Good day, ladies and gentlemen, and welcome to the Third Quarter 2024 Illumina Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sally Schwartz, Vice President of Investor Relations.

Hello, everyone, and welcome to our earnings call for the third quarter of 2024. During the call today, we will review the financial results we released after the close of the market and offer commentary on our commercial activity, after which we will host a question-and-answer session. Our earnings release can be found in the Investor Relations section of our website at Illumina.com. Providing prepared remarks for Illumina today will be Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will provide an update on the state of Illumina's business, and Ankur will review our financial results for Core Illumina. As a reminder, we divested GRAIL in June of this year. For a review of historical financial results for GRAIL and Consolidated Illumina, please see our earnings release and our SEC filing. We will be discussing non-GAAP results, which include stock-based compensation. We encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and in the supplementary data available on our website. As we go through the results, please note that year-over-year is as compared against the third quarter of fiscal 2023, while sequential is as compared against the second quarter of fiscal 2024. This call is being recorded, and the audio portion will be archived in the Investor section of our website. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent forms 10-Q and 10-K. With that, I will now turn the call over to Jacob.

Thank you, Salli. Good afternoon, and thank you, everyone, for joining our call today. Illumina delivered another quarter of strong financial performance. We are making significant progress in expanding margins and driving earnings, growing the utilization of the NovaSeq X platform, and bringing the next phase of sequencing innovation to our customers. In Q3, revenue was $1.1 billion, in line with our expectations. Across our regions, Americas revenue was down 6% year-over-year, Europe revenue was up 12%, EMEA revenue was up 7%, and Greater China was down 23%. In the quarter, we placed an additional 58 NovaSeq X Plus instruments, bringing our total installed base to 527. Approximately 40% of this installed base has been shipped to clinical customers, highlighting the diversity of our user base. The X-Series surpassed $1 billion in cumulative revenue, a major milestone. Our non-GAAP operating margin of 22.6% and diluted earnings per share of $1.14 exceeded our expectations, and we began executing on the capital allocation strategy we laid out at our August Strategy Update. Looking ahead through year-end, while the funds remain healthy, the near-term macroeconomic environment has been persistently constrained. We now expect our 2024 revenue growth to be slightly lower than our prior guidance range. However, we are raising our guidance for both 2024 operating margin and earnings per share, reflecting the significant progress we have made so far this year in our transformative journey, driving operational excellence and strengthening our culture of performance. Ankur will provide additional details during his remarks. During our August Strategy Update, we laid out a plan to drive high single-digit revenue growth and 500 basis points of operating margin expansion by 2027 while achieving annual EPS growth in the double digits to teens over the next three years. To achieve this, I've set key priorities to guide execution against our strategy: deeper customer collaboration, continuous innovation, and commitment to operational excellence and margin expansion. Our first priority, deeper customer collaboration, is centered on providing a range of targeted solutions to serve the increasingly diverse needs of our customer base. Over the past several months, I've continued connecting with our customers worldwide. Most recently, this included a group of academic core lab directors that have a long legacy of collaboration with Illumina and are some of our most experienced users. I'm grateful to them for their ongoing partnership and support. As we evolve the way we engage with customers, we have focused on two key initiatives. One, shifting how we interact and collaborate with customers to support their ambitions. My observation was that we needed to do better in this area. And now I'm beginning to hear from customers that they are seeing Illumina present itself in a new way. And two, giving customers a clear line of sight to the significant innovations we have in the pipeline. Their early input is invaluable, allowing us to develop the most impactful products and solutions in the industry. I'm pleased to see this partner mindset become increasingly embedded into our company's culture. It will serve as a cornerstone of our success going forward. Our second priority is continuous innovation, which follows naturally from our first priority as it is driven and shaped by what customers are telling us they need. For example, we recently announced the launch of the groundbreaking MiSeq i100. We are addressing demand for flexible solutions for smaller scale projects with faster turnaround time. Early feedback is validating our approach of bringing customers into the fold as advisors throughout the product development process. Customers are excited about room temperature shipping and storage arrangements, allowing for sequencing on demand without the need to store reagents. The shorter runtimes paired with 18 proven end-to-end workflows are what our customers have been asking for. And they have expressed that this is a game changer. Over time, we intend to leverage these new technologies in future releases across our portfolio. MiSeq i100 instruments for early access customers will begin shipping in late Q4, driven by the strong demand we saw in the days following the announcements. At our strategy update, we shared a number of additional innovations, including comprehensive whole genome sequencing and our five-phase genome that will launch over the next 12 to 18 months. Collectively, these technologies will reinvent genome while making NGS workflow easier. The comprehensive whole genome solution leverages a novel constellation map read technology to add additional layers of genomic data, redefining the extent of information created by the SPS chemistry. Standard library prep is eliminated as it is performed directly on the flow cell, going from multiple hours of hands-on time to just a few minutes. Another customer-driven innovation is the five-phase genome, which will provide variant and epigenetic information from a single library prep. Customers will have access to methylation information in every run, which is important to understand diseases, including cancer, obesity, and infectious diseases. Both the five-phase genome and constellation map read technology solutions are currently in development, with customers providing feedback that will influence our product advancements. We will be providing further details on these two innovations, including results from early access customers at upcoming industry events like ASHG later this week. In the near term, Illumina continues to deliver innovations for the NovaSeq X Series. We remain on track to begin shipping the single-flow cell NovaSeq X by the end of this year. This instrument will be upgradable to the NovaSeq X+. In Q4, we will introduce 100-cycle and 200-cycle 25B flow cells designed for high-output counting applications, such as single-cell and proteomics. Our third priority is operational excellence. Our focus here is to build a foundation that powers our long-term success, regardless of the top line. By enhancing productivity, optimizing our investment spend, and driving smart capital allocation, we are positioning Illumina to benefit directly not only our customers and the patients they serve, but also our employees and our shareholders. Indeed, we have made great progress in building a culture where every employee is driving efficiencies to contribute to operational excellence. Now I'll ask Ankur to share more detail on our third quarter results and outlook.

Thank you, Jacob, and good afternoon, everyone. I'll give you an overview of our financial results, provide more color about revenue, expenses, earnings, and developments on our balance sheet, and then speak about our outlook going forward. All financial information, including guidance that we shared on this call, is for Core Illumina only and excludes GRAIL. During the third quarter, Illumina's revenue of $1.08 billion was in line with our expectations, and the team delivered a very strong margin and earnings expansion through ongoing cost discipline and operational excellence. Cash generation remains strong, and we also put cash to use across all dimensions of our capital allocation strategy. Now I will add color to each of these items. Third quarter revenue was down 2% year-over-year on both a reported and constant currency basis, with strong growth in our consumables business offset by the instruments business declining against launch year compares. Sequencing consumables revenue was $741 million, up 7% year-over-year, driven by continued strong uptake in X consumables. The NovaSeq X transition progressed faster than we forecasted. As of the end of Q3, more than 55% of high throughput gigabases sequenced and more than 35% of high throughput consumables revenue was on the NovaSeq X series. We saw some acceleration of the transition from 6K to X this quarter, including in clinical as approximately 40% of high throughput clinical gigabases sequenced were on the NovaSeq X series. As legacy assays transition to the X series, we have seen increased clinical volumes and increasing adoption of the 25B flow cell from clinical customers. While there will be some quarterly variations in the pace of transition based on choices our customers make, we still believe almost half of high throughput consumables revenue could transition to the X series by the middle of 2025. Moving to sequencing activity, total sequencing GB output on our connected high and mid throughput instruments continues to grow at a rate of more than 40% year-over-year, with robust growth from both clinical and research customers. Sequencing instruments revenue was $104 million for Q3, a 42% year-over-year decline, slightly behind our expectations. The year-over-year decline was driven by two factors. One, lower NovaSeq X placements compared to significant pre-order launch related shipments in the third quarter of 2023. And two, a decline in mid throughput shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements globally. Sequencing service and other revenue was $150 million, up 6% year-over-year, driven by an increase in revenue from strategic partnerships as well as high instrument service contract revenue on a growing install base. Moving to the rest of the P&L, non-GAAP gross margin of 70.5% for the quarter increased 450 basis points year-over-year. This strong gross margin performance was driven primarily by the execution of our operational excellence initiatives that continue to improve productivity and deliver cost savings. The year-over-year improvement in gross margin was also supported by a more favorable revenue mix of sequencing consumables, making up roughly half of that improvement. While the business mix will change on a quarter-to-quarter basis, the productivity improvements we have achieved are sustainable and will support our margin expansion going forward. Non-GAAP operating expenses of $517 million were roughly flat to last quarter. This includes the additional headcount and expenses resulting from our acquisition of Fluent BioSciences. The Illumina team continues to manage expenses effectively. As I mentioned during our strategy update, we have several actions in play to reprioritize and reduce our expenses. As a result, non-GAAP operating margin for the quarter was 22.6% compared to the 22.5% in the prior year period. This came in well above our guidance of approximately 20%, driven by strong operational performance across gross margin and discipline in expenses. Below the operating income line, non-GAAP other expense was $14 million in Q3. During the quarter, we issued $500 million in debt at a 4.65% coupon that was used, along with cash on hand, to redeem in full the high-cost $750 million delayed broad term loan, effectively de-levering and also reducing our interest rate. Non-GAAP tax rate was 21% for the quarter. In Q3, we received the benefit of a few one-time credits as we filed our return for last year. Putting it all together, non-GAAP net income for Q3 was $181 million for diluted earnings per share of $1.14 per diluted share. Our non-GAAP weighted average diluted share count for the quarter was approximately 160 million shares. Moving to cash flow and balance sheet items for the quarter, cash flow provided by operations was healthy at $316 million. Capital expenditures were $32 million, and free cash flow was $284 million. During the quarter, we put cash to work in line with our stated capital allocation strategy. We acquired Fluent BioSciences, adding innovative instrument-free single-cell technology to Illumina's portfolio. We're excited about the potential for very large single-cell experiments this technology can enable. In addition, following authorization from our board earlier this quarter, we put a share repurchase program in place and repurchased 770,000 shares of Illumina stock for $98 million at an average price of $127.71 per share. And as noted, we de-levered. Taken together, these capital actions show the strength of our operational execution in the quarter. We ended the quarter with approximately $939 million in cash, cash equivalents, and short-term investments. In summary, revenue was in line with expectations. The transition of high-throughput sequencing to the NovaSeq X is going quite well. We announced breakthrough new products in low throughput. We made significant progress towards our stated goal of margin expansion, and we have been deploying our strong cash flow towards revenue growth, improved earnings, and shareholder-friendly capital actions. Moving now to 2024 guidance. Although our overall Q3 revenue results met our expectations, we are tempering our revenue expectations for year-end business and now expect full-year revenue to be down approximately 3%. For Q4, we expect revenue to be approximately $1.07 billion. We continue to see strong utilization levels and pull through on our instruments, but the near-term macroeconomic environment remains constrained and does not support any uptick in purchasing behavior through the end of the year. From an instruments versus consumables perspective, the projected mix is unchanged, and we're still forecasting instrument revenue to decline in the mid-30s percentage range relative to 2023. Although we are very excited about MiSeq i100, it is in early access, and we will receive minimal revenue contribution in Q4. As we had planned for, our low-throughput instrument business will likely decline in Q4, with customers waiting for the new instrument. For high throughput, we still expect second-half NovaSeq X shipments to be above what we delivered in the first half of 2024. We also still forecast sequencing consumables revenue to grow towards the upper end of the low single-digit percentage range versus 2023. We saw strong uptake and GB usage in the third quarter, setting the stage for exiting the year with solid year-over-year consumables growth. While we're disappointed in our lower revenue guidance, we are increasing our guidance for operating margin and diluted EPS, reflecting both the outperformance in Q3 and carrying forward the impact of our operational excellence initiatives into Q4. We are raising our non-GAAP operating margin guidance to a range of 21% to 21.5% for 2024. We are reducing our projected tax rate for the year to approximately 24%. And lastly, we're raising our guidance range for non-GAAP diluted earnings per share to $4.05 to $4.15 range for the full year 2024. With that, I will now turn it back over to Jacob for his closing remarks.

Thanks, Ankur. As I reflect on my first year, I'm excited for the early progress Illumina has made and the momentum we have created to drive the industry forward. We refocused the company on our strong core business and launched our new strategy. We reset the leadership team and made the necessary structural changes to support our customer-first orientation. We have been increasingly embedding operational excellence in our culture, and the results are beginning to show in our financials. This is a good start to our multi-year transformation journey. For 2025, we are looking forward to returning to growth, although I would like to finish Q4 before providing specific guidance. Ultimately, I'm encouraged and feel confident in bringing Illumina back to high single-digit revenue growth by 2027, as stated during our strategy update. Thank you for joining today. I will now invite the operator to open the line for Q&A.

Thank you. We'll first go to Doug Schenkel with Wolfe Research.

On guidance, just specifically, keeping in mind you are guiding revenue down a slight bit sequentially, what do you expect to drop, and specifically, do you expect sequenced and consumable revenue to grow sequentially and kind of building off of this? From a clinical standpoint, you're making really good progress in terms of placements with clinical customers. When you place a box, how much visibility do you have on that customer's plan? Specifically, do you know when existing assays are going to be moved from a legacy instrument to the X? I'm just looking for some help addressing concerns about a clinical cliff for consumable revenue as we look ahead to '25. Thank you.

Yes, thanks for that. I've heard this clinical cliff a few times, and I don't think that's the way we look at the business right now. I think, first and foremost, we are, of course, excited to see that there continues to be strong momentum moving towards the X. As Ankur was mentioning earlier that we are seeing the strong momentum. We are seeing a lot of volume moving towards the X. So, everything is pointing into the direction that we were also presenting at the Strategy Day. As you also mentioned, we did take down, and we were tweaking the guidance here for coming out of Q3 into Q4. As we did not see, even though we see a very healthy instrument funnel, we're not seeing the normal end-of-year activity that we would normally see. But as you're also mentioning, we actually saw a very nice uptake in our revenue for the consumables. I think that's also what we mentioned before, is a strong indicator for that we are seeing the trajectory of moving towards the X. With the specifics on clinical and on how we have transparency to our customers, we do spend, actually, quite a lot of time, especially with our larger customers. As I mentioned before, we are spending a lot of time, actually, to work closely with them to understand where they're going to actually go deeper into where we are with our funnel and what we have in our R&D pipeline, so they can get prepared to transition when we come out with new technologies. That goes both for our academic customers, but certainly also our clinical customers. We also have a quite good understanding on what the different projects they're looking into and when they're transitioning over to the X. Now, I would say that if I just look at it from a high-level perspective, we don't see a lot of customers that are going from completely 6K and over to X in a few months. This normally happens assay by assay, and it takes time. It usually takes a year, if not 18 months, to transition over to the X. But what Ankur was also saying, we've seen more than 40% of the volume now for the clinical accounts.

This is Ankur. Doug, on the other part, specifically to your question about the guidance for Q4 consumables, our guide right now assumes a typical seasonal decline from Q3 to Q4 in consumables. As you know, there are lots of holidays during Q4 relative to the other quarters. I looked back and looked at the trends for the last few years as well. And seasonally, the consumables purchases do kind of follow that seasonal pattern down in Q4, and that's what I'm assuming in the guide right now. Nothing underlying from a transition perspective or a clinical transition, et cetera, perspective there, just simple seasonality.

We'll move next to Puneet Souda with Leerink Partners.

So, I just wanted to clarify on the mid-throughput side, was that decline in mid-throughput come mostly from China, or was the decline in the quarter U.S. and Europe seeing more competition from a U.S.-based mid-throughput competitor? And then just briefly asking about 2025, I understand it's hard for you to provide a number there, but just can you walk us through the considerations that you have there for 2025? One of the biggest is obviously the clinical transition here for the customers as they switch over, obviously they'll purchase new instruments, that's a revenue, but at the same time they will also be taking a lower cost, which will reduce revenue to you. So, just can you walk us through the considerations as you think about 2025? Thank you so much.

Okay. Thanks for that. And I think, Puneet, let me start with the first one, is that I think we continue to see a lot of competition across the world. I'm actually quite encouraged with China. As you might recall, we have a new leader coming in almost six months ago in China, and Jenny has done a fantastic job to reset the organization, reconfigure the organization, also reset our relationship with many of our partners, and including also looking at different types of pricing strategy. And I think we're starting to see that actually working now, meaning that we are starting to see that sequentially we are seeing flat revenue there, so at least we are starting to see a change in the pattern in China. It's too early to call it up. Competition in the rest of the world, you're absolutely right that we are seeing most competition in the mid-throughput. I will say that we take that very seriously, I've said that before, but I actually think it's something that keeps us on our toes here, and it's something that I truly believe is important as a company to have competition. It makes us more agile, it makes us better in front of our customers, so I enjoy that. I will say that if you look into the performance of the mid-throughput itself, I had a conversation the other day, as I also mentioned, with the academic Core Lab directors, and during those conversations we were also looking to where they're getting their business from, and we see more and more of, they see a lot of customers, small biotech companies, all the small companies that previously would buy a likely mid-throughput instrument and do sequencing themselves, due to their financial constraints right now, many of them are outsourcing, and we still see, and thereby those lab directors will see more of that business. And for us, as we mentioned before, the macroeconomic is still the majority of the pressure we see in the mid-throughput. So if you look into 2025, I think we would still like to see end of this year before we go deeper into our considerations into 2025. But that said, as I mentioned, in the strategy day, we are expecting, we're still very committed to that we will end at high single-digit growth by 2027, as we also mentioned, we were stepping ourselves into that, and we expect to go from 2024, where we had negative growth here, and then step into positive growth regime in 2025.

We'll move next to Vijay Kumar with Evercore ISI.

Jacob or Ankur, maybe both of you can chime in on a lot of details here. The activity levels were about 40%, but I didn't hear a price for GB commentary. Was that in line with the minus 20, minus 25 that you expected at the Analyst Day? And given the mixed impacts here on margins, sorry, I think at the end of the Analyst Day you said 500 basis points of margin expansion. Is that off of the updated margin base of 21 to 21.5, or should we readjust the expansion given the guide increase for fiscal '24?

Well, first, thanks for that, Vijay, and I'll have Ankur to talk a little bit about the specific in the guidance here, but I will say that I'm very encouraged to see us delivering on our gross margin growth, but also our operating margin and EPS. I think it speaks volumes to the Illumina team and the company we want to be, that in tough times, we're also able to deliver significant progress in our margin expansion. So I'm excited about that, and I think it should give certain strong proof points that we are highly committed to deliver on the 500-basis point expansion that we set out to do at the Strategy Day. But, Ankur, do you want to remind where we are?

Yes, absolutely. So, Vijay, I think I answered the first question in between around that price thing. Yes, it was in that 25-percentage range. You've said that if the transition from 6K to X, since it accelerated, this quarter, we did see the price impact towards the higher end of that range, closer towards 25 rather than 20, but it was still within that model range. Now, around the margins, I can tell you I'm very pleased with the results. As I think about the 500 basis points, and I’m thinking of 21% as the base to work off that 500 basis point expansion, it's premised on two things, right? Our ability to expand our gross margins and be in that high 60s to 70% range. And what the team has been able to do here is crank up that model and get us, start giving us a view of what the model could be as we keep driving it higher. We still have lots of opportunity to take cost out within COGS to structurally get closer to that 70%. For now, this quarter, the higher mix was certainly beneficial. And then on the OPEC side, again, several levers still, but I think working off of that 21% and where we land this quarter and how we're looking at 2024 to end, I feel very good about the progress that we're making.

We'll move next to Dan Brennan with TD Cowen.

Maybe first one, I'm sorry I joined late, but maybe could you break out, I know a little, you gave some color on data growth, I believe, but could you break out a little bit how we think about NGS consumable revenue growth from the perspective of the research customer base versus the clinical customer base in Q3 and kind of how did that progress versus expectations?

Yes, I think I can, I don't know if you're breaking that out very clearly, but overall our consumables growth was up 7% for the quarter and then both research and clinical grew nicely. There wasn't a dramatic shift between the two.

Okay. Maybe stepping back just on kind of the outlook for kind of instruments that you discussed, could you give some color, what's now contemplated in the full year guide from a mid-throughput basis? I don't think you guys gave any kind of breakdown in the quarter what the mid-throughput placements were, but I know they were light. So any kind of math or any color you can provide for us about the mid-throughput number and kind of what's assumed now for the full year?

Yes. So at this point, we're not providing actual placement for mid-throughput. We will give you an update for the full year at the JPMorgan as we usually do. And I think, Ankur, maybe you want to go back on margins?

Yes. The sequence. Yes. Yes. I misspoke. The consumables growth for the quarter is 7%, not 6%. And yes, the research and clinical are both growing nicely.

Maybe can I sneak one other one in just on the X? I mean, is it fair to think, while you're not commenting on 25 at this point, I know we're in a difficult CapEx environment, but is it fair to contemplate like X placements in 25? Is it likely to start down year-over-year versus 24 or is it too early to say just given kind of the environment we're in?

Yes. We would like, as I mentioned, we would like to do the guide when we are, when we're ready to do that by the beginning of the year.

We'll move next to Tycho Peterson with Jefferies.

Just thinking a little bit about the clinical X transition seems to be happening. Maybe some momentum picking up here. How are you thinking about the pricing headwind of that as we think about going forward? Obviously cost per gig is lower and then you have the dynamic of, you know, some of those oncology customers locked into multi-year contracts, around GRAIL that they were able to sign. Do those break, I guess, with the transition to X? How do we think about those dynamics?

So overall, we are, of course, pleased that we continue to see our customers move towards X. We believe that the X platform is providing substantial benefit to our customers, both from a lower price point, but also the workflows that are able, combined with the Dragon compute power that we have and the interpretation power that we have. So there's a lot of reasons why our customers want to move on to the X. But as you also know, in the clinical space, you need to do a lot of work up front, validation and so on to make sure that you are ready to move all your assets over. And the other considerations also, if you see that you're working on a new type of asset, you might not want to move your current assay over because the cost of the validation might be outpacing what it costs or the cost reduction you get by moving it over to the other. So that's encouraging for us because we are seeing that many of the assets that the customers are moving over actually are either bigger panels or deeper sequencing, and thereby the elasticity is still working out. And now we are expecting our customers to do that. I mean, that's under our expectations that we are seeing. As we say, more than 40% of our placements are with clinical, and we expect that to continue to grow over the next period of time.

And, Tycho, so far during the transition, and I granted I've been here six months, I've seen two quarters, but every time customers are transitioning, the elasticity and the higher throughput that's going through the instrumentation is kind of playing out. The thesis I laid out during the Strategy Day, we just saw a little bit of acceleration of that during the quarter. We still saw very solid GB shift growth, and given the higher transition, we did see a higher price impact. But all-in-all, despite that, we were able to grow our consumables at a high single-digit rate this quarter because a larger portion of the business has now transitioned into X, right? I'm talking more than 55, so over half of the volumes already transitioned. That puts us in a good position that a larger part of the GB growth starts translating into revenue.

And, by the way, Tycho, also on your question about what you call the multi-year contracts, I think you are referring to what we call the open offer letter, and this is not instrument specific, so those contracts are also in place or will continue with the X.

We'll move up next to David Westenberg with Piper Sandler.

So I'm going to build on both of Doug's questions, I guess that was Doug and Tycho's question just here on the elasticity of demand. I'm sorry to belabor this point, but that cliff is a big topic we're getting from investors. So can you maybe give us some sort of conceptualization in terms of new assays to market or anything like that, that'll help us flavor the fact that this whole GB is actually getting, that these whole flow cells are actually playing out to a net positive revenue there. I know you've already given a lot of color, but it still is a little bit of a build I want to make on that. And then just on the fourth quarter seasonality here, to build on that part of the question, I think there's only been one year where Q4 was lower than Q3. Can you just talk about maybe some of the budget flush dynamics that are not happening in the quarter? I know there's obviously a low throughput weight on that one. However, low throughput is a percent of capital sales. I mean, it's fairly tiny on the overall P&L. So thank you very much.

Yes, David. let me let me go into that. I think there's two things to think about if you if you see those assays. I think I've definitely spoken to customers that have decided to make bigger assays. So if they have an oncology assay, they have decided to add more markers on, but also maybe methylation markers on all the things that require substantially deeper sequencing. So we see that happening right now. And on top of that, what should really be encouraging is that we are, as Ankur was also saying, we continue to see the strong volume uptake for both clinical and academic customer segments. So it really speaks to that, that while the X is offering, and most of that volume is obviously coming from the X. So even though that the X is offering a lower price, we see the elasticity actually works for both of the clinical and the research market. We are not seeing a lot of customers right now that is just shifting over and staying with the same volume. Most of them are transitioning to the X and also creating more volume. Ankur, do you want to?

No, that's great. In terms of your seasonality questions there, in our guide, if you're thinking sequentially, I think that instruments, given that we're holding at minus mid, what, minus 30% decline sequentially, the instruments would still be up relative to Q3 and my seasonality comment around a decline Q3 to Q4 was more for consumables with lesser number of working days, driving potentially lower testing and inventory, et cetera. One of the other things I would remind everyone, I think we've said this before, our X consumables have a relatively shorter shelf life still relative to what was for 6K. So some of those inventory dynamics might play out for the end of the year. If there are fewer tests to be performed or there are fewer number of working days, our customers may choose to manage their inventory accordingly.

We'll go next to Conor McNamara with RBC Capital Markets.

I'm just following up on just the overall revenue guidance change, works out to 20 million to 25 million, I think, for the year and I'm assuming most of that's in Q4. Is it safe to assume that's all in instruments? And if so, can you kind of give a breakdown of where you're seeing, is that all in the low and mid throughput or where else are the pockets where you're taking revenue out of guidance?

Yes, that's a good question. You're correct that it falls within the overall range we're discussing from a relative perspective. Looking back at our business in Q3 and the pace of our closures, we are very pleased with the performance of our consumables. However, when examining the instrumentation side and the pace of deal closures, we notice more variability recently. This variability is the main reason for our guidance change. Given the current environment, it’s challenging to predict the year-end business accurately. We concluded it's more realistic to expect results closer to the lower end of our guidance rather than the midpoint, which is why we are aiming for approximately the 10.70 mark. For modeling, I suggest splitting the impacts roughly equally among instruments, consumables, and services. This approach reflects our focus on deal closure velocity, rather than indicating weakness in a specific area. You could allocate about a third from each segment. I mention services specifically because we have certain CDX deals tied to our recently FDA-approved TSO comp assay. Some milestones associated with those CDS agreements are expected to be pushed into next year, so a balanced allocation across the three business lines is advisable.

We'll move next to Dan Arias with Stiefel.

Jacob, you guys have pretty consistently called out the macro environment of the headwind to placements throughout the year. It doesn't feel like there's a big change coming when the calendar flips and we're now in 2025. So how are you getting comfortable with the headwind actually abating? What should we look for as a shift that can impact the placement rate positively?

Yes, you're definitely right, Dan. I can't wait for the day that none of us have to talk about macro headwinds in these calls here. And I do think that as we mentioned before, we do think that at least from Illumina's perspective, the consumables growth is the early indicator that things are starting to turn around. That said, I mean, if I look, as we mentioned strategy day, it's at this point easier to look a few years out because we can see that in our models while we transition the business over to the X. But it's still very difficult to call quarter-by-quarter at this point or beyond a quarter at this point. But that said, we actually are seeing improvements, green shots, shoots in different parts. As you say, the consumables are looking better. We believe that the MiSeq i100 is giving us some momentum. But tomorrow is going to change everything again with the election coming up. So let's see. And we're taking it quarter-by-quarter right now.

So the only one thing I would add then is, as Jacob was saying, consumables are the right leading indicator for us. And some of our thesis around consumables returning to growth and then providing the foundation going forward, it's kind of playing out in the back half here. The instrumentation, yes, as Jacob said, we have to kind of see it play out.

We'll go next to Patrick Donnelly with Citi.

Ankur, probably one for you on the margin side. It's nice to see the gross margins back above 70 this quarter. Can you just talk about the cost savings programs? Obviously, you have the $100 million this year, how that's progressing. And then that incremental $200 as we look forward, just the pacing of it. Obviously, we have that longer-term up-margin guidance of the 500 bps or so over the next three years. But can you just talk about, I guess, the impact next year on the cost-saving side and then any offsets that we should think about on margins as we just think of that high-level framework for 2025, any headwinds that we should be aware of would be helpful. Thank you, guys.

Yes. So before Ankur goes into the details of the specifics here, I just want to mention again that the result we're seeing today is a very intentional focus on the whole company, Illumina, since I came in here, of really putting an effort, saying, look, there might still be a period ahead where we will be challenged on the top line. But in the meantime, we really want to set up the culture for the right focus on operational excellence and make sure we make the right priorities to both drive efficiencies in the company but also drive a much better way to run the company. And that goes way beyond just looking at operations. It goes from the commercial organization all the way through R&D operations and everything we do. And I truly believe, as I said before, this is what good companies do. And that won't change the day that we see substantial top-line improvements. I truly believe this is what a good company will look like also in the future and how we drive the culture. So, Ankur, you want to go into the details?

No, thanks, Jacob. And that is playing out right now in the last six months as we've come in, relaying the same message across the organization, laying our plans for where some of the savings could come from. But also, culturally, what we're also seeing is that the teams are the ones now, from a bottom-up perspective, starting to come up with initiatives, starting to come up with ideas around where the potential productivity gains could be, which is exactly where we want to drive this culture. So, very pleased with how this is heading. Now, to your question, feel good about the $100 million savings this year. If you simply look at the guidance overall, even at that 10.70 in our operating margin, we're talking about a 3% revenue decline year over year and a pretty substantial margin expansion, now more heavily focused towards gross margin during this year. And we've been able to substantially offset all of our inflationary or a good part of our inflationary pressures during 2024. So, feel good about that $100 million during this year. For the $200 million going forward or the 500 basis point margin expansion, as I said, during the Strategy Day, our focus will continue to take costs out of both COGS as well as operating expenses. We have a series of strategies, some already in execution and some in the early stages of execution around setting up global capability centers. We've moved our shipping line changes. We're consolidating some parts of our manufacturing lines into specific sites. We're looking at our R&D programs, et cetera. So, across the board that we're looking at. And in terms of where are we reinvesting, we'll likely reinvest in our sales and marketing a little bit more than where we are today. In terms of headwinds going forward, I don't see anything beyond the usual inflationary pressure, right? Every year, there will be a merit and an inflation that will come in and we'll find ways to offset that as part of taking out our expenses. But all-in-all, going back to our strategy of expanding 500 basis points over the next three years, I feel good about that.

We'll go next to Subha Nambi with Guggenheim.

You generated almost $300 million in free cash flow. Anything abnormal in the quarter? Where does this go from here? And are there enough levels to drive robust FCF from these levels? And building off of that, would you consider a more aggressive buyback at current levels?

Yes, Subha. Thanks for that. And first of all, I'm, of course, very pleased where we are now with our cash generation, and especially here after we focused the company back into our core business. And I think you can start to see that the model is starting to work. We're creating a good amount, excellent cash generation. And as we also mentioned at our Strategy Day, that we will start to execute on our capital allocation strategy. And you will see us in this quarter. We have started to do so. Where our focus would be both, of course, on stock repurchases, but also, of course, on M&A. And we did both in this quarter with the acquisition of Fluent, which we finalized in this quarter here, but also, of course, started to buy back shares. So, Ankur?

Yes. Thanks, Jacob. And thanks for the question, Subha, very happy with the cash generation profile of the business. Nothing material unusual in terms of if you're thinking about net income to FCF conversion. I anticipate to remain well above that 100, but even closer to 150%, I think, is what it is this quarter in that kind of territory here in the near term. So, very, very healthy cash generation just from a business perspective. Over a period of time, when you think about the next three to four-year timeframe, I do expect the FCF conversion to narrow a little bit. And part of it is going to be as we take different expense controls as we manage our capital expenses, some of our depreciation and our stock-based compensation, et cetera, will also come down. And those two are some of the components that lead to the higher FCF conversion. Now, I still expect it to remain well above 100% overall. So, strong cash generation position. And as you saw, we've started, Jacob was saying, started putting that cash to use. And that's our intent. We do intend to start deploying this cash back to the core business towards growing revenue as well as buying back shares. So, on the share buybacks and the overall strategy, what we laid out during the Strategy Day was that our focus is heavily towards revenue growth. We do want to buy back shares at least to the extent of our anti-dilution to keep the share count at least constant and then be opportunistic thereafter. On the M&A side, we intend to remain focused on tuck-in types of M&A, things that can be revenue-accretive for our businesses and bring in those technologies. And then continue to manage our balance sheet tightly. We de-levered a little bit this quarter. Now, we don't have any other bonds coming due here in the short term, but we'll continue to manage the balance sheet quite conservatively from there on.

We'll go next to Sung Ji Nam with Scotiabank.

Just wondering if you might be able to elaborate a bit more on the end market dynamics, specifically Europe relative to the Americas. If you look at Europe, your growth this year has been pretty steady both year-over-year and sequentially. I'm just kind of curious what the drivers might be there, if they're any different from what you're seeing in the Americas from a macro perspective. Thank you.

You're absolutely right. We're certainly pleased with our European performance. It's great to see that even under some tough challenges, conditions also in Europe that we have seen very consistent results. And we anticipate that that will continue over the next period of time. If you look into the Americas, to the U.S., that's also where we have higher pressure in the mid-throughput from a competitive situation, but also where we placed substantially more of the X instrument last year, and thereby the compare has been a little tougher in the U.S. than it was in Europe. So we anticipate that we will continue to look strong in Europe going forward, and the compares will be a little bit easier for U.S. going forward.

We'll move next to Mason Carrico with Stephens.

Hi, this is Ben on for Mason. Thanks for taking the question. I was just hoping you'd be able to maybe dive into the opportunity in single cell. And if you could just talk through how you see your ownership of Fluent, either growing the overall served addressable market, or sort of taking share from some other players out in the space. Just if you could talk through those balancing forces there, that'd be great. Thank you.

Yes, thanks for that. And we're certainly excited with the Fluent acquisition, and truly believe that we'll be able to build a very, very strong workflow that will help many of our customers. As you know, since you don't need to have a capital layout in the beginning, you can actually get very easy into to do single cell experiment. And also, the cost per cell experiment for a very high volume is also allowing for a really huge amount of single cell experience. So I actually think that the Fluent acquisition is helping to expand the market opportunity for all of us. And at the same time, even though we now, Illumina has, we have our own sample prep for single cell, we are very committed to support our current partners to make them very successful on our platforms. Our fundamental focus is to help our customers to be successful in single cell. I truly believe single cell is going to be a huge cornerstone, first and foremost, in research over the next period of time. And there's tremendous insight that you get through single cell. So I'm actually very bullish on the single cell opportunity. And I truly believe by focusing on our customers and what they need and make sure we can serve them, whether they choose the Fluent or some of our partners, we will make sure they're successful. And that will make all of us successful going forward.

We'll go next to Dan Leonard with UBS.

I could use some help trying to better frame the impact of the MiSeq 100 launch. What's been the growth trend in that low throughput sales category? And that might be helpful as I think about what would be the impact if that changes. And then a follow up on the XLEAP launch on the NextSeq. What's been the impact of that launch? Has that impacted the sales trajectory of consumables on that mid throughput line at all?

Yes, so let me start with the MiSeq. I mean, we certainly MiSeq i100, we are very excited about bringing a new instrument solution out to the low throughput end of the market. As you know, it is more than 10 years ago since we came out with the MiSeq and now the MiSeq i100 is going to be absolutely the best solution in that part of the market. We are really focusing on to make it easy to use, to make it easy to operate from. You don't have to store reagents or ship reagents or consumables in the freezer anymore. And that actually makes it much easier since you can take them directly. You can wrap up, open the package and use the consumables immediately instead of having to prepare for that. So we expect this to be very well received from our customers. And we actually think that some of the customers that potentially would have gone after a mid-throughput instrument might actually decide to go with the MiSeq i100 because it creates such a benefit for them. As you could imagine also, since our portfolio in the low throughput was in, it was time for an update, we have seen some weakening performance in that space. And thereby, we do believe that over the next 12 to 18 months, we will see a pickup in that space. As we also said before, we are not really seeing that to be meaningfully impacting Q4, but we expect that to start to have an impact in 2025.

Just to dimensionalize it for you, Dan, the low throughput instruments business on dollar terms is less than 1% or close to 1% of our revenue. So it's an exciting technology that has been around for over 10 plus years now. And the kind of interest that we're getting is substantial. We're also getting additional call points with customers to talk about an entire portfolio as well. But in terms of moving the overall revenue number for Illumina, just to help you dimensionalize that.

Yes. And then on the active chemistry, we have seen a lot of interest in that. We have more than 60% of our NextSeq 1K, 2K users that have downloaded the software and thereby also starting to use chemistry. So that has been very well received. We will continue to stay and be very committed to being competitive in the mid-throughput market. And I'm very excited about the future in that market also.

And that will conclude our Q&A session. I will now hand the call back over to Salli Schwartz.

Thank you for joining us today. As a reminder, a replay of this call will be available in the Investor section of our website. This concludes our call. And we look forward to seeing you at upcoming conferences and other events.

And again, ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time. And have a great day.