Earnings Call
Illumina, Inc. (ILMN)
Earnings Call Transcript - ILMN Q1 2024
Salli Schwartz, Vice President of Investor Relations
Hello, everyone, and welcome to our earnings call for the first quarter of 2024. During the call today, we will review the financial results we released after the close of market and offer commentary on our commercial and regulatory 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, which include GRAIL. Joydeep Goswami, who is serving as an adviser to the company through June 30, will then join us for Q&A. As a reminder, GRAIL must be held and operated separately and independently from Illumina pursuant to the transitional measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation. This call is being recorded, and the audio portion will be archived in the Investors 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.
Jacob Thaysen, CEO
Thank you, Salli. Good afternoon, everyone. Before going into our first quarter results, I want to take a moment to thank our former Chief Financial Officer and Chief Strategy and Corporate Development Officer, Joydeep Goswami, for his many contributions to Illumina over more than four years. As Salli noted, Joydeep will stay on in an advisory role through June to support a smooth transition. I also wanted to welcome our new CFO, Ankur Dhingra, who you will hear from shortly, and congratulate Jakob Wedel, who has now been named as Chief Strategy and Corporate Development Officer. Jakob joined Illumina in November and has been heavily involved in our long-term strategy planning. Throughout the quarter, I continued to meet with customers around the world and had the opportunity to bring a number of them to our San Diego headquarters to discuss new ways to collaborate, innovate, and shape what their future looks like with Illumina. Some of our customers shared how they are scaling up their projects with NovaSeq X to unlock greater discovery power. One key area of focus is harnessing whole genome opportunities in minimal residual disease. Other customers are starting to sequence deeper and are adding multiomics layers to their projects, while others are looking at epigenomic biomarkers and methylation to help diagnose and characterize disease. We are seeing a significant opportunity to expand in multiomics. Customers are looking for more sophisticated solutions to support their work, and we are exploring all avenues to create value in this space. Our recent acquisition of Partec, a specialized multiomics software solution, is the building block of our expansion into this space. Our intent is to collaborate with our customers to understand how we can provide more sample-to-answer solutions. Illumina is at the heart of the ecosystem, and we will continue to catalyze the industry with an even greater focus on our customers' priorities. Turning to our first quarter results. I'll focus my comments on core Illumina. In Q1, we delivered core Illumina revenue of approximately $1.06 billion, ahead of our expectations. While it was a decent start to the year, we remain cautious due to the persistently challenging global macro environment where customers are still constrained in their purchasing decisions. As expected, we are seeing this playing out across our regions, notably with lower NovaSeq X placements versus the first quarter of 2023, where we shipped our first X instrument to fulfill a strong preorder book. Three of our regions declined year-over-year. Americas revenue was down 4%, EMEA revenue was down 3%, and Greater China revenue was down 14%. Europe revenue was up 7% year-over-year, although we expect a decline in Q2 given last year's strong X shipment in Europe in the second quarter. Nonetheless, the Illumina management team continues to make significant progress executing against my three key priorities to accelerate value creation across the company. My first priority, driving our topline, is grounded in a growing installed base and helping customers realize the full potential of our instruments. In Q1, we shipped an additional 55 NovaSeq X instruments, bringing our total X installed base to more than 400 instruments. This is a solid start to the year, and we expect momentum to continue to build. We also saw promising consumables demand throughout the quarter as our customers continue to scale their operations and expand their sequencing projects. With the launch of the 25B reagent kit in Q4 and the 1.5B in Q1, alongside the well-received upgrade of the 10B flow cell, we are now providing our customers with the full suite of NovaSeq X products. In Q1, we also made XLEAP-SBS chemistry available to our mid-throughput customers with the launch of our P4 flow cell on the existing NextSeq 1000, 2000 instruments. In the first several weeks post-launch, we have received exceptional feedback from customers who are reporting reads that exceed specifications for quantity and quality. Customers are positive about the simple migration that's enabled them to run spatial and single-cell projects, and they are impressed with the accuracy they see with the DRAGEN onboard. Illumina continues to pursue strategic partnerships and alliances to drive the entire genomics ecosystem forward. As a recent example, Pillar Biosciences announced FDA approval for its pan-cancer IBD for general tumor profiling on the Illumina MiSeqDx system. We've been partnering with Pillar since 2017 and are excited for this important milestone. Also in the quarter, Bristol Myers Squibb joined our previously announced collaboration with Johnson & Johnson innovative medicine on the development of our multi-cancer whole-genome sequencing-based molecular residual disease assay to better understand disease recurrence. You should expect to see more of these types of activities going forward. Now turning to my second priority. I'm continuing my focus on delivering operational excellence by driving margin improvement through increased productivity while sustaining innovation and growth. It has been my goal to align our organization in a way that best supports our customers' evolving needs. In March, we brought together our marketing and commercial teams under one customer-first global function. I'm confident that combining these teams into one global commercial organization will build our agility to better serve customers while delivering more sustained growth and margins over time. Additionally, we are focused on driving further improvements throughout our end-to-end supply chain and are taking a disciplined approach to improving our cost structure. In Q1, we implemented new initiatives to adjust pricing across our portfolio to better cover our global operational cost. We also made progress in streamlining our real estate footprint as we exited select facilities in the Bay Area and in San Diego. These actions add to the number of ongoing initiatives that will continue to support our margins and increase flexibility for investment in high-growth areas. We are also tightly focused on stabilizing our Greater China business. In Q1, we brought on Jenny Zheng as Head of Region. Jenny has deep expertise in healthcare and global organizations and a strong leadership and execution mindset. She is already proving to be a great leader of our China team and is introducing changes to make our business more in China for China, which will include improving our local manufacturing and partnerships in the region. Moving on to my third priority, which is working to resolve GRAIL as quickly as possible. In April, we reached an important milestone in the divestment process when the European Commission approved our divestment plan for GRAIL. The approved plan contemplates both sales and capital market options, and we have made progress on both paths, consistent with the European Commission's divestiture. In the event of a capital market transaction, we are required to capitalize GRAIL with approximately $1 billion, reflecting 2.5 years of funding based on GRAIL's long-range plan. The amount includes cash on GRAIL's balance sheet. We are on track to finalize the terms of the transactions by the end of the second quarter. I look forward to having additional updates for you soon. Overall, I'm encouraged by the progress we have achieved in the quarter and optimistic about delivering on our initiatives here in 2024.
Ankur Dhingra, CFO
Thank you, Jacob, and hello, everyone. I'm very excited to join Team Illumina to improve human health by unlocking the power of the genome. I'm passionate about making a positive meaningful impact in healthcare. I am very familiar with the role Illumina has played in establishing and advancing the genomics industry over the last 25 years. Building on that strong foundation, I'm confident we can continue leading, supporting our customers, and delivering on the promise of what genomics can do for patients around the globe. I would also like to express my thanks to Joydeep for his support as I transition into my role. It's been a great first 2.5 weeks. I'll start by reviewing our segment results for core Illumina and GRAIL, followed by consolidated financial results and then conclude with my remarks on our current outlook for 2024. I will be discussing non-GAAP results, which include stock-based compensation. I 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. Starting with our segment financials. Core Illumina first quarter revenue was $1.06 billion, which is down 2% year-on-year, both on a reported and constant currency basis. This revenue performance exceeded our expectations and was primarily driven by three areas: first, strong performance in high-throughput consumables; second, timing of revenue from certain strategic partnerships; and third, some customers accelerating delivery of a few NovaSeq X instruments from Q2 into Q1. Core Illumina sequencing consumables revenue of $698 million was up 1% year-over-year, primarily due to growth in high-throughput. On a sequential basis, NovaSeq X consumables grew in the double digits following the successful launch of the 25B flow cell. Total sequencing GB output on our connected high and mid-throughput instruments grew over 35% year-over-year and grew at a high single-digit rate quarter-over-quarter. Research and applied activity benefited as the transition to the NovaSeq X continues to ramp, and 25B adoption grew at large core labs. Clinical activity continued to be driven predominantly by the NovaSeq 6000. As a reminder, we believe this data is a useful reference that shows the general activity trends across our installed base and is directionally correlated with revenue over time. Sequencing instruments revenue for core Illumina of $110 million declined 29% year-over-year in Q1 2024. The year-over-year decline was driven both by one, an expected decline in mid-throughput shipments as capital and cash flow constraints continue to impact purchasing behavior and moderate instrument placements; and second, lower NovaSeq X placements as compared to significant preorder launch-related shipments in the first quarter of 2023. For NovaSeq X, as Jacob noted, we shipped 55 instruments in Q1. Core Illumina sequencing service and other revenue of $151 million was up 27% year-over-year, driven primarily by an increase in revenue from strategic partnerships and hired instrument service contract revenue on a growing installed base. Moving to the rest of the core Illumina P&L. Core Illumina non-GAAP gross margin of 67.1% for the quarter increased 190 basis points year-over-year, driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight and improved productivity. This was partially offset by certain strategic partnership revenue that is lower margin and increased warranty and field service costs. Core Illumina non-GAAP operating expenses of $491 million were down $23 million year-over-year, primarily due to decreased labor expense as a result of reduced headcount and continued savings from our cost containment initiatives. Core Illumina non-GAAP operating expenses were lower than expected due to timing of project spend shifting from Q1 into Q2 and lower stock-based compensation expense due to one-off reversals. Putting it all together, core Illumina non-GAAP operating margin was 20.6% in Q1 2024 compared to 17.4% in Q1 2023. Transitioning to financial results for GRAIL. GRAIL revenue of $27 million for the quarter grew 35% year-over-year, driven primarily by adoption of Galleri. GRAIL non-GAAP operating expenses totaled $197 million and increased $24 million year-over-year, driven primarily by increased headcount to support commercial expansion and research and development. Moving to consolidated financial results. In the first quarter, consolidated revenue of $1.08 billion was down 1% year-over-year, both on a reported and constant currency basis. Non-GAAP net income was $14 million or $0.09 per diluted share, which included dilution from GRAIL's non-GAAP operating loss of $185 million for the quarter. Non-GAAP EPS exceeded our expectations driven primarily by higher core revenue and lower core operating expenses in the quarter. Our Q1 non-GAAP tax rate was 46.4% compared to 27.3% in Q1 2023, with both periods including a meaningful impact from the consolidations of GRAIL's operating loss, which increased by $21 million year-over-year. Absent the impact of GRAIL, our Q1 2024 and Q1 2023 tax rates were in the mid-20s. Our non-GAAP weighted average diluted share count for the quarter was approximately 159 million. Moving to consolidated cash flow and balance sheet items for the quarter. Cash flow provided by operations was $77 million. Capital expenditures were $36 million, and free cash flow was $41 million, and we did not repurchase any common stock. We ended the quarter with approximately $1.12 billion in cash, cash equivalents, and short-term investments. Moving now to 2024 guidance. As a reminder, Illumina is moving as quickly as possible to resolve GRAIL and the company is focusing its 2024 financial outlook on core Illumina given the uncertainty around the specific timing and impact of the GRAIL divestment. Our guidance does not assume any impact from the potential divestment of GRAIL in 2024. We will provide non-GAAP EPS guidance for 2024 upon completion of the divestment. We are encouraged by our results in Q1 that came in ahead of our expectations both for topline and margins. We've also seen the seasonal rebuild of our total performance obligations or backlog, which increased more than 20% from the end of Q4. At the same time, we're still not seeing any significant improvement in the macroeconomic environment or our business in China, and we are monitoring the impact of a strengthening U.S. dollar. While we are seeing early strength in consumables to start the year, it's being offset by capital constraints that are continuing to weigh on instrument purchases. As such, we are reiterating our full-year 2024 core Illumina revenue guidance of approximately flat from 2023 and non-GAAP operating margin of approximately 20%. Our operating margin expectations continue to reflect the benefit of gross margin improvement and disciplined management of our expenses, including reduced headcount, offset by normalization of our performance-based compensation as well as the impacts of inflation. For the second quarter of 2024, we expect core Illumina revenue in the range of $1.072 billion to $1.084 billion, reflecting a year-over-year decline of 6.5 to 7.5 percentage points. The year-over-year decline is predominantly because of the lower NovaSeq X instrument shipments given the significant backlog we worked through early last year following the launch. At the midpoint, this guidance reflects a $22 million sequential increase from Q1 of 2024. For the second quarter, we expect core Illumina non-GAAP operating margin of approximately 18%, resulting from a seasonal step-up in operating expenses in Q2 compared to Q1 primarily due to an increase in stock-based compensation expenses from the timing of equity grants. We also expect an increase due to some project spending shifting into Q2 from Q1.
Jacob Thaysen, CEO
Thanks, Ankur. Before we close and move to Q&A, I would like to comment on our upcoming strategy update event. Illumina's leadership team has been reexamining our strategy, the roadmap and initiatives for achieving it and the profitable growth we believe it can produce. Our strategy will continue to play to Illumina's strength of building the genomics ecosystem and maintaining a tight customer focus in an increasingly competitive space. Central to this is our goal of making customers the heroes in their labs. In every customer meeting, we are listening intently to understand what they need to unleash the full power of their Illumina instruments and making their priorities the core of our strategy. You will see us continue to develop more sample-to-answer solutions to enable the genomics and multiomics ecosystems. We'll maintain our open platform approach and continue to drive the innovation that our customers need to succeed and for which Illumina is known. Illumina has long been the standard in NGS. Our strategic hands-on support for customers globally, our deep experience and expertise across multiple research and clinical markets and our decade-long technology roadmap position us well to continue leading the industry and enabling our customers to improve human health. I am excited to announce that we will be sharing our comprehensive strategy work with you during a virtual event in the fall of this year. We will have more information in the coming months. Thank you for joining. I'll now invite Ankur and Joydeep to join me for Q&A.
Douglas Schenkel, Analyst
Jacob, I want to start with a high level on that kind of builds off of the announcement you just made and then I want to ask a specific cleanup question on the quarter. So first, it's hard to believe, but we're now just over, I think it's eight months into your tenure as CEO of the company. From the outside, we see the changes you are starting to make to leadership, to the broader organization and in moving towards a resolution on GRAIL. That said, there continues to be a lot of uncertainty about things like, first, I'd say, your view on Illumina's long-term growth profile especially given uncertainty about the competitive landscape and the outlook for market elasticity? Secondly, what are reasonable operational targets? And then thirdly, ultimately, whether the company as we sit here today, is positioned to play offense. Would you be willing to share at least a little bit more today about where you are in the process of moving from data gathering and business assessment to maybe putting some stakes in the ground regarding the medium and long-term outlook for the company from a growth and operating margin standpoint? And I know that was a lot, but let me sneak in the mathematical follow-up question on the quarter. It seems like high throughput sequencing consumable revenue grew low to mid-teens. Is that right? And if so, what does that tell you about evolving competitive dynamics and questions regarding elasticity?
Jacob Thaysen, CEO
Thank you, Doug. That was a detailed question, and happy birthday to you. I'll do my best to address the first part. I'm just over seven months into my new role, so I might need a bit more time before fully answering this. I continue to spend significant time with our customers and employees. I'm always excited to see the innovations happening in our R&D building. There is a lot happening in the company. We are actively exploring our current position and future direction for Illumina. As I mentioned in my prepared remarks, we see numerous opportunities in genomics, particularly with the new X product generating increased activity from many customers who are expanding into single-cell and spatial analysis. This is not a future trend; it is already occurring. We are also adjusting to changes in pricing, and we expect to see positive elasticity in our results soon. While I'm not ready to provide long-term growth projections just yet, I remain optimistic about Illumina’s growth ahead. Additionally, as noted in our Q1 results, we are fully committed to expanding our margins. I'm pleased with the progress the team has made and the gross margin improvement we've seen this quarter. This clearly reflects our commitment to driving margins higher, and I believe there are no obstacles to achieving historical margin levels in the near future. However, I would like to ensure our strategies, growth drivers, and cost structures are aligned before sharing specific details. Fundamentally, I believe Illumina has a significant opportunity to continue leading the genomics industry as we have over the past decade, in the center of the ecosystem and supporting our customers. In the future, as customer expectations evolve, we must focus on end-to-end workflows and innovations in the multiomic space, which we are dedicated to. Joydeep can provide more insight on the consumables question.
Joydeep Goswami, Analyst
Yes. Look, I think and happy birthday again, Doug. On consumables, we, as expected, saw strong growth with X consumables, and we saw X consumable revenues offset our growth in X consumables revenues offset the decline in 6K consumers, right? So that's a good piece. We also are seeing very strong sequencing activity growth driven by X and X customers, right? So this is a really positive thing, and it underpins a lot of what Jacob talked about in terms of new applications or expanded applications in clinical and in research, right? So we're excited about that, and we expect that to continue as the 25B flow cell gets more adoption and is more used in regular activities at our customers.
Puneet Souda, Analyst
I would like to focus on the mid-throughput segment. Can you share the growth figures for both consumables and instrumentation in that area? Customers in core labs that do not necessarily have an X or a 6K are increasingly opting for a competitor's system due to its lower cost per gigabase, which is nearly half that of XLEAP and NextSeq. Could you provide more details on what is happening in that segment and how you plan to address this issue?
Jacob Thaysen, CEO
Thank you for your question, Puneet. To begin, we are not disclosing specific growth details for the mid-throughput segment. However, I can address some of your inquiries. We are very dedicated to the mid-throughput area, and I’m particularly excited about the new chemistry for the 1K and 2K. Although it's only been a few weeks since its release, we’ve observed significant enthusiasm from our customers. This technology does not require a new instrument; with just a software upgrade, customers can utilize the new flow cells to achieve higher quality scores, increased capacity, and all at a lower price point. This has generated a lot of excitement among our customers, making us very competitive in this sector. You are correct that there is competition, which we take seriously across all our segments, but the mid-throughput market is particularly competitive. Most of the activity is still concentrated in China, though there is competition elsewhere as well. We will continue to innovate in this area, with the XLEAP being a positive step forward. We are committed to competing actively and will strive for every point of market share available.
Joydeep Goswami, Analyst
To add to that, we are continuing to see growth in consumables, particularly in the mid-throughput segment. Additionally, when we outlined our budget for the year, we had already factored in a certain level of competition, and what we are observing in the market aligns with those expectations. I want to highlight that some of the forecasts we provided regarding throughput considered the macroeconomic challenges we anticipated this year, and those challenges have materialized. So, once again, this is consistent with what we've communicated.
Vijay Kumar, Analyst
Ankur, welcome. I guess my first question is on the guidance here. And Jacob, maybe you can chime in on this, right? So sequentially, core revenues are up by about $30 million-ish. Is that all being driven by consumables? I think you mentioned you saw improving consumable pull-through on the X throughout the quarter as the quarter progressed. So maybe some color on what the exit rate is and where is that increase coming from?
Jacob Thaysen, CEO
Yes, I think Ankur can certainly add to this. We observed strength throughout the quarter, without any notable decline in the final weeks. Customers are increasingly adopting our X consumables, which now include a full range of products like the 25B, the 10B, and the 1.5B. We are seeing many new applications being developed by our customers, which has contributed to our success, as Joydeep mentioned earlier. The performance in consumables was strong, and we've also experienced growth in our BD revenue. Several partnerships have accelerated, and we are excited about this as it's a significant aspect of our strategy to grow alongside our partners. Ankur, do you have any additional comments?
Ankur Dhingra, CFO
Yes, I think thanks that was well covered. The only thing I would add specifically is that the sequential increase in business that we are forecasting and building the guidance comes both from instruments and consumables. So we expect both of those positive trends to continue here.
Daniel Brennan, Analyst
Ankur, welcome aboard. Maybe just a question on multiomics and some of the new products that, Jacob, you've been talking about, and it's been kind of in the Illumina proxy as well. Can you just give us some color maybe starting with maybe the SomaLogic kind of partnerships? Is that the multiomic excitement that you're expressing? And then any other color you could provide about sample-to-answer and some of the newer areas that you're looking to explore timing-wise, when do you think we'll get an update on that? Will it be on Investor Day? Or just how do we think about potential opportunities for Illumina?
Jacob Thaysen, CEO
Yes, absolutely. Thank you, Dan. I share your excitement about the role sequences can play in multiomics and how we can assist our partners and customers in stimulating that market across all multiomic areas. In the short term, we are particularly enthusiastic about our collaboration with SomaLogic and the potential for growth in proteomics. We are still in the early access phase, and 2024 will be the year when we engage a select number of customers to fully understand the capabilities, and the feedback we’ve received so far has been very positive. I am genuinely excited about this, and we will continue to explore opportunities to strengthen our position in multiomics moving forward, both organically and in collaboration with our partners. When we consider end-to-end workflows, I see a significant opportunity; customers are looking for top-notch technology as well as ease of use. It’s not just about the sequence itself but also the sample-to-answer process. The more we can automate and simplify, whether in sample preparation or informatics, the better we can enable our customers to focus on where they create the most value. We will discuss more on this in our strategy update, and I believe Illumina has a tremendous opportunity to cover entire workflows and develop impactful applications for our customers.
Unknown Analyst, Analyst
This is Paul on for Dan. I think just one from us. In terms of POPSEQ, could we get some commentary on that? It seems like all of us have seen some budget pressure. There's been some news flow there with recent cuts. Does that create any risk to the consumables forecast for the year? And maybe on the flip side, in Europe with Genome of Europe, there's been some chatter about that picking up? Is that something you could see increased activity in 2025 that would be meaningful?
Jacob Thaysen, CEO
I believe that looking at the long or mid-term horizon, I am very optimistic about PopGen, not just for PopGen itself but for its implications in large genomic studies that will eventually be integrated into the healthcare system. Currently, we have over 30 programs in progress and an equal number of potential opportunities in the pipeline for the future. However, we are not relying on any single program. It's evident that with these large initiatives, where there are governments managing the systems and budgets, there can be some fluctuations. Therefore, we are not structuring our budgets around individual programs. I don't anticipate that any of them will have a significant impact on our opportunities in 2024 or 2025. Nonetheless, we are making every effort to encourage market growth.
David Westenberg, Analyst
I want to continue with Puneet's question about the mid-throughput area. How has XLEAP contributed to this segment, or how do you expect it to help? Joydeep, you mentioned some elasticity in this area. However, it seems less clear in the X department; while we see advancements in whole genome analysis and single-cell technology, could you reiterate some of that elasticity and how we can avoid a price-driven race to the bottom with competitors? Regarding the high-throughput side, you indicated that you expect order rate momentum to increase. Is this based on actual orders already in place, or is it just a reflection of anticipated budgets? Could you provide some clarity on this?
Jacob Thaysen, CEO
Yes, let me provide more insight into the mid-throughput capabilities we are observing with XLEAP's chemistry. There are three key aspects: superior sequencing quality, increased capacity, and reduced costs. This advancement allows customers to utilize sequences more effectively. We are noticing that customers who previously hesitated to explore single-cell or spatial options due to cost barriers are now finding those possibilities accessible. This indicates a shift in demand that we expect to evolve over the coming period. Ultimately, customers are eager to collaborate with innovators in the field, and XLEAP chemistry exemplifies our commitment to ongoing innovation across all segments. Despite the current challenges posed by macroeconomic factors, I am genuinely optimistic about the impact XLEAP chemistry will have in the near future and the new applications it will create in mid-throughput. There are also significant developments in high-throughput, but we are observing similar trends in mid-throughput as well.
Joydeep Goswami, Analyst
Yes. I think just to comment on and add to what Jacob has said, right? XLEAP, remember, was a way for us to help our customers use the same instruments that are already out in the field, and with a simple software change, right, they basically can get increased output, better accuracy, better performance. And I think we saw that come through very clearly with our launch in Q1. I want to emphasize too, right? You're seeing the elasticity and really immediately in the research domain, right, where a lot of what Jacob was talking about in terms of multiomics, single cell, spatial things do tend to get performed first on the research side on mid-throughput. We are also continuing to see that we can maintain, because of our innovation and our technical superiority, a price premium over what others are offering in the market, right? So we're seeing a lot of that continue, and we are encouraged by that. The macroeconomic pieces are there, but they will end at some point, and we do expect that at that point, some of the cash constraints that our customers are facing will lift.
Subhalaxmi Nambi, Analyst
You reiterated guidance for the core sequencing revenue growth this year. And I apologize if I missed it, but do you still expect the mix of consumables and instruments to be the same? Or is the expected trajectory now or a bit different?
Ankur Dhingra, CFO
Yes. Great question. This is Ankur. So you're right. We reiterated our guidance for the full year, both for revenue as well as for the operating margin. Actually, we're off to a great start for the year as well with the Q1 performance, certainly looking at that derisking the performance a little bit. Now overall, we'll be confirming our guidance. So the construct is still there. And you've seen the Q1 performance. Just to add a little bit more color there, if you think from a half one, half two perspective, et cetera, our instrument growth rates given how the shipments of X were last year, those growth rates have a variability during the year between half and half two, although consumables as they're starting now should have a more steady kind of profile. Now we saw good pricing. We've seen good pull-through during the quarter as well. So as of now, we're just reiterating the overall guidance for the year.
Sung Ji Nam, Analyst
And also welcome to Ankur and congrats, and thank you to Joydeep. Just a quick question about the status of the jurisdictional appeal in Europe. If that resolution doesn't occur before the end of the second quarter, will you still provide your final terms for the divestiture?
Jacob Thaysen, CEO
Yes, thank you for that. We are progressing with GRAIL as quickly as possible and are committed to providing insights by the end of Q2. At this point, there is nothing preventing us from meeting that timeline. We do not know when the ECJ information will be available, but we are not waiting for it. If it arrives before Q2, it won’t impact our timeline for the end of Q2.
Tejas Savant, Analyst
Just a few cleanups on the high-throughput side, Jacob, if I may. So on the 25B flow cell, it sounds like you're getting really good traction there. Can you give us an update on that 40% number you provided in the past and X customers who adopted 25B? Where is that number today? Second, any update on where high clinical customers are in their X validation process? Any metrics you could share? Or should we think of the production workflows and clinical ramping as mainly a 2025 dynamic? And then last one, just on excess high throughput capacity. That's a dynamic that comes up every once in a while. Is that starting to weigh on customer purchase decisions for these high throughput customers at all? You've got Ultima launching as well here. So just curious as to the macro headwinds versus the digestion of that high throughput capacity that's been added given the NovaSeq X and the 25B launch but also the competition?
Jacob Thaysen, CEO
Overall, we're very pleased with the progress of the X and the 25B consumers. Currently, about half of our customers have adopted the 25B flow cell, which is exciting and gives us good momentum. Many of our clinical customers are still primarily using the 6K for their assays. We are closely monitoring each of them to understand their validation processes and when they'll move into production. We have significant insights into this, but we're not ready to share those details yet. It's clear that many of them are still navigating the validation process before they start adopting the new assays, which are likely to provide greater depth and insights compared to what they previously had with the 6K.
Mason Carrico, Analyst
Sorry if these questions have already been covered since I joined a bit late. Could you provide an update on win rates outside of China for the last quarter? I believe you mentioned they stabilized in Q3 and Q4. Has that stability continued throughout 2024 so far? Additionally, could you share any insights on the types of orders being received in terms of 6K upgrades, fleet expansions, new customers, and new high-throughput customers?
Jacob Thaysen, CEO
So I think overall, we are following very closely, of course, where we are on the win rate. And as we also mentioned, it's stabilized, and we are looking at that regularly and ensuring that we continue to hone in on how we can do even better. So I'm actually pleased with the performance out there. But obviously, we're keeping a very close eye on this. As I mentioned before, we take competition very seriously. We are doing everything we can to keep our customers very highly supported and make sure that they are successful in laboratories, which I think in the end, in the long run is the winning formula for being the preferred partner for our customers. And I think on the mix of orders, I don't know whether we normally share that information. But I think there are certainly still more research customers that have moved on to the X. And we have seen customers with multiple 6Ks that are now starting to move over to the X. I would say the vast majority still are in the transition phase.
Rachel Vatnsdal Olson, Analyst
So I want to question a little bit on the instrument placement number for the X this quarter. You mentioned 55 placements, but you also highlighted that there were a number of places that were pulled forward from 2Q into 1Q. So first, can you just quantify how many placements were pulled forward? And then just in terms of full year dynamics, you continue to highlight that the macro backdrop remains difficult. We've seen that really across the sector this quarter. But can you just give us in light of that assumption, what are your latest assumptions on placements for the year?
Jacob Thaysen, CEO
Yes. Overall, we didn't pull anything forward, although a few customers requested to advance their timelines because some of their programs were progressing more quickly than expected. However, it was only a small number of cases, so it didn't significantly alter our expectations. I find this encouraging as it indicates strong interest, with customers who have already made purchases eager to quicken their transition to the X. While we aren't providing specific numbers right now, we ended 2022 with a very strong backlog as we entered 2023. This made 2023 a strong placement year for high throughput. We do anticipate a decline compared to last year, which we previously communicated in our original guidance, but we aren't changing our expectations for the year at this moment.
Ankur Dhingra, CFO
The only thing I would add, Richard, is that for you, just in terms of our topline performance was quite better than what we were expecting. Relative to that overall achievement or overachievement, only a small portion, say, about a quarter or so came from these customers who asked to for an earlier delivery of the instrument. So relatively small portion from that phenomenon.
Patrick Donnelly, Analyst
Can you just talk through the margins? Q2, obviously, a little bit of a step down. I know you guys mentioned maybe some product cost there. But can you just give a little more color in terms of what spend picks up in Q2 and then how we should think about that metric as we work our way through the year? And then just a quick cleanup, just on the service revenues; those came quite a bit higher than we were expecting. If you could just flesh out what happened there as well, that would be helpful.
Ankur Dhingra, CFO
Yes, sure. Good question. So let me address them both. This is Ankur. So on the OpEx, as I said in my prepared remarks, yes, there is a step-up in spending from Q1 to Q2, primarily coming from two factors. One of them relates to just the timing of our merit increases in the annual stock branch cycle. So we end up getting the full impact of that cost in Q2. So that's seasonal, and it typically happens every year for the company. So roughly about half of our sequential increase in the OpEx comes from that. The other half is generally around certain project-related spend that we've pushed out either pushed out into Q2, or there are milestones into Q2 that will happen. In terms of going forward, as you think about your P&L for the rest of the year, I do expect the overall operating margin performance to continue to improve sequentially every quarter. So Q3 better than Q2 and then Q4 better than Q3.
Joydeep Goswami, Analyst
And then on the services?
Ankur Dhingra, CFO
And then on the services side, again, very strong overall growth, about 27% year-over-year growth, two main components. One part of that is a little less than half is coming from specific pharma customer services, which had the timing of that in the quarter. So that was less than half of it, but roughly half of that growth is coming from just the excellent performance in our core instrument services business.
Joydeep Goswami, Analyst
You would expect that given the number of instruments we placed. And just to add to Ankur's comments, right? We are expecting and delivered better gross margin performance, right? So that should help our operating margin. We expect to continue strong performance on gross margins. So that should help us, and as revenue steps up as well. And given that we have taken measures to control our costs, we've reduced our headcount overall by about 12% compared to last year. That should also add benefits to the operating margin line as we go through the year.
Eve Burstein, Analyst
Earlier this week, the FDA published a final rule exercising regulatory power over lab-developed tests. For you guys, you have the benefit of having IVD compliant machines when a lot of the companies that are emerging to challenge you don't have those yet. However, our understanding is that research-use-only machines are actually used quite a bit for FDA-approved tests. It's a little bit harder, but it can be done. So we don't expect this to affect you that much or give you a big competitive advantage. Is that the right way to think about it? Or could there be more upside from the role for you?
Jacob Thaysen, CEO
Yes. No, first of all, I think we are pleased for sure that we have now more of greater clarity on the FDA ruling and the direction of this. But there's still a lot of detail that needs to be clarified. But overall, you're right that with our positioning, both with our DX portfolio and the investment we have made into the high-quality and also helping with required documentation for our customers to go in there and get their PMAs approved, I think we're very well positioned. You mentioned that LDTs are used for FDA approval. Well, really only if you go into a single site PMA setup. And that requires actually a lot of work for vendors like Illumina to help our customers with that with the right level of documentation and so on. So I think it actually plays to our strength going forward, and we are committed to support this area and help our customers be successful independent on whether it's a full PMA single site or other types of opportunities that this new world will bring us.
Conor McNamara, Analyst
I understand that you mentioned not providing too much detail regarding the consumable adoption with X customers. However, can you provide any quantification regarding the approximately 400 boxes placed? Specifically, how many of those customers would you say are operating at scale and ordering according to demand, compared to those who are still in the validation phase or have not ordered as expected due to economic conditions? Additionally, have there been any stock orders from any of the X customers?
Jacob Thaysen, CEO
Yes, that's a good question. At this point, we see that most of our customers are still in the ramp phase. While some research customers are moving quickly and running larger programs, we have observed an increase in throughput, particularly in areas like single cell, where there's significant interest. Some of these research customers have already achieved scale with at least one of the instruments they've purchased and may be beginning to transition to the next one. However, looking at the broader group of around 400, most of them are still in a ramp-up phase. That's the current situation.
Joydeep Goswami, Analyst
And the stocking?
Jacob Thaysen, CEO
Yes, yes, go ahead, Joydeep.
Joydeep Goswami, Analyst
I mean, on the stocking side, look, when we haven't seen too much stocking on the 25B, because as a standard, right, the initial shelf life is shorter, so you wouldn't expect people to stock up too much. On the 10B side, it's very early in that stockup phase. Again, we expect to see a little bit more as we go through the year, but not yet.
Salli Schwartz, Vice President of Investor Relations
Thank you for joining us today. As a reminder, 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 upcoming conferences and other events.
Operator, Operator
This concludes today's call. You may now disconnect.