Good day ladies and gentlemen, and welcome to the First Quarter 2025 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 Brian Blanchett, the Interim Head of Investor Relations.

Hello everyone and welcome to Illumina's first quarter 2025 earnings call. Today, we will review our financial results released after market close and provide commentary before opening for Q&A. Our earnings release is available in the investor relations section of illumina.com. Speaking today are Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will provide an update on Illumina's business, followed by Ankur's review of the company's financials. All financial information shared on this call relates to core Illumina. For historical consolidated financials, please refer to our earnings release and SEC filings. Please note that all revenue growth rates discussed during the prepared remarks are presented on a constant currency basis to exclude the impact of foreign exchange fluctuations. We encourage you to review the GAAP reconciliation of our non-GAAP measures, which can be found in today's release and in the supplementary data available on our website. This call is being recorded and the audio will be archived in our investor section of our website. It is our intent that all forward-looking statements regarding the financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including our most recent forms 10Q and 10K. With that, I now turn the call over to Jacob.

Thank you, Brian, and good afternoon everyone. Before we begin, I want to take a moment to recognize our former chair of the board of directors, Steve MacMillan, for his leadership in strengthening Illumina’s position in genomics innovation. His contributions have positioned us well for the significant opportunities ahead. I look forward to working closely with our new chair, Scott Gottlieb, as we advance our mission, execute our strategy, and progress the omics ecosystem. I'm also pleased to welcome Keith Meister to the board. His deep investor experience in genomics and strong track record of driving shareholder value will be invaluable as we build our momentum and deliver on our strategic priorities. Despite the macroeconomic challenges we have faced over the past few months, we have a good start to the year. Thanks to the Illumina team's continued focus on execution and operational excellence, we delivered Q1 revenue and EPS at the upper end of our guidance range. Illumina is a resilient franchise with multiple drivers of near and long-term growth, and there is a lot to be encouraged by this quarter. Our NovaSeq X instruments continue to perform well, exceeding our expectations with another quarter of over 60 placements in Q1, following more than 90 placements in Q4. The X transition continues to progress well, particularly among clinical customers, reaffirming both the value we provide and the resilience of the clinical markets. We also saw a sequential increase in X and overall high throughput consumables, a clear indicator that this key growth driver continues to gain traction and demonstrate elasticity. Our innovation pipeline remains unmatched. We are advancing the multi-omics ecosystem and every day our technologies enable customers to generate insights that were previously not possible. With this foundation, we've focused on achieving our long-term financial goals. We continue to execute on our strategy to deliver high single-digit revenue growth and 500 basis point margin expansions by 2027, excluding our Greater China region, which has been affected by the recent regulatory developments. At the same time, we are navigating a dynamic environment with discipline and urgency. Developments around China, U.S. funding uncertainty, and global trade dynamics have introduced new pressures for our customers. These are important concerns and we are taking clear actions to address them. But these are transitory challenges that will not define Illumina's long-term success or our leadership in advancing the genomics revolution. In light of this, we are revising our guidance to reflect both the headwinds and the proactive steps we are taking to protect earnings. I will now walk through each of these factors and Ankur will provide more details in his remark shortly. In China, our ability to export sequencing instruments has been restricted. We now expect lower revenue from the region in 2025, driven by minimal instrument placements. To provide greater clarity on the fundamentals of our global business, we will issue distinct guidance for the Greater China region and the rest of the world until the situation is resolved. We continue to engage with the regulatory authorities in China on potential solutions to support a sustainable long-term presence in the market. And we will keep you updated on any material developments as the situation evolves. In the U.S., ongoing uncertainty in research funding is weighing on our customers and affecting purchasing timelines. We are working closely with our customers to help them navigate this environment, offering flexible solutions to sustain their research projects and drive continued genomic innovation. In March, we took decisive actions to address the impact of China and the research environment by executing a global incremental $100 million cost reduction program. As of this call, we've already implemented the necessary actions to realize the full savings in 2025, reinforcing our disciplined approach to operational execution. Since our last update, the U.S. government enacted a baseline import tariff of 10% with significantly higher rates for certain countries. These tariffs are increasing costs for Illumina. To address this, our teams are actively working to minimize the impact through supply chain optimization, cost measures, and pricing actions. With these actions underway, we expect to partially offset the impact in 2025. And at current level, our aim is to more fully mitigate the impact in 2026. The Illumina team is navigating these external pressures carefully and strategically, ensuring that our core business and our commitment to our customers and to advancing innovation remain strong and unaffected. We have made significant progress in delivering competitively differentiated innovations that keep our customers at the forefront of discovery. Our multi-omics roadmap, a growing portfolio of omics and sequencing applications, is key to advancing the ecosystem and in helping us achieve our long-term targets. I will share a few examples. In February, we announced our new spatial offering featuring a significantly larger capture area, higher resolution, and greater sensitivity than existing technologies. This powerful solution will enable researchers to analyze millions of cells per experiments, increasing the likelihood of identifying rare cell populations. These advancements open new possibilities for research applications that were previously unattainable. This offering will integrate seamlessly into Illumina’s end-to-end workflows and connect with Illumina connected multi-omics, our new tertiary analysis solution, powered by intuitive data visualization technology. We have begun early access, and early customer feedback has been very positive, emphasizing our spacious solutions accessibility without the need for special equipment purchases, and how it streamlines a previously complex analysis and interpretation process. We plan to release our new spatial offering in 2026. Also tied to our multi-omics strategy, we recently announced a new single-cell offering for CRISPR research with applications in oncology, immunology, and drug target discovery. Our new Perturb-Seq solution will allow researchers to study how genetic changes affect single cells at scale, accelerating drug discovery and advancing our understanding of complex diseases. This is the next evolution of the technology we acquired last year. By capturing both CRISPR guide RNA and messenger RNA transcript from the same cell, our solution will enable researchers to perform genome-wide CRISPR screens at market-leading costs, providing deeper insights with greater efficiency. The solution is expected to launch later this year. Additionally, our innovation pipeline remains on track. Our proteomics solution, developed in collaboration with Standard BioTools, is in early access, and we are looking forward to our commercial launch in the first half of 2025. Our constellation mapped reads and 5-base genome technologies are already in early access, with full commercial launches on track for 2026. We are excited about these innovations. With advancing multi-omics while empowering our customers with deeper insights than ever before. The core of Illumina is strong, and our growth projections ex-China are on track as we deliver on our strategy. I'll now ask Ankur to share more details on our results and outlook for 2025, and we'll go from there directly into Q&A.

Thank you Jacob and good afternoon everyone. I will give you an overview of first quarter financial results and provide more color about our revenue, expenses, earnings, and developments on our balance sheet, and then speak about our outlook going forward. Before I get into the details of the financial performance, let me provide a high-level view of how the first quarter played out relative to our expectations. In Q1, despite the dynamic environment, team Illumina delivered a quarter of excellent execution, enabling us to deliver financial results towards the high end of our guidance. Revenue was flat year-over-year at the top end of our guidance, and EPS at $0.97 was also towards the top end of the range. Now, let me provide you with details of the financial performance. First quarter revenue of $1.04 billion was down 1.4% year-over-year on an as-reported basis. This included 1.2 points of headwind from foreign exchange and constant currency revenue was roughly flat. Excluding China, revenue was slightly up year-over-year on a constant currency basis. Sequencing consumables revenue of $696 million grew approximately 1% year-over-year, driven by strength in high throughput consumables and the continued transition of high throughput sequencing to X. During the second half of the quarter and correlated with uncertainty around NIH and other research funding levels, we started to see our customers, especially in research and academia, be slightly more conservative in consumable purchases. We estimate this phenomenon impacted consumables growth by approximately 1 point year-over-year. Despite this, the sequencing activity on the connected instruments remains strong. We typically see a seasonal increase in ordering activity in Q1, including long-range purchase commitments, leading to building of backlog. We report that as performance obligations in our 10Q. And this ordering activity was stronger than the last couple of years and encouraging sign for the rest of the year. Now about the X transition, which continues to progress well. In Q1, roughly 68% of high throughput gigabases shipped and approximately 43% of high throughput consumables revenue was on the NovaSeq X series. Greater than 80% of high throughput gigabases shipped to our customers in research markets is already on NovaSeq X series. And now over 50% of clinical volumes are also on X. We continue to make progress in the framework we previously disclosed. That in the second half of 2025, approximately 50% of high throughput revenue and approximately 75% of GB shipped will be on the NovaSeq X series. With continued strong underlying sequencing volume growth and strong adoption of X, over time, the price effect of lowered mix of 6K consumables fades away, and a much larger part of high GB growth translates to revenue growth. About sequencing activity, total sequencing GB output on our connected high and mid throughput instruments grew at a rate of more than 30% year-over-year, with robust growth from both clinical and research customers. Sequencing instruments revenue of $109 million was approximately flat year-over-year in Q1, with a higher than expected number of X series instruments shipped in high throughput and the successful launch of the MiSeq i100 in our low throughput portfolio. The clinical transition to NovaSeq X continues as approximately 60% of Xs placed in Q1 were to clinical customers. As you know, early in March, our ability to export instruments into China was restricted. We had in-country inventory to ship our instrument orders in Q1. Sequencing service and other revenue of $142 million was down approximately 5% year-over-year in line with expectations, mainly due to the timing of certain strategic partnership revenues last year related to the AGD consortium. Excluding those, our core services and informatics business grew in the mid single digits. Moving to the rest of Illumina's P&L. Non-GAAP gross margin of 67.4% for the first quarter increased 30 basis points year-over-year. Margins were slightly lower than anticipated as we saw a higher mix of instruments business. In addition, we're in the process of rolling out software upgrades for our high throughput instruments, which is improving their performance. As part of this upgrade, we're also pulling forward some of the routine instrument service, which has had a higher cost impact than we had assumed. The vast majority of the upgrades should be completed by Q2. Our manufacturing cost actions continue to make good progress. Non-GAAP operating expenses were $489 million. This reflects our ongoing focus on cost optimization and prioritizing key growth investments. During the quarter, we initiated additional actions to reduce our full-year expenses by $100 million and realized a partial benefit in Q1. Given these cost reduction initiatives, we do not expect the typical seasonal rise in OpEx that occurs post Q1 to repeat in 2025 and expect OpEx to be flat to slightly down for the remainder of the year. The $100 million in cost actions to be realized in 2025 are inclusive of certain stock-based compensation changes and represent over $225 million in total run rate reductions when fully annualized over the next four years. Non-GAAP operating margin was 20.4% in Q1. Looking at our results below the line, non-GAAP other expense, which is largely comprised of net interest expense, was $15 million and non-GAAP tax was 22%. And our average diluted shares were approximately 159 million, one million lower than last quarter, driven by share repurchases, net of dilution from employee equity awards. Altogether, non-GAAP EPS of $0.97 per diluted share came in at the high end of our guidance range. Moving to cash flow and balance sheet items for the quarter. Cash flow provided by operations was a robust $240 million. As a reminder, our annual cash bonus is paid out in Q1. Capital expenditures were $32 million and free cash flow was $208 million. In Q1, we repurchased approximately 1.73 million shares of Illumina’s stock for $200 million at an average price of $115.74 per share. These repurchases were completed in February. We ended the quarter with approximately $1.24 billion in cash, cash equivalents, and short-term investments. In gross leverage of approximately 1.8x gross debt to last 12 months EBITDA. Now, moving to guidance for the year 2025. As you may have seen in the press release, we are updating our guidance to reflect the impact of recent changes in the geopolitical environment. We remain confident in the continued strong position of our business and underlying growth in sequencing demand. However, the overall environment remains dynamic and we are providing estimates of known changes as of today and reflecting these impacts in our guidance. As it relates to our business in China, we will now be providing guidance separately for the Greater China region. This will allow for visibility into the evolution of our business in China, as well as that the over 95% of our business in 2025 outside Greater China is making significant progress towards our long-term financial targets. Starting with revenue, we are reducing our revenue guidance for Greater China by $125 million at the midpoint in connection with export restrictions on instruments and the projected impact on the remainder of our China business. For the rest of the world, we're lowering our revenue guidance to reflect the effect of two items. First, reducing revenue by 2% to 4% quarterly, weighted more towards our research customers due to a constrained funding environment. Partially offset by second approximately 1% of additional quarterly growth driven by clinical customers as we've seen strong instrument placements over the last couple of quarters. The net impact of these two items is approximately $60 million over the next three quarters. In addition, we're taking pricing actions that provide incremental revenue benefit primarily in the back half of the year. FX favorability relative to our previous guidance adds about $25 million to our projected reported revenue. All put together for the rest of the world, this represents revenue growth of 1% at the midpoint. More about China. We are in active dialogue with the regulatory authorities for a long-term resolution. We're taking a pragmatic view in our guidance and have taken expense actions to offset the impact on our earnings, both for this year and on a cumulative basis going forward. The guide assumes $165 million to $185 million in full-year revenue in the Greater China region, of which $72 million was recognized in Q1, and $60 million is projected for Q2 of 2025. And only $43 million of contribution at midpoint in the second half of the year. To the extent that there is a positive resolution in China, that will represent additional upside to this guidance. Now shifting into our product assumptions. Excluding the Greater China region, we expect sequencing consumables growth between flat and 2%, driven by strong sequencing activity, especially with our clinical customers. For sequencing instruments, we are assuming that our customers will continue to manage their capital investments closely. We expect demand for NovaSeq X instruments to remain relatively constant and low throughput growth driven by placements of the MiSeq i100, which is being received very well. We expect sequencing instruments excluding Greater China to be roughly flat year-over-year. Now moving to EPS. As you may recall, our revised EPS guidance in March, which maintained EPS of approximately $4.50 took into consideration the reduction in Greater China region revenue and the impact from our more constrained funding environment, as well as new actions we initiated to help protect our earnings growth. Our new EPS guidance additionally takes into consideration the developments thereafter, and the primary factor lowering our guidance is the new tariff environment. For Illumina, the estimated gross cost of tariffs for 2025 is approximately $85 million. The largest part of this relates to goods shipped from our manufacturing facility in Singapore to the U.S. The remainder relates to parts and subassemblies imported to our manufacturing operations in the U.S., as well as Illumina products sold into China. For Q2, given the inventory effects, we will see a partial period impact and a $30 million to $35 million impact in the following quarters. Our current guidance does not assume any incremental tariffs, including any counter tariffs from the EU or other countries. We're taking several actions across supply chain optimization, pricing, and enacting other expense measures to fully mitigate the impact of these tariffs. These actions take time, and we will realize an incremental benefit from these actions in 2026. For 2025, we are expecting to mitigate roughly half of this tariff impact and hence reducing the EPS at midpoint by $0.25 from the revised guidance provided in early March. In addition to our ongoing focus on reducing costs, we also plan to continue to repurchase shares under our previously approved share repurchase authorization, which has $1.2 billion remaining at the end of the quarter. These repurchases should provide a small in-year accretive benefit to EPS. Embedded in our FY25 EPS guidance is a contribution from Greater China of approximately $0.35. For comparison, in FY24, we estimate Greater China EPS to be approximately $0.76. Our rest of the world EPS this year at midpoint of guidance would be $3.90 growing at a rate of 15% compared to the last year. As I mentioned before, the expense actions we triggered in March will give us incremental benefit going forward and drive earnings growth irrespective of the outcome in China. Bringing it all together, our updated guidance for the year reflects revenue in the range of $4.18 billion to $4.26 billion, a decline in the range of 3% to 1%. And excluding Greater China, a range of flat to 2% growth. We expect a non-GAAP operating margin of approximately 21.5% to 22%, an expansion of 45 basis points at the midpoint versus 2024. The net impact of tariff-related items is a reduction of 125 basis points in operating margin. We're also lowering our non-GAAP tax rate, which is now expected to be approximately 22%. This results in an EPS guidance range of $4.20 to $4.30. Now moving to the second quarter of 2025. For the second quarter, we expect total revenue range between $1.04 billion to $1.06 billion. This includes revenue in the Greater China region between $55 million and $65 million. And revenue outside the Greater China region in the range of $980 million to $1 billion, or down between 2% and 3% year-over-year, driven predominantly by a decline in certain strategic partnership revenues and the research market dynamics I've spoken to. We are only applying the pricing actions to new orders. Therefore, there will be minimal benefit in Q2. We expect a non-GAAP operating margin of approximately 21% and non-GAAP earnings per share in the range of $1 to $1.04, both of which include the estimated $15 million in direct cost impact due to tariffs. Our guide, like before, implies a stronger second half contribution versus the first half, which is premised on both continued improvement in consumables growth with the transition of X and also the effect of just triggered expenses and pricing actions whose contributions increase in the second half. In closing, I would like to acknowledge the perseverance and commitment of all the Illumina employees amidst an increasingly dynamic environment. I remain confident in the path forward and the Illumina team's ability to execute towards our near-term and long-term financial targets.

Our first question will come from Doug Schenkel of Wolfe. Please unmute your line and ask your question.

Hey guys, good afternoon and thank you for all of the detail. At a simple level, I think investment in Illumina here requires a belief that revenue growth will start to rebound sooner than later, meaning hopefully next year. And that margins will expand to something above 25%. You're doing what you can do to control costs. That's been commendable. I think where most of the questions reside right now are on the top-line growth outlook. So, you did a lot to help us with that already, but I'm hoping you might be able to help us in a few different ways. So, on the quarter, outside of China, what was your total clinical revenue growth and what was your total research growth, and then kind of building off of that, as we think about guidance for the year, what are you assuming by end market? It seems like you might be assuming a double-digit decline in the research end market and still kind of mid-single digit plus growth on the clinical side. And then the last thing is in China it's going to be down to 4% of sales based on your guide, which is down significantly from 10% two years ago. That said, you know, if 4% goes down from there next year, it still could be a headwind in a period where we're hoping that things start to improve. Are there other things you're contemplating to manage that risk as we think about not just 2025, but beyond?

Thank you, Doug. I appreciate the questions. Let me begin, and I know Ankur will assist in recalling the details as well. First and foremost, we have a very resilient business. Illumina has demonstrated over time that even when facing strong headwinds, we can maintain significant activity. There is ongoing sequencing activity that supports our expectation of returning to high single-digit growth in the coming years. Outside of China, we are not observing any considerable changes in our strategic direction from what we shared earlier this summer, which focuses on the transition to the X platform. As we proceed with this transition, we expect the market volume to translate more effectively into revenue growth. By 2025, we aim to have at least 50% of our revenue from high throughput on the X platform in the latter half of the year, leading to subsequent revenue increases. We feel positive about this outlook. From a strategic standpoint, we remain on course, especially regarding the business outside of China, as we wait to see how the situation evolves there. You are correct that without changes in China, we project approximately 5% growth in 2025. Furthermore, if conditions do not improve, we anticipate a continued decline into 2026. However, it is essential to note that the cost reduction measures we implemented recently will impact this year's performance by $100 million and are expected to yield over $200 million in total analyzed value over the coming years. Therefore, we believe we are well-positioned to manage the potential impacts stemming from China. The $4.25 EPS is now our new baseline for growth based on our strategic plan, projecting a shift from double-digit increases to teen growth rates. I want to reaffirm our commitment to our strategy, while focusing on the business outside of China, which constitutes 95% of our operations. Ankur, would you like to share more insights on our anticipated growth rates?

Yes, Doug, I'll address the research versus clinical question both for the near term and what's outlined in the guide. As you look at Q1, everyone is aware of the changes in the geopolitical environment. In Q1, our clinical business has continued to show strength, evidenced by strong X placements carrying over from Q4 into Q1. Our consumables business in clinical grew in the mid-single digits. Based on our guidance details, we have raised our expectations for the clinical business for the rest of the year due to strong ongoing demand and good adoption of both existing and upcoming tests. On the research side, however, we have faced more challenges recently, with our research business seeing a decline in consumables in the mid to high single-digit range. As we consider the rest of the year, it's important to note that the challenges in the research environment began in the middle of the quarter. Conversations with our research customers, especially in academia and government, reveal difficulties primarily due to two factors: a constrained funding environment and inflationary impacts from tariffs. These dual impacts will persist throughout the year, leading us to lower our expectations for the research market. Our current guidance now anticipates a decline close to 15% in that area for the remainder of the year. While the clinical side remains robust, the research sector is expected to be weaker.

We'll move next to Dave Westenberg with Piper Sandler. Please unmute your line and ask your question.

Thank you for the opportunity to ask a question. I would like to discuss some aspects of the consumables in mid-throughput and low-throughput. I suspect there could be three main factors contributing to the situation: either a direct or indirect switch to X through a service provider, some form of competitive pressure, or perhaps a lack of funding. There may be other influences as well, but I believe those are the primary three. Could you provide a percentage breakdown of what’s currently occurring? I am considering this in terms of elasticity absorption, particularly regarding the first variable compared to the competitive pressure, which is clearly unfavorable. The possibility of funding issues leading to a shutdown is another concern. I would appreciate your insights on this. Additionally, regarding the conservatism in your guidance, Ankur, I think you mentioned having more commitments from customers, such as contract agreements. I just want to make sure I understood that correctly, as it would reassure us about the guidance.

Thank you, Dave. Let’s begin with the mid and low throughput market. We are very excited about the MiSeq i100 that we launched late last year, and we are seeing continued momentum in that area. The MiSeq i100 has been well received, and there is strong interest and a solid order book for it, which is encouraging. In the mid-throughput market, we have observed that it has faced more challenges compared to the high throughput market, particularly in difficult conditions. The mid-throughput segment is less production-focused and often caters to research or smaller clinical accounts that may not generate enough volume for high throughput use. As a result, when constraints arise in this market, customers may delay instrument acquisitions or opt for service providers, thereby affecting our consumable flow. This explains why the overall mid-throughput market is more constrained compared to high throughput. Additionally, we introduced new chemistry about a year ago, which has led to a significant shift among customers due to its superior quality and better pricing. We are also undergoing price rebalancing in this area. The two main factors contributing to the weakness in the mid-throughput market are competition, particularly in China, where we are currently seeing strong challenges, and the overall market conditions. However, we have performed quite well in China relative to our closest competitor, indicating that while the environment is challenging, it is more influenced by macro factors than by competitive ones.

So about the performance obligations and the backlog build. So, we contextualize that as a seasonal item usually in Q1, Illumina does see a fair lease. This is the time when a lot of our long-range contract negotiations and renewals happen. And we report that number as performance applications in our 10-Q. So, you should take a look at that. And my comment there is about this year, we have seen those order bookings, long-range order bookings to grow pretty significantly. Actually, our performance obligations are up double digits year-over-year and have grown much better than what we've seen in the last couple of years.

Our next question comes from Jack Meehan of Nephron. Please unmute your line and ask your question.

Thank you and good afternoon. Jacob, Ankur, I was wondering with the tariff dynamics going on in the market at the moment, whether you thought that might have influenced the demand in the first quarter? And then I don't know if you're willing to share anything since Liberation Day, just how customers, just from a demand perspective, whether the announced tariffs have influenced any purchasing behavior at all?

Thanks, Jack. For Q1, we didn't observe any specific change in our customers' behavior related to the tariffs, and I believe the same holds true for Q2. There has been a slight increase in demand in China, likely due to concerns about the situation there. However, for the rest of the world, we are not seeing anything significant that would affect our quarterly performance.

But as you know, just to add there are, at least for the rest of the year, we are certainly anticipating that as the impact of tariff becomes more better known and starts showing up in the cost that there will be some impact and have accordingly taken our guide down.

Our next question comes from Vijay Kumar of Evercore. Please unmute your line and ask your question.

Hey Ankur, Jacob, thanks for taking my question. I have one regarding the revenue guidance assumptions, if that's alright. The previous guidance was an increase in the low single digits. Currently, the updated guidance appears to be a decrease in the low single digits, possibly a shift of 300 to 400 basis points. It seems that most of this change is due to the reduction in China. I'm curious about the research aspect; Ankur, when you mentioned research is down 15%, how is that factored into the offset? Did the clinical assumptions change compared to before? Where is the offset coming from if the research is changing?

Yes, let me start and have Ankur dive deeper into the numbers here. We anticipated the impacts from China and NIH funding when we released our March forecast, so we had those factors already considered in our expectations. At that time, we indicated various possible outcomes, and now we are providing the full details. Overall, that outlines our current direction. We believe we have a clear understanding of trends in the academic and government sectors. As Ankur mentioned, we currently expect a 15% decrease in those areas, which is the primary factor influencing our results. Conversely, our clinical customers have shown stronger performance in Q1. We anticipate this trend will continue, as reflected in our numbers, indicating that our clinical business is more robust than we initially expected, and we are pleased with this development.

Yes, at a high level, the main change is in China, which we have highlighted separately. For the rest of the world, the research business is down by about 3 percentage points. This figure pertains to the remaining three quarters, translating to roughly $90 million related to research and tariff impacts. We are experiencing stronger clinical performance, both in our continued placements and in units expected to come live, which provides about a 1-point offset. Additionally, we've discussed mitigating actions concerning tariffs, which include pricing adjustments expected to contribute roughly another 1 point. Overall, these are the main factors affecting our performance. There is also a small positive impact from foreign exchange, which has improved since our last guidance, contributing about 0.5 points to reported growth, though not in constant currency.

We'll move next to Tycho Peterson with Jefferies. Please unmute your line and ask your question.

Hey, thanks. Ankur, I want to stress test your kind of assumptions around price here. It sounds good. I'm just curious where in the portfolio you think you can take price. Obviously, you've got competitors, including one giving away free sequencing. So just talk a little bit about your confidence that you can actually start to push higher pricing?

Yes. Let me start there and then Ankur can provide more details as well. Illumina has a long-standing history of reducing prices, and we will continue to ensure that our customers have competitive pricing. In this environment, it's also important for customers to partner with companies that will remain in the market for years to come. Therefore, we have a careful approach to both our pricing strategy and the innovative solutions we offer. Given the situation with tariffs, we are actively working to minimize any impact on our customers. We believe our analysis was thorough in determining the appropriate pricing adjustments. Naturally, no one enjoys a price increase, and we understand the discomfort it causes our customers. However, we are confident that customers will recognize Illumina's commitment to the long term. If we navigate this challenging period together, we will emerge stronger and continue to drive innovations that contribute to their success. Offering sequencing for free would undoubtedly harm our business over the next few quarters.

We'll move next to Conor McNamara of RBC Capital Markets. Please unmute your line and ask your question.

Hey guys, thanks for all the color on the tariff impact, really appreciate that. But just to expand a little bit on the competitive front, are you seeing customers delay or defer equipment purchasing in anticipation of current or any future product offerings from competitors?

Yes, that's a good question. We've heard this a few times as we remain in a competitive market. We believe we're performing well against our competitors. Recently, there was a technology overview announcement, but it wasn't a product launch. Technology overviews can create excitement, but they often fail to meet customer satisfaction. While promises can be made, consistent delivery is essential. In challenging times, customers tend to choose companies that can deliver with certainty, whether they are in clinical or research areas. We feel confident about our position, and so far, we haven't observed any disruptions or delays from customers due to uncertainty about new technology, which remains undefined even to us. New technologies require validation through academic research, and this process takes time. It's important to acknowledge that this is a complex and evolving market, and we will see how things progress, but there is currently no impact on our operations.

We'll move next to Mike Ryskin of Bank of America. Please unmute your line and ask your question.

Great, can you guys hear me?

Yes, we can Mike. Hi.

Great, thanks for taking the question. You spent a lot of the call talking about China and what's changed and your views on China for the rest of the year. You talked about academic and government headwinds this year. How do we think about both of those markets going into 2026? And what I mean by that is, if you're going to be doing $15 million, $20 million, $25 million per quarter in China in Q3, Q4, does that go to zero in 2026? Or do you think that's a sustainable level from which maybe you can start to grow again? And same thing on the academic research, if we look at what's happening in the U.S. on NIH and things like that, it doesn't seem like this is a temporary headwind. It's just taking a step back and looking at next year and the year after, these are two pivotal markets. Where do you think they go from here after the headwinds seen this year?

Thank you, Mike. I agree that we’ve focused too much on China, which represents only 5% of our business. We may also be overemphasizing the challenges in NIH, where we have strong markets continuing to grow, particularly in the clinical sector. Additionally, Europe is delivering robust performance for us. We need to realign our focus away from this small part of the business. We are a resilient company that continues to engage in numerous activities and generate excellent cash flow. Regarding China, as Ankur mentioned, we are in discussions with Chinese authorities to explore potential solutions. However, we are prepared for the possibility that we might not establish a long-term sustainable business there. We're implementing cost measures to offset any revenue declines. Based on our current expectations, we foresee revenue from China continuing to decrease in the second half of the year, and if our discussions with regulators do not yield changes, we anticipate further declines in 2026. Despite this, we remain optimistic about China as an important market. I had the opportunity to meet with some of our Chinese colleagues last week, and they express a strong desire for us to remain in this market. We are committed to supporting their success. While we are unsure of the outcome right now, we are taking steps to address the situation. Concerning academia and government, we are facing headwinds currently. However, I believe many politicians in both the U.S. and globally recognize that academic research is essential for advancing the industry, including its role in pharmaceuticals and medical science overall. I consider these challenges to be short-term and believe we will emerge stronger. The 21st century is all about genomics, and while we're experiencing some difficulties now, I am confident in our performance going forward in this arena.

Hey guys, thanks for the question. Just on the investigation to GRAIL recently, it looks like the SEC is set to close that. If that were to happen, would that give you more freedom to move into larger acquisitions or deals that involve buying clinical labs with big market opportunities such as MRD? And then taking this to fact, it's been almost a year since that divestiture. Has that actually helped you accelerate core Illumina? It kind of seems like on the surface like maybe not given the performance, but you have more attention on the pipeline now. So, just would love to hear your thoughts on that.

Hey Kyle, sorry, we didn't hear the second part of your question?

It's been almost a year since the divestiture. Has that helped you accelerate core Illumina?

Yes. Let me begin by saying we are very pleased that the SEC investigation is concluded with no findings, which we expected. We are glad to have this behind us. We continue to seek opportunities for value-added bolt-on acquisitions, and we are monitoring the market closely. We are very disciplined in identifying where we can find opportunities, and we are generating a significant amount of cash each year. This gives us flexibility to explore various options. I can confidently say that MRD is likely not a space we will be pursuing for now. Ankur?

Yes. So thanks for adding that, Jacob. Clearly, very good balance sheet, very pleased with what our cash flow generation has been now 3 quarters since GRAIL generating over $1 billion of cash. I was also very pleased with our Q1 results, where despite some of the research at the market the way it was. And despite paying out the annual bonus out of the quarter, we generated over $200 million in cash as well. So, very pleased, puts us in a very, very good position. As you know, we've also bought back roughly $200 million worth of shares during the quarter. But our primary focus remains on growth, bolt-on M&A. And there are several technologies, which we think can take advantage of our size, our scale as well as our large installed base, which is where our primary focus is. And hopefully, there will be some that we will be able to actually move on. At the same time, as we've said, don't intend to keep accumulating cash either. And as I stated in my script, we will continue to for the rest of the year, keep buying back some shares opportunistically as well.

And let me just clarify my comment on MRD. I think there's a huge opportunity in MRD, just not from an M&A perspective from Illumina as well, yes.

And our final question comes from Rachel Vatnsdal with JPMorgan. Please unmute your line and ask your question.

Thank you for taking the question. This is Martha on for Rachel. In terms of our mitigation actions for tariffs that you've discussed, can you talk about which actions have already been implemented and which ones still are to be implemented? And then how do you expect that to impact your EPS pacing for the rest of the year? And then a quick clarifying question. Are you assuming any 4Q budget flush at this point?

Yes. From the tariff perspective, it's only been a few weeks since we've gotten a clear understanding of the situation. It remains fluid and is still evolving. Based on our current assessment, we expect the impact for 2025 to be around 85 million, with the possibility of offsetting about half of that. We are exploring changes to some of our supply chains and are in collaboration with our suppliers, while also considering our manufacturing locations. Most of our manufacturing takes place in Singapore and the U.S. and is set up to be optimized, though we are not planning substantial changes to that setup at this time. We've already taken steps on the pricing front and feel confident about the actions we've implemented, and we will keep optimizing our supply chain moving forward.

And that will conclude our Q&A session. I will hand it back to Brian Blanchett for closing remarks.

Great. Thank you for joining us today. A replay of this call will be available in the Investors Section of our website. This concludes our call, and we look forward to seeing you at our upcoming events. Thank you.