margin, and you kept guidance in line at the same spot for the year. So can you just walk through that outperformance? And what are some things that will continue throughout the year? And why didn't you use it as an opportunity to raise guidance...

Yes, sure. Yes, lots to unpack there. So thank you. And always good to come into your first quarter with a beat story, right? And then it quickly becomes, how are you going to raise? Why not? So very pleased overall, and encouraged with how the year has started, right? Jacob did lay out for the entire year, we expect 2024 to be similar to 2023 overall with the operating margin closer to 20%. So when I came in and looked at the performance for Q1, so very encouraging. Good overall revenue beat, pretty sizable revenue beat overall. And for the most part, it was driven by consumables and a good X placement story as well. We saw our backlog build as well as it seasonally does, but it was a good backlog build over the quarter as well, which was adding to that encouragement. And then the P&L side, broad beat on gross margins as well as OpEx leading to a pretty healthy operating margin start. So when I started evaluating and looking at all the metrics and started thinking about the guidance there, a couple of thoughts around that. One was just in general, being early in the year. We just completed one quarter, three to go. And then you juxtapose that against to say, has anything materially changed in my end markets, right? Has the capital investment environment changed? The answer is not really. Has China changed materially? The answer is no. So when you look at the pieces to say, yes, we executed very well in the market. We have good confidence about our execution capabilities, but the underlying market conditions on the capital investment side really didn't see any change on the positive side. So it's early, not seeing any material changes. I'll bank this part for myself, kind of derisk my full year guidance for now, would be -- probably be a prudent approach to peek at this point and see how the second quarter goes out. By the time we get to the second quarter guidance, obviously, everyone can mathematically build every quarter in the full year by then, right? So that's the thinking behind not raising the full year. I feel good about the operating margin pathway that we are on and the actions that the team is taking overall. So...

Right. And a couple of pricing questions. Now there was a pricing initiative that Jacob called out to cover operating expenses. And then there has been some pricing pressure from a competitive perspective. So can you just walk through within the quarter and as we think about '24, what -- the headwinds and the tailwinds, what's the net impact of that new pricing dynamic?

Yes, and I'll make a few comments, and Salli will probably add. So two dynamics. I'll take the simpler one first. We do our annual price increases every year, and we saw very good realization relative to what our plan was both across instruments as well as consumables on those. We did pocket that. It's good and kind of points to the -- just the underlying position that you has irrespective of how much of a competitive pressure there is or not, right? So from a pricing perspective, being able to realize that -- that increase more than we anticipated was a net positive. Now the overall step back and think about the transition from -- into the X or into the XLEAP in both mid throughput and the high throughput portfolios, that's going as expected, right? We expect people to buy these high throughput or higher volume instruments, be able to drive higher sequencing throughput out of it, which we're seeing with over 35% sequencing growth, which naturally results into a lower cost of sequencing and impacts what you would call as a net price that we end up realizing or achieving. We modeled that. That was part of our thinking when we guided that the 2024 would look similar to '23, where anticipating was volume consumption goes up but we get the lower part of it, and that has progressed in line with our expectations as well overall. So Salli, anything I missed?

I mean I'll just reiterate we impacted the pull-through ranges in the guidance that we gave at the beginning of the year. So we took those moving parts into account and have a view on them and pull through in the quarter across instruments, mid-throughput, high throughput, low throughput was in line with the ranges that we gave. One other piece on the P4 flow cell. I know we just launched that in March. So we only had a few weeks before we gave earnings and with that out in the market, but it was very well received, and we had a belt roughly 25% of our customers that are using the 1K, 2K have actually adopted the software that allows them to take advantage of that flow cell. So that's pretty early -- good indications of uptake there.

Great. And just on the -- you talked about on the mid-throughput with the new XLEAP chemistry. What was the dynamic in the quarter? Was there a pause from customers for buying new equipment until that was launched? And just what's the initial feedback? And how should we think about that impacting the consumable stream on the mid-throughput customers?

Yes, a little bit. We launched it towards, what, middle of March, right, so towards the end of the quarter. So overall impact I wouldn't say it was very material relative to the past, but we did see some customers. I don't know if you can add more color on that.

Basically, the comments I mentioned, I think, are what we're seeing early is just really good uptake of this new chemistry that we're offering and the work that can get done with it, things like single cell work, spatial work, all the pieces that people are talking about quite a bit right now.