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

Perfect. Good morning, everyone. This is Rachel Vatnsdal from the life science tools and diagnostics team at JPMorgan. I'm joined today by Jacob from the Illumina team. So as a reminder, this is a 40-minute session. The first half will be prepared presentation, followed by roughly 20 minutes of Q&A. With that, Jacob, I will pass it off to you.

Thanks, Rachel, and to JPMorgan for hosting us at this conference, and to all of you for joining us today. I'm Jacob Thaysen, CEO of Illumina. All right. As a reminder, our presentation does include some forward-looking statements and non-GAAP measures, and I encourage you all to spend time on this information in our SEC filing. I'll cover 4 areas today in our presentation. First, I will share my view of the business and the significant opportunity ahead for Illumina. Second, I'll cover preliminary Q4 and full year 2024 results and provide some commentary on our outlook for 2025. Third, I will share the strong progress we have made against our new strategy to move from cost per gigabase to the highest quality insight for the lowest end-to-end cost. And fourth, I'll talk about the path ahead and why we're incredibly excited about it. Let's get started with the overview. Okay. Over more than a 1/4 century, Illumina pioneered the growth of next-generation sequencing from a nascent technology to a foundational tool in biology. NGS has now become integral to the genomic research and clinical applications worldwide. Today, Illumina is operating from a position of global strength. In 2024, alone, more than 480 petabases of data was generated on our sequences. That is equivalent to approximately and impressively 5 million of whole genomes. Our leading technologies enable breakthrough research that is increasingly transitioning into clinical applications, and 56% of Illumina's sequencing consumables revenue now comes from clinical customers. Illumina's revenue is highly diversified across products, markets and geographies. This power a strong business model, healthy free cash flow generations and a solid balance sheet, providing flexibility to continue to drive the genomics market forward. I've shared that we believe that over the next decade, NGS will become broadly adopted and have an even more significant impact. NGS will be deeply embedded in health care, and we provide the highest quality of insight to ensure patients are given the most effective personalized care. In addition, sovereign nations will embrace whole genome sequencing, moving truly from sick care into health care. The power of NGS will unlock deeper insights in multiomics by multiomics. And finally, AI-powered cohorts of whole-genome sequence multiomics data will provide insights that will help transform our partner's drug discovery going forward. Illumina is uniquely positioned to provide this value at scale. We're working towards shifting the industry from a sole focus on cost per gigabase towards what really impact customers. They're attaining the highest quality insight for the lowest end-to-end cost. Therefore, Illumina's long-term market opportunity remains significant. Of the more than $125 billion total addressable market, only $10 billion is today served by NGS. Illumina is engaged in many tangible near-term drivers of sequencing activity across both the research and the clinical markets. For the clinical market, penetration will increase as genomic becomes the standard of care for therapy selection, early detection and MRD, and also expand into other disease types. The research market will increasingly focus on understanding diseases through the lens of additional multiomics that require high-intensity sequencing and much many more samples. Illumina will continue to lead the ecosystem through relentless innovation and partnering. Moving along to our high-level Q4 and full year 2024 results as well as our preliminary '25 outlook. Illumina delivered Q4 results that exceeded our expectations, primarily driven by greater and as expected NovaSeq X shipments. Core revenue for Q4 was approximately $1.1 billion, up approximately 1% from prior year, with non-GAAP operating margin of approximately 19.7% for the quarter. Illumina non-GAAP EPS was in the range of $0.91 to $0.93. You can see the full year results also here. I'm incredibly proud of what the Illumina team accomplished in 2024. Our innovation and product launches, customer centricity and focus on operational excellence have driven significant progress towards our refresh strategy for returning to growth. Our ability to improve margins even under tough market conditions showcases the essence of the new Illumina operating model, and you will see more of that going forward. And our focus on innovation will continue to be underpinned by spending time with our customers and partners to share insights and support their ambitions. For 2025, we expect revenue growth in the low single-digit percentage range on a constant currency basis. On a reported basis, we expect revenue in the range of $4.28 billion to $4.4 billion. We're planning for a non-GAAP operating margin of approximately 23%, a 170 basis point improvement from 2024 as we continue on the focus on operational excellence. And with the continued focus also on below line, we expect approximately 10% non-GAAP EPS growth. This preliminary outlook for 2025 is based on the current macroeconomic conditions and environment, and we do not attempt to reflect any potential changes in legislations. We will provide the full year guidance for '25 in our Q4 and full year '24 earnings call, which is scheduled for February 6. During our Strategy Update in August, we set a path to achieve several key financial targets by 2027: high single-digit growth, 500 basis points of operating margin expansion and double-digit to teens EPS growth for '25 through '27. We have already made meaningful progress towards them. '24 was a solid initial step, and '25 will bring us even closer to these goals. While we remain well on track, '27 is not the end of the journey. We're just getting started. Our pipeline is full of exciting innovations that is building on the foundation to enable us to grow beyond what we're looking to accomplish in the near term. We've also been executing on our capital allocation strategy. Our first priority remains investing back into our business for driving growth and improving capabilities and productivity. We have a robust innovation pipeline that spans investment in sequencing platform, multiomics technologies and a range of services, software and data offerings. Second, our M&A strategy will be focusing on bolt-on acquisitions that can expand our addressable markets. We also expect to continue bolstering our ecosystem with strategic investments, partnerships and our initiatives. Third, we intend to maintain a solid balance sheet and an investment-grade credit rating. And finally, our share buybacks aims to be anti-dilutive over time, with the potential of additional opportunistic buybacks. We're excited to resume our share buybacks following the August Strategy Update. Over the remainder of '24, we bought back approximately $116 million of stock in aggregate. Now I would like to review our refresh strategy where we have our focus and also what will drive near-term growth. We continue to expect 3 key drivers to return Illumina to high single-digit growth by 2027. And the next few slides, I'll go through each of them. The NovaSeq X is delivering on the promise of setting a new standard for NGS that enables deeper and high-quality sequencing and serves as a platform of the future for multiomics. We placed 91 X systems in Q4 alone, and a pull-through for the X averaged $1.3 million per instrument in 2024. We're making strong progress with the transition to the NovaSeq X. By the second half of this year, we should see approximately 75% of total high-throughput gigabase shipped and approximately 50% of total high-throughput consumables revenue to be now on the X. And as more sequencing volume moves to the X, the impact of the reduced pricing lessens, and we expect to see a higher portion of the volume translate into true revenue growth. And as you're aware, we announced the MiSeq i100 last October. We started shipping in December and placed more than 70 instruments before year-end. Consumers are excited to expand their applications with faster answers. And some are even planing to use the MiSeq i100 to test experiments before running them at scale on the NovaSeq X. We'll be sharing more details in the upcoming earnings call. The growth in data sequence over the past couple of years shows that our customers are truly using the X for deeper and broader sequencing. The X Series will continue to serve as the foundation for growth in sequencing volume. This underpins my confidence in our high-throughput consumables growth. Customers have been excited about breakthroughs in multiomics Illumina has under development. These solutions are poised to deliver the highest quality insight for the lowest end-to-end cost. As an example, the KOLs we've induced constellation mapped reads haven't just shared their positive feedback, they are thrilled with this technology. It's helping them to see unprecedented level of information with substantially simplified workflow. With constellation, KOLs has been able to detect large structural variants that were previously very challenging to see in the short reads. One KOL shared that until constellation, it has actually been impossible with any technology to detect the most common causes of hemophilia A in boys. We have now made that possible. We're also very excited about Illumina's proteomic solution, which we have jointly developed with Standard BioTools and are launching in the first half of this year. Illumina's protein solution provides a true complete end-to-end market solution for proteomics, with easier automated workflow than other on-market products. With 9,000 protein panel, this is the largest orthogonal validated NGS proteomics panel in the industry. Recent publications have highlighted promising data that show that this has significantly outperformed other on-market NGS proteomics products with respect to position and reputability, with impressive median coefficient variance of less than 5% across all 9,000 proteins. This is not only impressive, but essential for identifying clinical relevant targets and insights. We are getting ready for prime time, and I believe that Illumina proteomic solutions will become the standard going forward. I encourage you to attend the Standard BioTools presentation on Thursday to hear more about the impressive performance and innovations and the foundational SOMAmer technology that powers the Illumina proteomic solutions. All Illumina solutions are supported by Illumina's advanced software stack that customers can use for integrated workflows across a range of multiomics applications. We're just super excited to see what benefits our customers can unlock with these technologies. With the X and our best-in-class DRAGEN-led software suite, we have made sequencing even more accessible. Services and multiomics data from our customers' population studies, as well as drug discovery, support our third key growth driver. We believe these efforts have significant potential to evolve the broader ecosystem and enable higher volume of sequencing. We're partnering with leading players to broaden our reach into the intersection of technology, health care and pharma. You've seen an example in our and others' announcements even yesterday. This partnership will enable our customers to generate more detailed data and richer insights. So I'm very excited for the path ahead. Illumina has a great foundation to work from and clear plans to go after the next wave of innovation in our ecosystem. We're already partnering with the ecosystem and collaborating closely with our customers, and we'll continue to ensure that innovation road map is directly linked to their plans. We will return to growth in 2025. The NovaSeq X Series is key to unlocking more and larger sequencing projects and will drive majority of growth in this year. The addition of multiomics and our increased focus on service, software and data will add further layers of growth as we move into '26 and '27. We're on track to step back to high single-digit growth revenue and 26% operating margin for 2027, and for an EPS growth in the double-digit to teens range. Thank you, everyone. I appreciate you joining the presentation today, and I also look forward to seeing many of you in the coming days and, of course, at our Q4 and full year earnings call in February. Thank you.

Perfect. Thank you, Jacob. So maybe first up, I wanted to ask on some of the announcements that we received from you guys earlier this week. Most notably, you announced a collaboration with NVIDIA to approve the analysis of multiomic data and accelerate some of developments within clinical research. So can you elaborate on the first phase of this collaboration and discuss some of your specific goals with the partnership? Additionally, how do you see this really aligning with Illumina's long-term plan and long-term goals?

Yes. Thanks for that, Rachel. And I'm super excited about the relationship and the announcement we've come out, both with NVIDIA, but certainly also with Truveta, and there was a few announcements coming out. But as I mentioned in our presentation, we truly believe that what we have done over the last few decades is Illumina have really set the standard for sequencing. And -- but there's now an opportunity to really move into multiomics to really understand and transform our understanding on biology. But the amount of data that goes into this is just enormous, and the complication of actually analyzing that, I think no human can actually sit in front of their computer and do so with an Excel sheet. So the AI is going to be tremendously important to do so. And that's really where the relationship with NVIDIA is going to be powerful. We've already built great tools with it on the DRAGEN platform. But now working with NVIDIA both to bring the DRAGEN on to the GPU platforms and CPUs and, of course, where we are today on FPGA, but to ensure that all customers, whatever platform they have or whatever technology they have, we'll be able to address it. But secondly, also, getting the tools that NVIDIA has been working on for building foundation models, make them available in our platform so customers can get access to this. We really want to make sure that our customers, especially in the research environment today, get access to the best tools so they can build what we call foundational models and really to have a deeper, much deeper insight on biology. And I'm excited about that. I think we will all sit here in a few years and think about back and see this is the starting of a new era. I think this is going to change how we think about health care, how we think about treatments, but also drug discovery and, of course, going from sick care into health care. So there's a lot there, but we're just getting started.

Perfect. Then I wanted to dig into some of the preannouncement numbers that you just unveiled for us. So in 4Q, you mentioned that you've shipped 91 NovaSeq X instruments. The guidance in the back half really assumed that placements will be higher than the first half placements of 117. That backs into like a 60 instrument placement guide that you guys had at 4Q. So obviously, you crushed that number. So can you walk us through what really drove those expectations? What drove the beat in the quarter? Was there anything from like a reagent rental type of model that we should be aware of? Or how are you able to achieve the 91 placements?

Well, first of all, and I will have Ankur stepping in here also, but first of all, we're super excited about the resource, and we're super excited about seeing customers really have -- are planning for '25 and continued transition on to the X platform. As we talked about, and I showed in the presentation, is that we do see that moving to the X is driving significant more volume. So I'm excited to see that more customers are adopting access. But it's not only new customers, it's also customers that already done work on 1 or 2 Xs and now buying 5 packs or 10 packs of Xs. So we're seeing really that progress. But Ankur, do you want to step further into this?

Yes. So again, very, very pleased with the performance there, Rachel. 91 was the number, which is well beyond our expectations as well as we've been talking about it. But one -- there are 2 things that kind of -- that look very, very promising to us. One, I've always said, throughout this, that we've had a very robust pipeline for our instrumentation. And embedded in our guide was a thinking that the deal flow and the deal closure process has been elongated throughout the first 3 quarters of the year. And we couldn't really take a call on what will we see during the end of the year. What we saw in this push was actually a pretty sizable interest from our clinical customers, where several of our clinical customers bought multiple units of X together. And as part of our discussions, we've been having discussions with a lot of our clinical customers around newer applications that are in development, like MRD, et cetera. And for us, this is more a signal around capacity addition that some of our customers are now making in preparation for what they are planning for their next year, et cetera. So it was good to see that come through. The deal closure rates were way better than we anticipated. And yes, we're having very good conversations with our clinical customers there.

Then shifting to the consumables side of the equation then. In 3Q, you mentioned that you were expecting that sequencing consumables would actually decline sequentially, just given some of the seasonality in holiday season. So can you walk us through what was some of the color on what you saw from a consumable trend intra-quarter? If we do some back-of-the-napkin math on 91 placements on NovaSeq in 4Q, getting to like $720 million, $730 million of consumables revenue, is that the right ballpark? Or if not, correct me, where am I wrong?

Yes. Again, I mean, you're right. I mean Q4, for us, is always a little bit slower in consumables. Not slow overall, but that's simply just less working days. People are enjoying the holiday breaks and, of course, our consumables is a run rate. So we do normally see that we have a sequential step down. So that was as expected. Ankur, maybe you want to provide some more insight on that also?

Yes. To contextualize on the consumables for X, where we've been going through the transition from 6K, especially within the high-throughput and then overall, we've seen very, very good transition throughout the year. What we've also seen is that the underlying sequencing activity has remained quite robust throughout the year. In the first 3 years, we've talked about it being up 30%, 40%. And during Q4, as we looked at the activity, it has remained strong, although all the specifics of that we'll talk about during the earnings call, et cetera, but the underlying demand and the running of the instruments was quite robust. We called during the earnings call, during our guidance, that we do anticipate volumes to be lower in Q4, and it kind of played out that way. Between Thanksgiving, all the way up to the Christmas, you see a kind of a reduction in the actual utilization, the actual run of the test. So it kind of fell in the ranges of where we were anticipating and guiding as well. It kind of, I think, like, the instruments and the overall underlying demand still sets up -- sets us up quite well as we look into 2025.

Helpful. One trend that I think we've been getting asked about a lot is just NIH funding, given the new administration. So I want to see, first up, have you seen any shift in customer behavior intra-quarter since the new administration was elected? And then also, what are your thoughts in regards to funding as we look to next year for academic and government customers as well?

Yes, overall, I mean, remember also the budget for NIH and others is setting in the fall, so we don't see actually a lot of changes in '25. But we also expect that, even though there will be considerations and, of course, new administration will look into all types of funding, the areas that we are within both genomics but also multiomics are areas that actually likely will see increased funding. So even though that the overall NIH budget might be under pressure, and I think we'll be more positive today than maybe we were a few weeks ago, a few months ago. We don't think that it's going to change a lot, but there will be puts and takes with the new administrations coming in. Honestly, we have seen a lot of curveballs over the last 5 years, so I don't think this is a bigger challenge for us than what we can overcome.

Perfect. So maybe along those same lines then, just in terms of the 2025 guidance, you laid out those single digits today. Can you walk us through what are the underlying assumptions on that, given some of the uncertainty that we had around things like NIH? So walk us through, how do you really get confident in that low single digit? And what does it assume from a market perspective?

Yes. Overall, as we -- as you mentioned also in the market perspective, we don't assume any changes in the macroeconomic environment, but we don't assume any changes in legislation either. So that's on the highest level. If we -- if you take one step further also is that, as I was also mentioning, is it's still a transition year from the X. So we're still seeing the impact of, of course, the pricing reduction we took on the X. And now the volume is coming out, but we also see '25 being a transition year, and thereby, even though we expect to see positive volume revenue growth on consumables, it's still not to the level that corresponds to the actually underlying volume. But as I was also mentioning, by mid this year, we expect to have 75% of our volume on the X and 50% of the revenue. So we certainly will start to see more of positive impact on the growth from consumable volume onto revenue. Do you want to go a little further into the details?

I'll add a couple more things around the X transition. So Jacob, as [ vision ] '25 will still, at least, the first half and some part of the second half would still be the year of transition, which is embedded within our guidance. If you step back up from thinking about 2025 for the company, we're very well positioned overall to be able to continue to drive the trends, both within genomics as well as within the multiomics space. We've talked about several new product launches, some in early access versus -- and the new ones, either in the core genome, we talked about constellation mapped reads. We're getting a lot of interest from our customers, as well as in the multiomics, on the single-cell and the proteomics side. So that positions us well more, especially in the research side, wherever the funding movements, if they happen, it kind of positions us with the newer technologies for driving research. And then at the macro level, the geopolitical side probably is a factor that we'll continue to watch for, to see how it evolves with the new administration coming in, and see what actual policies actually do get in place and how do they impact the business. So considering those is how we're thinking about the next year. We've had, again, a very, very strong Q4 from an X installations perspective. That gives us good confidence in the overall transition and the confidence that our customers are placing in our multiomic strategy, thinking about how X can be used in more ways than just running their genomic samples.

Okay. That's helpful. Then along the same lines, just in terms of the '25 numbers that you gave us. You pointed towards operating margins of roughly 23% for the year as a guidance number. I believe that's about 170 bps relative to the 500 basis point target that you guys have laid out at your analyst update earlier this summer. So walk us through how should we think about the levers to get to that operating margin expansion this year? How much of it is driven by things like gross margin and some of the pricing dynamics at play versus some of the other OpEx things that are in your own control as well?

Yes. I think, first and foremost, we're super excited what we also did here in '24 and proved to ourselves, but also to everyone else that, even in tough market conditions, that Illumina can actually improve margins. And that speaks to the effort we put into what we call operational excellence, but really a very strong focus in the organization to really drive on all elements in the business on how we do things better. I truly believe that a great company is always focusing. It doesn't matter whether you are growing faster or the market is growing fast or slow, you always need to be focusing on doing things better every day. And the energy that actually goes into that, but the excitement that comes out of that, when I started to push that into the company, there's a little bit of that, oh, this is about cost cutting. But it's all about actually driving more efficiency. And I actually believe in more enjoyment in the work because nobody wants to be unproductive. Nobody wants to waste time on things that is not actually optimized and not works the way it should be. So we're now starting to see that the organization is really getting exciting and really coming up with ideas how we can do things even better. We have a whole program around that. I won't go into details, but a lot of the improvements we're seeing in '25 also will be driven by operational excellence. I mean the growth of where we are expecting is simply not -- is not strong enough to drive the overall margin improvement. So that will be driven by operational excellence.

That's right. And across all lines of the P&L.

Yes.

It will be in gross margin as well as in the operating expenses. But I would want to just add and close on that. Despite all the margin expansion, we will still continue to invest, both in innovation as well as expansion of the broader genomic ecosystem. Just saw a couple of announcements yesterday, right? We're investing in Truveta. We're working with NVIDIA, as we continue to expand what really is a possibility of taking the power of genomics into the hands of all the researchers as well as clinicians across the world, and we'll continue to invest while expanding margins.