Illumina, Inc. (NASDAQ:ILMN) Conference Call Summary Company Overview - **Company**: Illumina, Inc. - **Date**: November 20, 2024 - **Participants**: Ankur Dhingra (CFO), Doug Schenkel (Wolfe Research) Key Points Industry Context - **Market Dynamics**: The call discussed the implications of recent elections on NIH funding, local competition in China, and tariff impacts on the business [3][19][39]. Financial Performance and Strategy - **Revenue Growth**: Illumina aims to restore revenue growth to high-single-digit percentages over the next few years, focusing on core consumables and instrumentation [7][8]. - **Divestiture**: The company has divested GRAIL, which is expected to streamline operations and focus on core business [7]. - **Cash Flow**: Illumina has robust free cash flow and is exploring M&A opportunities while also considering share repurchases [18]. Clinical Market Insights - **High Throughput Growth**: High throughput and mid throughput sequencing activity grew 40% year-over-year, but revenue growth was impacted by pricing declines, with a noted 25% price drop during the quarter [52][56]. - **Transition to New Platforms**: The transition from older platforms to the new X platform is expected to stabilize pricing and improve revenue flow by the second half of 2025 [61]. Customer Engagement and Product Development - **Customer Collaboration**: Illumina has opened its pipeline to key customers for early access to new technologies, enhancing customer feedback and engagement [14][15]. - **Multiomics Strategy**: The company is expanding its multiomics capabilities through acquisitions and partnerships, which are expected to contribute to growth [10][16]. Challenges and Risks - **NIH Funding**: The company is monitoring NIH funding closely, noting that while direct exposure is low, any cuts could impact business indirectly [24][29]. - **China Market**: Illumina faces strong competition in China, but recent stabilization at approximately $75 million per quarter is noted. The company is making structural changes to improve its market position [39][40][41]. - **Mid Throughput Pressure**: The mid throughput segment is under pressure due to macroeconomic factors, with customers transitioning to high throughput options [77][80]. Future Outlook - **2025 Projections**: Consensus estimates suggest 4% revenue growth for 2025, with potential upside from new product launches and ongoing transitions to the X platform [83][84]. - **Market Conditions**: The company does not anticipate macroeconomic improvements in the near term, which could affect revenue trajectories [84]. Additional Insights - **Regulatory Environment**: Improvements in regulatory relationships in China are noted, allowing for increased participation in tenders and direct sales to hospitals [42][43]. - **Tariff Exposure**: Illumina's manufacturing is primarily outside of China, with minimal exposure to tariffs, allowing for flexibility in supply chain management [48][49]. This summary encapsulates the key discussions and insights from the Illumina conference call, highlighting the company's strategic direction, market challenges, and future outlook.

[Condensed Consolidated Financial Statements](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides the company's financial position, performance, and cash flows, supported by detailed notes on accounting policies, the GRAIL Spin-Off, and other key disclosures [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets decreased from **$10,111 million** to **$6,014 million**, primarily due to reductions in goodwill and intangible assets, reflecting the impact of the GRAIL Spin-Off | Metric | September 29, 2024 (Unaudited) | December 31, 2023 | | :---------------------------------- | :----------------------------- | :------------------ | | Total Assets | $6,014 million | $10,111 million | | Goodwill | $1,113 million | $2,545 million | | Intangible Assets, net | $305 million | $2,993 million | | Total Liabilities and Stockholders' Equity | $6,014 million | $10,111 million | | Total Stockholders' Equity | $2,125 million | $5,745 million | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a net loss for both periods, significantly impacted by goodwill and intangible impairment charges, with total revenue decreasing by **3.4%** year-over-year for the nine months | Metric | Three Months Ended Sep 29, 2024 (Millions) | Three Months Ended Oct 1, 2023 (Millions) | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | Total Revenue | $1,119 | $1,119 | $3,268 | $3,382 | | Net Income (Loss) | $(754) | $(754) | $(1,410) | $(986) | | Basic Earnings (Loss) Per Share | $(4.77) | $(4.77) | $(8.86) | $(6.23) | | Goodwill and Intangible Impairment | $821 | $821 | $1,889 | $821 | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Total comprehensive loss for the nine months ended September 29, 2024, increased to **$(1,414) million**, primarily reflecting the net loss | Metric | Three Months Ended Sep 29, 2024 (Millions) | Three Months Ended Oct 1, 2023 (Millions) | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :------------------------------ | :----------------------------- | :----------------------------- | :---------------------------- | | Net Income (Loss) | $705 | $(754) | $(1,410) | $(986) | | Unrealized (loss) gain on cash flow hedges, net of deferred tax | $(19) | $9 | $(4) | $18 | | Total Comprehensive Income (Loss) | $686 | $(745) | $(1,414) | $(968) | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Total stockholders' equity significantly decreased from **$5,745 million** to **$2,125 million**, primarily due to net loss and the **$2,399 million** impact from the GRAIL Spin-Off | Metric | December 31, 2023 (Millions) | September 29, 2024 (Millions) | | :---------------------------------- | :------------------ | :----------------------------- | | Total Stockholders' Equity | $5,745 | $2,125 | | Additional Paid-In Capital (Impact of GRAIL Spin-Off) | $9,555 | $7,449 (decrease of $2,399 due to Spin-Off) | | Accumulated Deficit | $(19) | $(1,428) | [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities increased to **$473 million**, while net cash used in financing activities decreased to **$(523) million**, driven by GRAIL deconsolidation and debt repayments | Cash Flow Activity | Nine Months Ended Sep 29, 2024 (Millions) | Nine Months Ended Oct 1, 2023 (Millions) | | :---------------------------------- | :----------------------------- | :---------------------------- | | Net cash provided by operating activities | $473 | $254 | | Net cash used in investing activities | $(130) | $(146) | | Net cash used in financing activities | $(523) | $(1,183) | | GRAIL cash deconsolidated as a result of spin-off | $(968) | — | | Cash and cash equivalents at end of period | $869 | $927 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed disclosures cover organization, accounting policies, the GRAIL Spin-Off, revenue, investments, debt, equity, balance sheet items, legal proceedings, income taxes, and segment information, highlighting key events and impairment charges [1. Organization and Significant Accounting Policies](index=11&type=section&id=1.%20Organization%20and%20Significant%20Accounting%20Policies) Illumina provides genetic analysis solutions; the GRAIL Spin-Off completed on June 24, 2024, with **14.5%** retained ownership, and no significant accounting policy changes occurred in YTD 2024 - Illumina provides sequencing- and array-based solutions for genetic and genomic analysis, serving research, clinical, and applied markets[25](index=25&type=chunk) - The GRAIL Spin-Off was completed on June 24, 2024, distributing approximately **85.5%** of GRAIL common stock to Illumina stockholders, with Illumina retaining approximately **14.5%**[26](index=26&type=chunk)[37](index=37&type=chunk) - No changes to significant accounting policies were made during YTD 2024[30](index=30&type=chunk) - ASU 2023-07 (Segment Reporting) is effective for the company in fiscal year 2024 and interim periods within fiscal year 2025. ASU 2023-09 (Income Taxes) is effective in fiscal year 2025[31](index=31&type=chunk)[32](index=32&type=chunk) [2. GRAIL Spin-Off](index=13&type=section&id=2.%20GRAIL%20Spin-Off) The GRAIL Spin-Off completed on June 24, 2024, distributing **85.5%** of GRAIL common stock to Illumina stockholders, with Illumina retaining **14.5%** and contributing **$974 million** for operations, incurring **$53 million** in separation costs - GRAIL Spin-Off completed on June 24, 2024, distributing approximately **85.5%** of GRAIL common stock to Illumina stockholders (1 GRAIL share for every 6 Illumina shares)[37](index=37&type=chunk) - Illumina retained approximately **14.5%** of GRAIL common stock post-Spin-Off[37](index=37&type=chunk) - Illumina contributed **$974 million** (less GRAIL's cash) to GRAIL for **2.5 years** of operations[38](index=38&type=chunk) - Incurred **$53 million** in separation-related transaction costs in YTD 2024, recognized in selling, general, and administrative expense[39](index=39&type=chunk) GRAIL Net Assets Deconsolidated | GRAIL Net Assets Deconsolidated | Amount (in millions) | | :-------------------------------- | :------------------- | | Cash and cash equivalents | $968 | | Intangible assets, net | $2,201 | | GRAIL net assets | $2,738 | [3. Revenue](index=14&type=section&id=3.%20Revenue) Total revenue slightly decreased in Q3 and YTD 2024 due to lower instrument sales, offset by consumables and service growth, with regional declines in Americas and Greater China Revenue by Source | Revenue by Source (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Consumables | $807 | $760 | $2,376 | $2,327 | | Instruments | $107 | $181 | $342 | $537 | | Service and other revenue | $166 | $178 | $550 | $518 | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | Revenue by Geographic Area | Revenue by Geographic Area (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--------------------------------------- | :------ | :------ | :------- | :------- | | Americas | $609 | $663 | $1,852 | $1,920 | | Europe | $291 | $260 | $859 | $825 | | Greater China | $75 | $98 | $228 | $302 | | Asia-Pacific, Middle East, and Africa | $105 | $98 | $329 | $335 | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | - Remaining performance obligations totaled **$688 million** as of September 29, 2024, with approximately **82%** expected to convert to revenue in the next twelve months[45](index=45&type=chunk) [4. Investments and Fair Value Measurements](index=15&type=section&id=4.%20Investments%20and%20Fair%20Value%20Measurements) Marketable equity securities increased to **$70 million** due to retained GRAIL investment, incurring a **$332 million** unrealized loss, while the GRAIL contingent consideration liability decreased to **$82 million** due to revised projections and restructuring Investments | Metric (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Marketable Equity Securities | $70 | $6 | | Non-Marketable Equity Securities | $27 | $28 | | Venture Funds (carrying amount) | $191 | $168 | - An unrealized loss of **$332 million** was recognized in YTD 2024 on the retained investment in GRAIL subsequent to the Spin-Off[48](index=48&type=chunk)[49](index=49&type=chunk) - The Helix contingent value right was settled for **$83 million** cash on July 31, 2024[54](index=54&type=chunk)[55](index=55&type=chunk) GRAIL Contingent Consideration Liability | GRAIL Contingent Consideration Liability (in millions) | September 29, 2024 | December 31, 2023 | | :----------------------------------------------------- | :----------------- | :------------------ | | Fair Value | $82 | $387 | - The significant decrease in the GRAIL contingent consideration liability was due to revised revenue projections announced by GRAIL in May 2024 and a restructuring announcement in August 2024, along with an increased revenue risk premium[58](index=58&type=chunk) [5. Debt](index=18&type=section&id=5.%20Debt) Net term debt increased to **$1,988 million** with the issuance of **$500 million** in 2026 Term Notes and repayment of the **$750 million** Delayed Draw Credit Facility, while the **$750 million** revolving credit facility remains undrawn Term Debt Obligations | Term Debt Obligations (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Principal amount of 2025 Term Notes outstanding | $500 | $500 | | Principal amount of 2026 Term Notes outstanding | $500 | — | | Principal amount of 2027 Term Notes outstanding | $500 | $500 | | Principal amount of 2031 Term Notes outstanding | $500 | $500 | | Net carrying amount of term debt, non-current | $1,988 | $1,489 | - Issued **$500 million** aggregate principal amount of **4.650%** Term Notes due 2026 on September 9, 2024, with net proceeds of **$497 million** used to repay debt[63](index=63&type=chunk)[182](index=182&type=chunk) - The **$750 million** Delayed Draw Credit Facility, borrowed on June 20, 2024, was fully repaid on September 9, 2024, resulting in a **$5 million** loss on debt extinguishment[68](index=68&type=chunk)[181](index=181&type=chunk) - A **$750 million** senior unsecured five-year revolving credit facility is available, with no outstanding borrowings as of September 29, 2024[69](index=69&type=chunk)[70](index=70&type=chunk)[184](index=184&type=chunk) [6. Stockholders' Equity](index=19&type=section&id=6.%20Stockholders'%20Equity) Stockholders' equity was impacted by the GRAIL Spin-Off and equity award adjustments; a new **$1.5 billion** share repurchase program was authorized, with **$99 million** in repurchases in Q3 2024 - Approximately **5.4 million** shares remained available for future grants under the 2015 Stock and Incentive Compensation Plan as of September 29, 2024[73](index=73&type=chunk) Restricted Stock Units | Restricted Stock Units (in thousands) | Outstanding at Dec 31, 2023 | Outstanding at Sep 29, 2024 | | :------------------------------------ | :-------------------------- | :-------------------------- | | RSU | 2,198 | 4,623 | | PSU | — | 620 | - All stock options were cancelled, resulting in no outstanding options as of September 29, 2024[76](index=76&type=chunk) - Liability-classified equity incentive awards for GRAIL employees were assumed by GRAIL in connection with the Spin-Off, with a derecognition of **$283 million**[77](index=77&type=chunk) - A new share repurchase program for up to **$1.5 billion** of common stock was authorized in August 2024, with **$1.4 billion** remaining available as of September 29, 2024[81](index=81&type=chunk)[186](index=186&type=chunk) Share Repurchase Activity (Q3 2024) | Share Repurchase Activity (Q3 2024) | Value | | :---------------------------------- | :---- | | Number of shares repurchased (thousands) | 770 | | Total cost of shares repurchased (millions) | $99 | | Average price paid per share | $127.71 | Share-Based Compensation Expense | Share-Based Compensation Expense (in millions, before taxes) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :----------------------------------------------------------- | :------ | :------ | :------- | :------- | | Total Share-based compensation expense | $84 | $86 | $291 | $286 | [7. Supplemental Balance Sheet Details](index=22&type=section&id=7.%20Supplemental%20Balance%20Sheet%20Details) Accrued liabilities significantly decreased to **$784 million**, with **$46 million** in restructuring charges and **$1,886 million** in goodwill and **$420 million** in IPR&D impairments for GRAIL, while derivative instruments manage foreign exchange risks Balance Sheet Metrics | Metric (in millions) | September 29, 2024 | December 31, 2023 | | :---------------------------------- | :----------------- | :------------------ | | Accounts Receivable, net | $699 | $734 | | Inventory, net | $574 | $587 | | Accrued Liabilities | $784 | $1,325 | Restructuring Charges | Restructuring Charges (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :---------------------------------- | :------ | :------ | :------- | :------- | | Employee separation costs | $6 | $7 | $13 | $33 | | Asset impairment charges | — | $49 | $32 | $56 | | Total restructuring charges | $6 | $58 | $46 | $91 | - A goodwill impairment of **$1,466 million** for GRAIL was recorded in Q2 2024, as its carrying value exceeded its fair value[94](index=94&type=chunk) - An IPR&D asset impairment of **$420 million** for GRAIL was recorded in Q2 2024[98](index=98&type=chunk) Intangible Assets, Net | Intangible Assets, Net (in millions) | September 29, 2024 | December 31, 2023 | | :----------------------------------- | :----------------- | :------------------ | | Total finite-lived intangible assets, net | $305 | $2,403 | | In-process research and development (IPR&D) | — | $590 | | Total intangible assets, net | $305 | $2,993 | - Acquired Fluent BioSciences in Q3 2024, recording **$42 million** in developed technology and **$2 million** in customer relationship intangibles[103](index=103&type=chunk) - Foreign exchange forward contracts for non-hedging purposes had total notional amounts of **$497 million** as of September 29, 2024. Contracts for cash flow hedges had total notional amounts of **$671 million**[107](index=107&type=chunk)[108](index=108&type=chunk) [8. Legal Proceedings](index=27&type=section&id=8.%20Legal%20Proceedings) All GRAIL acquisition regulatory proceedings in the US and EU are resolved, with the EU fine of **€432 million** withdrawn, resulting in a **$481 million** gain, though ongoing SEC, shareholder, and DOJ actions persist - All regulatory proceedings in the United States and European Union related to the GRAIL acquisition were resolved as of September 6, 2024[110](index=110&type=chunk) - The EU Court of Justice ruled in Illumina's favor on September 3, 2024, annulling the European Commission's assertion of jurisdiction over the GRAIL acquisition[113](index=113&type=chunk) - The European Commission withdrew its previously imposed fine of **€432 million** on September 6, 2024, resulting in a net gain of **$481 million** in Q3 2024[113](index=113&type=chunk)[114](index=114&type=chunk) - The U.S. Federal Trade Commission dismissed its administrative complaint on August 15, 2024[115](index=115&type=chunk) - An SEC inquiry related to the GRAIL acquisition and certain statements/disclosures is ongoing[116](index=116&type=chunk) - Multiple shareholder derivative complaints and federal and state securities class actions are ongoing, alleging breaches of fiduciary duties and misleading statements related to the GRAIL acquisition[117](index=117&type=chunk)[119](index=119&type=chunk)[122](index=122&type=chunk)[123](index=123&type=chunk)[126](index=126&type=chunk)[128](index=128&type=chunk) - Received a DOJ civil investigative demand on January 18, 2024, concerning a False Claims Act investigation related to cybersecurity compliance[130](index=130&type=chunk) [9. Income Taxes](index=30&type=section&id=9.%20Income%20Taxes) The effective tax rate was **2.1%** for Q3 2024 and **(3.2)%** for YTD 2024, unfavorably impacted by **$308 million** goodwill impairment and **$141 million** GRAIL NOLs, but favorably by the EC fine reversal Effective Tax Rate | Effective Tax Rate | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :----------------- | :------ | :------ | :------- | :------- | | Rate | 2.1% | 3.6% | (3.2)% | (3.8)% | - YTD 2024 effective tax rate was unfavorably impacted by a **$308 million** income tax expense from non-deductible goodwill impairment and a **$141 million** income tax expense from GRAIL pre-acquisition net operating losses on GILTI[134](index=134&type=chunk) - The income tax rate in Q3 2024 and YTD 2024 was favorably impacted by the reversal of the European Commission fine (excluded from taxable income) and the mix of earnings in jurisdictions with lower statutory tax rates, such as Singapore[134](index=134&type=chunk) [10. Segment Information](index=31&type=section&id=10.%20Segment%20Information) The company reports Core Illumina and GRAIL segments; post-Spin-Off, GRAIL no longer contributes revenue, while Core Illumina's revenue slightly decreased but income from operations significantly increased - Reportable segments are Core Illumina and GRAIL[136](index=136&type=chunk) Core Illumina | Core Illumina (in millions) | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :-------------------------- | :------ | :------ | :------- | :------- | | Revenue | $1,080 | $1,106 | $3,228 | $3,341 | | Income (loss) from operations | $741 | $262 | $1,298 | $519 | - GRAIL's revenue and income (loss) from operations are no longer reported after the Spin-Off in Q2 2024[137](index=137&type=chunk)[139](index=139&type=chunk) [Management's Discussion & Analysis](index=32&type=section&id=MANAGEMENT'S%20DISCUSSION%20%26%20ANALYSIS) This section provides management's perspective on the company's financial condition and results of operations, covering an overview, detailed results, liquidity, capital resources, and critical accounting policies [Management's Overview and Outlook](index=32&type=section&id=Management's%20Overview%20and%20Outlook) Illumina, a DNA sequencing leader, faces macroeconomic and competitive challenges; the GRAIL Spin-Off completed in June 2024, with YTD 2024 revenue down **3%**, gross margin at **65.3%**, and increased operating loss due to impairments - Illumina is a global leader in DNA sequencing and array-based technologies, serving research, clinical, and applied markets[146](index=146&type=chunk) - Macroeconomic factors (inflation, exchange rates, economic downturn), competitive challenges in China, and Russia sanctions continue to impact sales and operations[150](index=150&type=chunk) - The GRAIL Spin-Off was completed on June 24, 2024, with Illumina retaining approximately **14.5%** of GRAIL common stock[147](index=147&type=chunk) Financial Highlights (YTD 2024) | Financial Highlight (YTD 2024) | Value | Change from YTD 2023 | | :----------------------------- | :---- | :------------------- | | Revenue | $3,268M | -3% | | Gross Margin | 65.3% | +4.1 percentage points | | Loss from Operations | $(1,008)M | Increased by $103M | | Effective Tax Rate | (3.2)% | +0.6 percentage points | | Cash, Cash Equivalents, and Short-term Investments (Q3 2024) | $939M | - | | Goodwill and Intangible Impairment (YTD 2024) | $1,889M | +$1,068M | | Legal Contingency and Settlement (YTD 2024) | $(474)M | Favorable impact of $488M | | Gains on GRAIL Contingent Consideration Liability (YTD 2024) | - | Increased by $222M | [Results of Operations](index=34&type=section&id=Results%20of%20Operations) Consolidated revenue decreased by **3%** due to lower instrument sales, while gross margin improved; operating expenses were impacted by GRAIL impairments and the EC fine reversal, with other income affected by GRAIL investment losses Consolidated Financial Performance | Metric | Q3 2024 (Millions) | Q3 2023 (Millions) | YTD 2024 (Millions) | YTD 2023 (Millions) | | :---------------------------------- | :------ | :------ | :------- | :------- | | Total Revenue | $1,080 | $1,119 | $3,268 | $3,382 | | Consolidated Gross Profit | $745 | $684 | $2,133 | $2,070 | | Consolidated Gross Margin | 68.9% | 61.1% | 65.3% | 61.2% | | Consolidated Operating Expense | $4 | $1,438 | $3,141 | $2,975 | | Consolidated Research and Development | $253 | $315 | $913 | $1,013 | | Consolidated Selling, General and Administrative | $239 | $303 | $813 | $1,127 | | Consolidated Goodwill and Intangible Impairment | — | $821 | $1,889 | $821 | | Core Illumina Legal Contingency and Settlement | $(488) | $(1) | $(474) | $14 | | Total Other Expense, net | $(21) | $(28) | $(358) | $(45) | | Provision (Benefit) for Income Taxes | $15 | $(28) | $44 | $36 | - Core Illumina consumables revenue increased due to NovaSeq X consumables, while instrument revenue decreased due to fewer high-throughput and mid-throughput instrument shipments[158](index=158&type=chunk) - GRAIL goodwill and intangible impairment for YTD 2024 included **$1,466 million** goodwill impairment and **$420 million** IPR&D intangible asset impairment[170](index=170&type=chunk) - Core Illumina legal contingency and settlement in Q3 2024 and YTD 2024 primarily consisted of a **$489 million** gain from the reversal of the EC fine accrual[171](index=171&type=chunk) - Other income (expense), net in YTD 2024 was primarily driven by an increase in net losses on strategic investments of **$303 million**, including an unrealized loss of **$332 million** on the retained investment in GRAIL[173](index=173&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) Cash and cash equivalents decreased to **$869 million** due to GRAIL deconsolidation and debt repayments; **$500 million** in new term notes were issued, a **$750 million** loan repaid, and a **$1.5 billion** share repurchase program authorized Cash Flow Summary | Metric (in millions) | YTD 2024 | YTD 2023 | | :---------------------------------- | :------- | :------- | | Net cash provided by operating activities | $473 | $254 | | Net cash used in investing activities | $(130) | $(146) | | Net cash used in financing activities | $(523) | $(1,183) | | Net decrease in cash and cash equivalents | $(179) | $(1,084) | - Cash and cash equivalents were **$869 million** as of September 29, 2024, with **$464 million** held by foreign subsidiaries[179](index=179&type=chunk) - The European Commission withdrew its **€432 million** fine, resulting in a net gain of **$481 million** in Q3 2024, and related guarantees are no longer outstanding[180](index=180&type=chunk) - Issued **$500 million** aggregate principal amount of 2026 Term Notes and repaid the **$750 million** Delayed Draw Credit Facility in Q3 2024[181](index=181&type=chunk)[182](index=182&type=chunk) - A new share repurchase program for up to **$1.5 billion** was authorized in August 2024, with **$1.4 billion** remaining available[186](index=186&type=chunk) - The company expects current cash, cash equivalents, short-term investments, operating cash flows, and available borrowing capacity to be sufficient for near-term capital and operating needs for at least the next 12 months[188](index=188&type=chunk) [Critical Accounting Policies and Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) No material changes occurred to critical accounting policies and estimates during YTD 2024, despite macroeconomic uncertainties - No material changes to critical accounting policies and estimates during YTD 2024[195](index=195&type=chunk) [Recent Accounting Pronouncements](index=41&type=section&id=Recent%20Accounting%20Pronouncements) Recent accounting pronouncements applicable to the condensed consolidated financial statements are summarized in Note 1, 'Organization and Significant Accounting Policies' - Refer to Note 1 for a summary of recent accounting pronouncements[196](index=196&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No substantial changes to the company's market risks occurred in YTD 2024 compared to prior disclosures in the Annual Report on Form 10-K - No substantial changes to market risks in YTD 2024[197](index=197&type=chunk) [Other Key Information](index=41&type=section&id=OTHER%20KEY%20INFORMATION) This section covers additional important information including controls and procedures, legal proceedings, risk factors, share repurchases, trading plans, and a list of exhibits [Controls and Procedures](index=41&type=section&id=Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of Q3 2024, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of the end of Q3 2024[200](index=200&type=chunk) - No material changes in internal control over financial reporting occurred during Q3 2024[199](index=199&type=chunk) [Legal Proceedings](index=41&type=section&id=Legal%20Proceedings) Detailed discussion of legal proceedings is provided in Note 8, 'Legal Proceedings', within the Condensed Consolidated Financial Statements section - Refer to Note 8 for details on legal proceedings[201](index=201&type=chunk) [Risk Factors](index=41&type=section&id=Risk%20Factors) The GRAIL Spin-Off introduced significant costs, potential revenue loss, and adverse impacts, while ongoing litigation, regulatory investigations, and shareholder lawsuits related to the acquisition persist - The GRAIL Spin-Off resulted in significant costs, potential loss of revenue, and adverse effects on business, financial condition, results of operations, and stock price[204](index=204&type=chunk) - The company is subject to ongoing SEC investigations, shareholder inspection demands, derivative lawsuits, and securities class actions related to the GRAIL acquisition[205](index=205&type=chunk) [Share Repurchases and Sales](index=42&type=section&id=Share%20Repurchases%20and%20Sales) A new **$1.5 billion** share repurchase program was authorized in August 2024, with **770 thousand** shares repurchased for **$99 million** in Q3 2024 - A new share repurchase program for up to **$1.5 billion** of outstanding common stock was authorized in August 2024[206](index=206&type=chunk) Share Repurchase Activity (Q3 2024) | Share Repurchase Activity (Q3 2024) | Value | | :---------------------------------- | :---- | | Total Number of Shares Purchased (thousands) | 770 | | Total Cost of Shares Repurchased (millions) | $99 | | Average Price Paid per Share | $127.71 | | Approximate Dollar Value of Shares Remaining Under Program (millions) | $1,401.684 | [Adoptions, Modifications or Terminations of Trading Plans](index=43&type=section&id=Adoptions,%20Modifications%20or%20Terminations%20of%20Trading%20Plans) No directors or officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q3 2024 - No directors or officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements in Q3 2024[210](index=210&type=chunk) [Exhibits](index=44&type=section&id=Exhibits) This section lists exhibits filed with Form 10-Q, including amended bylaws, underwriting agreements, officer's certificates, a separation agreement, and SOX certifications - Exhibits include Amended and Restated Bylaws, Underwriting Agreement, Officer's Certificate, Separation Agreement, and Section 302 and 906 certifications[212](index=212&type=chunk) [Form 10-Q Cross-Reference Index](index=46&type=section&id=Form%2010-Q%20Cross-Reference%20Index) This index provides a cross-reference to the parts and items requirements of the SEC Quarterly Report on Form 10-Q, indicating page numbers for each item - Provides a cross-reference index for the parts and items requirements of the SEC Quarterly Report on Form 10-Q[215](index=215&type=chunk)

Financial Data and Key Metrics - Revenue for Q3 2024 was $1.1 billion, in line with expectations [10] - Non-GAAP operating margin was 22.6%, and diluted earnings per share were $1.14, exceeding expectations [12] - Revenue in the Americas was down 6% YoY, Europe was up 12%, EMEA was up 7%, and Greater China was down 23% [10] - The company placed an additional 58 NovaSeq X Plus instruments, bringing the total installed base to 527, with 40% shipped to clinical customers [11] - The X-Series surpassed $1 billion in cumulative revenue [11] Business Line Data and Key Metrics - Sequencing consumables revenue was $741 million, up 7% YoY, driven by strong uptake in X consumables [29] - Sequencing instruments revenue was $104 million, a 42% YoY decline, slightly behind expectations [31] - Sequencing service and other revenue was $150 million, up 6% YoY, driven by strategic partnerships and high instrument service contract revenue [33] - More than 55% of high-throughput gigabases sequenced and over 35% of high-throughput consumables revenue were on the NovaSeq X series [29] Market Data and Key Metrics - Total sequencing GB output on connected high and mid-throughput instruments grew over 40% YoY, with robust growth from both clinical and research customers [31] - The company expects almost half of high-throughput consumables revenue to transition to the X series by mid-2025 [30] Company Strategy and Industry Competition - The company aims to drive high single-digit revenue growth and 500 basis points of operating margin expansion by 2027, with annual EPS growth in the double-digits to teens over the next three years [14] - Key priorities include deeper customer collaboration, continuous innovation, and operational excellence [15] - The company recently launched the MiSeq i100, addressing demand for flexible solutions for smaller-scale projects with faster turnaround times [19] - The company is developing comprehensive whole genome sequencing and the five-phase genome, which will launch over the next 12 to 18 months [21] Management Commentary on Operating Environment and Future Outlook - The near-term macroeconomic environment remains constrained, and the company expects 2024 revenue growth to be slightly lower than prior guidance [13] - The company is raising guidance for 2024 operating margin and earnings per share, reflecting progress in operational excellence and margin expansion [13] - The company expects to return to growth in 2025, with high single-digit revenue growth by 2027 [49] Other Important Information - The company divested GRAIL in June 2024, and all financial information discussed excludes GRAIL [5][27] - The company issued $500 million in debt at a 4.65% coupon to redeem a high-cost $750 million delayed broad term loan, reducing leverage and interest rates [38] - The company repurchased 770,000 shares for $98 million at an average price of $127.71 per share [41] Q&A Session Summary Question: Guidance and Clinical Transition Concerns [50] - The company does not foresee a "clinical cliff" for consumable revenue, as the transition to the X series is gradual, typically taking 12-18 months [52][55] - Q4 consumables guidance assumes a typical seasonal decline due to fewer working days and holidays [56][57] Question: Mid-Throughput Decline and 2025 Outlook [59] - The mid-throughput decline was driven by macroeconomic pressures and competition, particularly in the U.S. and Europe [60][61] - The company expects to return to positive growth in 2025, with high single-digit growth by 2027 [63] Question: Price per GB and Margin Expansion [65] - The price per GB impact was closer to 25%, within the expected range of 20-25% [67] - The company is targeting 500 basis points of margin expansion from a base of 21% [67][68] Question: NGS Consumable Revenue Growth [71] - Consumables revenue grew 7% in Q3, with both research and clinical segments showing strong growth [73] Question: Clinical X Transition and Pricing Dynamics [76] - The transition to the X series is driven by its benefits, including lower costs and improved workflows, with customers gradually moving assays over time [77][78] - Multi-year contracts are not instrument-specific and will continue with the X series [83] Question: Elasticity of Demand and Q4 Seasonality [85] - Customers are expanding assays and increasing sequencing depth, driving volume growth despite lower prices [89] - Q4 seasonality is expected to impact consumables due to fewer working days and inventory management [90][91] Question: Revenue Guidance Change [93] - The revenue guidance change is primarily due to slower deal closures in the instruments business, with the impact spread across instruments, consumables, and services [94][96] Question: Macro Environment and Growth Outlook [99] - The company sees consumables growth as a leading indicator of improvement, but the macroeconomic environment remains a headwind [100][101] Question: Margin Expansion and Cost Savings [103] - The company achieved $100 million in cost savings in 2024 and is targeting an additional $200 million, with a focus on COGS and operating expenses [107][108] Question: Free Cash Flow and Share Buybacks [112] - The company generated $284 million in free cash flow in Q3 and plans to continue share buybacks and tuck-in M&A to drive growth [113][117] Question: End Market Dynamics [120] - Europe showed steady growth, while the Americas faced tougher comparisons due to higher X instrument placements in the prior year [122] Question: Single-Cell Opportunity [124] - The acquisition of Fluent BioSciences expands the single-cell market opportunity, with a focus on enabling large-scale experiments [125][126] Question: MiSeq i100 and XLEAP Impact [130] - The MiSeq i100 is expected to drive growth in the low-throughput segment, with significant interest from customers [131][133] - Over 60% of NextSeq 1K/2K users have adopted the XLEAP chemistry, showing strong market reception [135]

Financial Performance - Core Illumina revenue for Q3 2024 was $1.1 billion, down 2% from Q3 2023 on a constant currency basis[2] - Core Illumina GAAP operating margin for Q3 2024 was 68.6%, with a non-GAAP operating margin of 22.6%[2] - Core Illumina GAAP diluted EPS for Q3 2024 was $4.03, and non-GAAP diluted EPS was $1.14[2] - Fiscal year 2024 Core Illumina revenue guidance was lowered to a decline of ~3% from fiscal year 2023, with Q4 2024 revenue expected to be approximately $1.07 billion[2] - Fiscal year 2024 Core Illumina non-GAAP operating margin guidance was raised to a range of 21% to 21.5%[2] - Fiscal year 2024 Core Illumina non-GAAP diluted EPS guidance was raised to a range of $4.05 to $4.15[2] - Total revenue for Q3 2024 was $1.08 billion, a decrease of 4% compared to $1.119 billion in Q3 2023[20] - Net income for Q3 2024 was $705 million, compared to a net loss of $754 million in Q3 2023[20] - Core Illumina constant currency revenue for Q3 2024 was $1.078 billion, a decrease of 2% compared to $1.101 billion in Q3 2023[25] - Consolidated constant currency revenue for Q3 2024 was $1.078 billion, a decrease of 3% compared to $1.114 billion in Q3 2023[26] - Non-GAAP diluted earnings per share for the three months ended September 29, 2024, was $1.14, compared to GAAP diluted earnings per share of $4.03[28] - Non-GAAP net income for the three months ended September 29, 2024, was $181 million, compared to GAAP net income of $642 million[29] - Non-GAAP diluted earnings per share for the nine months ended September 29, 2024, was $3.20, compared to GAAP diluted earnings per share of $4.88[28] - Non-GAAP net income for the nine months ended September 29, 2024, was $510 million, compared to GAAP net income of $777 million[29] - Non-GAAP diluted earnings per share for the nine months ended October 1, 2023, was $0.73, compared to GAAP diluted loss per share of $(6.23)[31] - Non-GAAP net income for the nine months ended October 1, 2023, was $115 million, compared to GAAP net loss of $(986) million[32] - Non-GAAP gross profit for the consolidated operations was $732 million, representing 65.4% of revenue[34] - Non-GAAP operating profit for the consolidated operations was $93 million, representing 8.3% of revenue[34] - Core Illumina non-GAAP gross profit was $2.228 billion, representing 69.0% of revenue[36] - Consolidated non-GAAP operating profit was $362 million, or 11.1% of revenue[36] - Non-GAAP gross profit for Core Illumina is $2,208 million, representing 66.1% of revenue[38] - Non-GAAP operating profit for Core Illumina is $681 million, representing 20.4% of revenue[38] - Non-GAAP operating profit for Consolidated is $196 million, representing 5.8% of revenue[38] Expenses and Margins - Gross margin for Q3 2024 increased to 68.9% from 64.7% in Q3 2023, driven by cost savings and improved productivity[5] - Research and development expenses for Q3 2024 were $253 million, a decrease from $315 million in Q3 2023[20] - Selling, general and administrative expenses for Q3 2024 were $239 million, a decrease from $303 million in Q3 2023[20] - GAAP R&D expense for the consolidated operations was $315 million, accounting for 28.1% of revenue[34] - Non-GAAP R&D expense for the consolidated operations was $312 million, representing 27.8% of revenue[34] - GAAP SG&A expense for the consolidated operations was $303 million, accounting for 27.0% of revenue[34] - Non-GAAP SG&A expense for the consolidated operations was $328 million, representing 29.3% of revenue[34] - Non-GAAP R&D expense for Core Illumina is $754 million, representing 22.5% of revenue[38] - Non-GAAP SG&A expense for Core Illumina is $773 million, representing 23.1% of revenue[38] Cash Flow and Assets - Free cash flow for Q3 2024 was $284 million, compared to $94 million in the prior year period[7] - Free cash flow for Q3 2024 was $284 million, compared to $94 million in Q3 2023[23] - Total assets decreased to $6.014 billion as of September 29, 2024, from $10.111 billion as of December 31, 2023[17] - Stockholders' equity decreased to $2.125 billion as of September 29, 2024, from $5.745 billion as of December 31, 2023[18] - Cash and cash equivalents decreased to $869 million as of September 29, 2024, from $1.048 billion as of December 31, 2023[17] Legal and Tax Adjustments - Legal contingency and settlement adjustments reduced GAAP net income by $488 million for the three months ended September 29, 2024[29] - Goodwill and intangible impairment adjustments increased GAAP net income by $821 million for the nine months ended October 1, 2023[32] - GILTI, US foreign tax credits, and global minimum top-up tax adjustments increased non-GAAP net income by $54 million for the three months ended September 29, 2024[29] - Incremental non-GAAP tax expense reduced non-GAAP net income by $26 million for the three months ended September 29, 2024[29] - GAAP goodwill and intangible impairment for the consolidated operations was $821 million, accounting for 73.4% of revenue[34] - GAAP legal contingency and settlement was $(474) million, or (14.4)% of revenue[36] - Non-GAAP other expense was $(32) million, or (1.0)% of revenue[36] - Consolidated GAAP operating loss was $(1.008) billion, or (30.8)% of revenue[36] - Strategic investment related loss was $339 million, or 10.4% of revenue[36] - Goodwill and intangible impairment related to GRAIL is $821 million, representing 24.3% of revenue[38] - Legal contingency and settlement reversal for Q3 2024 is $14 million, representing 0.4% of revenue[38] Product and Innovation Updates - The company introduced the MiSeq i100 Series, Illumina's simplest and fastest benchtop sequencers[8] - The company announced plans to provide updates on key innovations in whole-genome sequencing, proteomics, and single-cell technology at the American Society of Human Genetics Annual Meeting[8] Other Financial Metrics - GAAP other expense, net for the consolidated operations was $(28) million, accounting for (2.6)% of revenue[34] - Non-GAAP other expense, net for the consolidated operations was $(6) million, representing (0.5)% of revenue[34] - Strategic investment-related loss, net for the consolidated operations was $19 million, accounting for 1.8% of revenue[34] - Core Illumina GAAP gross profit was $2.181 billion, or 67.6% of revenue[36] - Non-GAAP tax provision for Core Illumina is $48 million, representing 21.0% of revenue for the three months ended September 2024[43] - Non-GAAP tax provision for Consolidated is $48 million, representing 21.0% of revenue for the three months ended September 2024[44] - Non-GAAP tax provision for Consolidated is $77 million, representing 23.4% of revenue for the nine months ended September 2024[44]

Illumina, Inc. (NASDAQ:ILMN) 2024 Strategy Update Summary Company Overview - **Company**: Illumina, Inc. - **Industry**: Genomics and Biotechnology - **Event Date**: August 13, 2024 - **Participants**: Jacob Thaysen (CEO), Steve Barnard (CTO), Ankur Dhingra (CFO) Key Points Vision and Growth Strategy - Illumina aims to redefine genomics through next-generation sequencing (NGS) and has a mission to improve patient outcomes by reducing diagnosis wait times from weeks to days [3][4] - The company is shifting focus from cost per gigabase to total cost of workflow, emphasizing high-quality biological insights [5][6] Market Opportunity - The total addressable market for Illumina is over $125 billion, with only $10 billion currently served by NGS [8] - The clinical market is expected to grow significantly, particularly in liquid biopsy, which is projected to reach $800 million with a 34% CAGR [9][10] Product Innovations - The NovaSeq X Series is a key enabler for expanding applications in genomics, with nearly half of high-throughput data sequenced on the X Plus by the end of Q2 2024 [11] - Illumina is focusing on multiomics, integrating various biological insights, and enhancing customer workflows through innovative technologies [12][18] Financial Outlook - Illumina targets high single-digit revenue growth by 2027, driven by core sequencing, multiomics, and expanded services [49][63] - The company has seen GB output growth of over 25% annually, with recent quarters showing growth rates of 35% to 40% [50] Margin Expansion - Illumina aims to expand operating margins by 500 basis points through 2027, with a goal of achieving a top quartile margin performance among peers [59] - The company has implemented cost-saving measures, including a 10% reduction in workforce and optimizing real estate [48][60] Customer-Centric Approach - Illumina is committed to understanding and addressing the diverse needs of its customer base, focusing on partnerships rather than vendor relationships [58] - The company is enhancing its R&D pipeline to ensure alignment with customer needs and market demands [57] Future Innovations - Upcoming products include a 5-base genome technology that provides both variant and epigenetic information in a single workflow, and a comprehensive genome that simplifies library preparation [35][36] - Illumina is also advancing its proteomics capabilities and integrating multiomic data analysis through platforms like Partek [39][40] Conclusion - Illumina is positioned for significant growth and innovation in the genomics space, with a clear strategy to enhance customer experience, expand market reach, and improve financial performance [64][63]

[Condensed Consolidated Financial Statements](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section presents the company's financial position, performance, and cash flows for the reported periods, along with detailed explanatory notes - The financial statements are prepared in accordance with U.S. GAAP for interim information and do not include all footnotes required for complete financial statements[33](index=33&type=chunk) - Management's estimates and assumptions affect reported amounts, and actual results could differ[33](index=33&type=chunk) [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Illumina's balance sheet as of June 30, 2024, shows a significant decrease in total assets and stockholders' equity compared to December 31, 2023, primarily driven by the GRAIL Spin-Off and related impairments. Current liabilities increased due to the current portion of term debt Balance Sheet Highlights (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $920 | $1,048 | | Total current assets | $2,459 | $2,609 | | Goodwill | $1,079 | $2,545 | | Intangible assets, net | $278 | $2,993 | | Total assets | $6,081 | $10,111 | | Term debt, current portion | $744 | $— | | Total current liabilities | $2,208 | $1,570 | | Total stockholders' equity | $1,436 | $5,745 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For Q2 and YTD 2024, Illumina reported a substantial net loss, primarily due to significant goodwill and intangible impairment charges, despite a slight decrease in total revenue Consolidated Statements of Operations (in millions, except per share) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Total revenue | $1,112 | $1,176 | $2,188 | $2,263 | | Gross profit | $721 | $732 | $1,388 | $1,386 | | Goodwill and intangible impairment | $1,886 | $— | $1,889 | $— | | Loss from operations | $(1,637) | $(88) | $(1,749) | $(152) | | Net loss | $(1,988) | $(234) | $(2,114) | $(231) | | Basic loss per share | $(12.48) | $(1.48) | $(13.28) | $(1.46) | [Condensed Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Illumina's comprehensive loss for Q2 and YTD 2024 significantly increased compared to the prior year, primarily reflecting the substantial net loss Consolidated Statements of Comprehensive Loss (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :---------------------- | :------ | :------ | :------- | :------- | | Net loss | $(1,988) | $(234) | $(2,114) | $(231) | | Total comprehensive loss | $(1,986) | $(221) | $(2,099) | $(222) | [Condensed Consolidated Statements of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Total stockholders' equity decreased significantly from December 31, 2023, to June 30, 2024, primarily due to the net loss incurred and the impact of the GRAIL Spin-Off, which resulted in a substantial reduction in additional paid-in capital Changes in Stockholders' Equity (in millions) | Metric | December 31, 2023 | June 30, 2024 | | :-------------------------- | :---------------- | :------------ | | Additional paid-in capital | $9,555 | $7,347 | | Accumulated deficit | $(19) | $(2,133) | | Total stockholders' equity | $5,745 | $1,436 | - The Spin-Off of GRAIL resulted in a derecognition of **$2,399 million** from additional paid-in capital[25](index=25&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For YTD 2024, operating activities provided cash, while investing and financing activities used cash, leading to a net decrease in cash and cash equivalents, significantly impacted by the GRAIL Spin-Off and related debt Consolidated Statements of Cash Flows (in millions) | Metric | YTD 2024 | YTD 2023 | | :------------------------------------ | :------- | :------- | | Net cash provided by operating activities | $157 | $115 | | Net cash used in investing activities | $(89) | $(93) | | Net cash used in financing activities | $(191) | $(476) | | Net decrease in cash and cash equivalents | $(128) | $(458) | - GRAIL cash deconsolidated as a result of spin-off: **$(968) million** in YTD 2024[28](index=28&type=chunk) - Borrowings on delayed draw term loan, net of issuance costs: **$744 million** in YTD 2024[28](index=28&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide essential details and explanations for the unaudited condensed consolidated financial statements, covering significant accounting policies, the GRAIL Spin-Off, revenue recognition, investments, debt, equity, balance sheet specifics, legal proceedings, income taxes, segment information, and a subsequent event [Organization and Significant Accounting Policies](index=11&type=section&id=1.%20Organization%20and%20Significant%20Accounting%20Policies) This note outlines Illumina's business, the impact of the GRAIL Spin-Off, and key accounting policy changes, including the interim income tax calculation method and weighted average shares for loss per share - Illumina provides sequencing- and array-based solutions for research, clinical, and applied markets[31](index=31&type=chunk) - Completed GRAIL Spin-Off on June 24, 2024, distributing **85.5%** of GRAIL common stock to Illumina stockholders; retained approximately **14.5%**[32](index=32&type=chunk) - Changed interim income tax calculation method to estimated annual effective tax rate for Q2 and YTD 2024[36](index=36&type=chunk) Weighted Average Shares Used in Calculating Loss Per Share (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------------------ | :------ | :------ | :------- | :------- | | Weighted average shares used in calculating basic loss per share | 159 | 158 | 159 | 158 | | Weighted average shares used in calculating diluted loss per share | 159 | 158 | 159 | 158 | [GRAIL Spin-Off](index=13&type=section&id=2.%20GRAIL%20Spin-Off) This note details the completion of the GRAIL Spin-Off, the distribution of shares to Illumina stockholders, the cash contribution to GRAIL, and the financial impact of deconsolidated assets and separation costs - Spin-Off completed on June 24, 2024; Illumina stockholders received one share of GRAIL common stock for every six Illumina shares[41](index=41&type=chunk) - Illumina retained approximately **14.5%** of GRAIL common stock post-Spin-Off[41](index=41&type=chunk) - Illumina contributed **$974 million** in cash to GRAIL for **2.5 years** of operations (Disposal Funding)[42](index=42&type=chunk) GRAIL Net Assets Deconsolidated (in millions) | Asset/Liability | Amount | | :------------------------------------ | :----- | | Cash and cash equivalents | $968 | | Intangible assets, net | $2,201 | | GRAIL net assets | $2,738 | - Incurred **$52 million** in separation-related transaction costs during YTD 2024[44](index=44&type=chunk) [Revenue](index=14&type=section&id=3.%20Revenue) This note provides a breakdown of revenue by source, highlighting decreases in Core Illumina instrument sales and increases in GRAIL service revenue, along with remaining performance obligations Revenue by Source (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------- | :------ | :------ | :------- | :------- | | Product revenue | $927 | $1,001 | $1,803 | $1,923 | | Service and other revenue | $185 | $175 | $385 | $340 | | Total revenue | $1,112 | $1,176 | $2,188 | $2,263 | - Core Illumina instruments revenue decreased by **39%** in Q2 2024 and **34%** in YTD 2024, driven by fewer shipments of high-throughput and mid-throughput instruments[145](index=145&type=chunk) - GRAIL service and other revenue increased by **32%** in Q2 2024 and **31%** in YTD 2024, primarily due to sales of Galleri[146](index=146&type=chunk) - Remaining performance obligations totaled **$717 million** as of June 30, 2024, with **82%** expected to convert to revenue in the next **12 months**[49](index=49&type=chunk) [Investments and Fair Value Measurements](index=15&type=section&id=4.%20Investments%20and%20Fair%20Value%20Measurements) This note details changes in marketable equity securities, including the retained GRAIL investment and associated unrealized losses, as well as the fair value adjustments for the Helix contingent value right and GRAIL contingent consideration liability - Marketable equity securities increased to **$74 million** as of June 30, 2024, from **$6 million** at December 31, 2023, primarily due to the retained **14.5%** investment in GRAIL, initially recorded at **$397 million**[52](index=52&type=chunk) - Recorded an unrealized loss of **$328 million** on the GRAIL investment in Q2 and YTD 2024[52](index=52&type=chunk) Net Losses Recognized on Marketable Equity Securities (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------------------------------------------------------------------ | :------ | :------ | :------- | :------- | | Net losses recognized during the period on marketable equity securities | $(330) | $— | $(329) | $(2) | | Net unrealized losses recognized during the period on marketable equity securities still held at the reporting date | $(330) | $(1) | $(329) | $— | - Helix contingent value right fair value increased to **$79 million** as of June 30, 2024, and was settled for **$82.5 million** cash on July 31, 2024[58](index=58&type=chunk) - Contingent consideration liability related to GRAIL decreased significantly to **$131 million** as of June 30, 2024, from **$387 million** at December 31, 2023, due to an increase in the revenue risk premium assumption[59](index=59&type=chunk) [Debt](index=18&type=section&id=5.%20Debt) This note summarizes the company's term debt obligations, including the new Delayed Draw Credit Facility used for GRAIL Spin-Off funding, and details the revolving credit facility Summary of Term Debt Obligations (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :-------------- | :---------------- | | Principal amount of 2025 Term Notes | $500 | $500 | | Principal amount of 2027 Term Notes | $500 | $500 | | Principal amount of 2031 Term Notes | $500 | $500 | | Principal amount of 2025 Delayed Draw Term Loan | $750 | $— | | Net carrying amount of term debt | $2,234 | $1,489 | - Borrowed **$750 million** on the Delayed Draw Credit Facility on June 20, 2024, to provide a portion of the GRAIL Spin-Off Disposal Funding, maturing June 19, 2025, with a current borrowing rate of **6.7%**[66](index=66&type=chunk) - Maintains a **$750 million** senior unsecured five-year revolving credit facility, undrawn as of June 30, 2024[68](index=68&type=chunk) [Stockholders' Equity](index=19&type=section&id=6.%20Stockholders'%20Equity) This note details adjustments to equity awards due to the GRAIL Spin-Off, restricted stock activity, derecognition of liability-classified awards, ESPP share issuance, remaining share repurchase authorization, and share-based compensation expense - All unvested RSU and PSU were equitably adjusted for the GRAIL Spin-Off, increasing shares reserved under the 2015 Stock Plan by **160,000**[71](index=71&type=chunk) Restricted Stock Activity (Units in thousands) | Metric | RSU | PSU | | :-------------------------------- | :---- | :---- | | Outstanding at December 31, 2023 | 2,198 | — | | Awarded | 2,666 | 457 | | Unvested adjustment for GRAIL Spin-Off | 107 | 12 | | Outstanding at June 30, 2024 | 4,685 | 450 | - Liability-classified awards for GRAIL employees were assumed by GRAIL in connection with the Spin-Off, resulting in a derecognition of **$283 million**[75](index=75&type=chunk) - Approximately **0.3 million** shares were issued under the ESPP during YTD 2024, with **12.6 million** shares remaining available[77](index=77&type=chunk) - Approximately **$15 million** remained available for share repurchases under the **$750 million** program as of June 30, 2024[79](index=79&type=chunk) Share-Based Compensation Expense (in millions) | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Share-based compensation expense, before taxes | $110 | $105 | $208 | $199 | [Supplemental Balance Sheet Details](index=22&type=section&id=7.%20Supplemental%20Balance%20Sheet%20Details) This note provides detailed breakdowns of accounts receivable, inventory, and accrued liabilities, and explains significant restructuring charges, goodwill impairment, and intangible asset impairment related to GRAIL, along with foreign currency hedging activities Accounts Receivable, net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :-------------- | :---------------- | | Trade accounts receivable, gross | $651 | $741 | | Total accounts receivable, net | $641 | $734 | Inventory, net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :---------------- | :-------------- | :---------------- | | Raw materials | $232 | $276 | | Work in process | $416 | $402 | | Total inventory, net | $561 | $587 | Accrued Liabilities (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :-------------- | :---------------- | | Legal contingencies | $481 | $484 | | Contract liabilities, current portion | $238 | $252 | | Accrued taxes payable | $177 | $79 | | Total accrued liabilities | $1,265 | $1,325 | - Recorded **$40 million** in total restructuring charges in YTD 2024, primarily from asset impairment charges related to leased facilities[85](index=85&type=chunk) - Recorded goodwill impairment of **$1,466 million** for GRAIL in Q2 2024, as its carrying value exceeded its fair value[87](index=87&type=chunk) - Recorded IPR&D intangible asset impairment of **$420 million** for GRAIL in Q2 2024[90](index=90&type=chunk) Total Intangible Assets, Net (in millions) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :-------------- | :---------------- | | Total finite-lived intangible assets, net | $278 | $2,403 | | In-process research and development (IPR&D) | $— | $590 | | Total intangible assets, net | $278 | $2,993 | - Entered into new forward contracts for **€432 million** in June 2024 to hedge foreign currency exposure for the European Commission fine[96](index=96&type=chunk) [Legal Proceedings](index=26&type=section&id=8.%20Legal%20Proceedings) This note details ongoing legal and regulatory actions, including the FTC complaint, the European Commission fine for the GRAIL acquisition, an SEC investigation, and multiple shareholder lawsuits alleging fiduciary duty breaches and misleading statements - FTC administrative complaint regarding GRAIL acquisition was subject to a Joint Motion To Dismiss on July 30, 2024, following the Spin-Off[100](index=100&type=chunk) - European Commission imposed a fine of approximately **€432 million** on July 12, 2023, for breaching EU Merger Regulation, representing **10%** of 2022 consolidated annual revenues[105](index=105&type=chunk) - Accrued **$481 million** as of June 30, 2024, for the EC fine, including interest and foreign currency fluctuations[106](index=106&type=chunk) - SEC is conducting an investigation related to the GRAIL acquisition and certain statements/disclosures[108](index=108&type=chunk) - Multiple shareholder derivative complaints and federal/state securities class actions have been filed, alleging breaches of fiduciary duties and false/misleading statements related to the GRAIL acquisition[109](index=109&type=chunk)[111](index=111&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk)[118](index=118&type=chunk)[120](index=120&type=chunk) [Income Taxes](index=30&type=section&id=9.%20Income%20Taxes) This note presents the effective tax rates for the reported periods and explains the primary variances from the U.S. federal statutory tax rate, including the impact of non-deductible goodwill impairment, GRAIL pre-acquisition net operating losses, and R&D expense capitalization Effective Tax Rates | Period | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------- | :------ | :------ | :------- | :------- | | Effective tax rate | (0.6)% | (163.8)% | (1.4)% | (38.5)% | - Variance from U.S. federal statutory tax rate (**21%**) in Q2 and YTD 2024 primarily due to: **$308 million** income tax expense impact from non-deductible goodwill impairment; **$99 million** (Q2 2024) and **$116 million** (YTD 2024) income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, U.S. foreign tax credits, and Pillar Two global minimum top-up tax; and **$41 million** (Q2 2024) and **$63 million** (YTD 2024) income tax expense impact of R&D expense capitalization for tax purposes[125](index=125&type=chunk) [Segment Information](index=32&type=section&id=10.%20Segment%20Information) This note outlines Illumina's two reportable segments, Core Illumina and GRAIL, and provides a breakdown of revenue and income (loss) from operations for each segment, noting GRAIL's spin-off - Illumina has two reportable segments: Core Illumina and GRAIL, with GRAIL spun off on June 24, 2024[129](index=129&type=chunk) Segment Revenue (in millions) | Segment | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------ | :------ | :------ | :------- | :------- | | Core Illumina | $1,092 | $1,159 | $2,148 | $2,235 | | GRAIL | $29 | $22 | $55 | $42 | Segment Income (Loss) from Operations (in millions) | Segment | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :------------ | :------- | :------- | :------- | :------- | | Core Illumina | $442 | $115 | $558 | $257 | | GRAIL | $(2,078) | $(204) | $(2,305) | $(408) | [Subsequent Event](index=33&type=section&id=11.%20Subsequent%20Event) This note discloses the acquisition of Fluent BioSciences on July 9, 2024, including the upfront cash payment and contingent consideration structure - Acquired Fluent BioSciences on July 9, 2024[132](index=132&type=chunk) - Upfront cash payment of **$85 million**, plus contingent consideration based on milestones[132](index=132&type=chunk) [Management's Discussion & Analysis](index=33&type=section&id=MANAGEMENT'S%20DISCUSSION%20%26%20ANALYSIS) This section provides management's perspective on the company's financial condition, results of operations, liquidity, and capital resources [Management's Overview and Outlook](index=33&type=section&id=Management's%20Overview%20and%20Outlook) Illumina, a global leader in DNA sequencing, completed the GRAIL Spin-Off on June 24, 2024. The company's financial results are impacted by macroeconomic factors and competitive challenges. YTD 2024 highlights include a revenue decrease, gross margin increase, significant operating loss due to impairment, and a negative effective tax rate - Illumina is a global leader in DNA sequencing and array-based technologies[136](index=136&type=chunk) - Completed the Spin-Off of GRAIL on June 24, 2024, retaining approximately **14.5%** ownership[137](index=137&type=chunk) - Macroeconomic factors (inflation, exchange rates, economic downturn, China competition, Russia sanctions) continue to impact sales and operations[140](index=140&type=chunk) - Revenue decreased **3%** in YTD 2024 to **$2,188 million** compared to YTD 2023[141](index=141&type=chunk) - Gross profit margin was **63.5%**, up from **61.3%** in YTD 2023, driven by favorable sequencing consumables mix and cost savings[141](index=141&type=chunk) - Loss from operations increased to **$1,749 million** from **$152 million** in YTD 2023, primarily due to **$1,889 million** in goodwill and intangible impairment charges[141](index=141&type=chunk) - Effective tax rate was **(1.4)%** in YTD 2024[141](index=141&type=chunk) - Ended Q2 2024 with **$994 million** in cash, cash equivalents, and short-term investments[142](index=142&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) This section provides a detailed breakdown of Illumina's financial performance, showing a decline in total revenue driven by instrument sales, an improved gross margin for Core Illumina, and a substantial increase in operating loss due to significant goodwill and intangible asset impairments, particularly from GRAIL Consolidated Statement of Operations Data as Percentage of Total Revenue | Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 | | :-------------------------------- | :------ | :------ | :------- | :------- | | Total revenue | 100.0% | 100.0% | 100.0% | 100.0% | | Gross profit | 64.8% | 62.2% | 63.5% | 61.3% | | Total operating expense | 212.0% | 69.7% | 143.4% | 68.0% | | Loss from operations | (147.2)% | (7.5)% | (79.9)% | (6.7)% | | Net loss | (178.8)% | (19.9)% | (96.6)% | (10.2)% | - Core Illumina instruments revenue decreased by **$77 million (39%)** in Q2 2024 and **$123 million (34%)** in YTD 2024 due to fewer high-throughput and mid-throughput instrument shipments[145](index=145&type=chunk) - Core Illumina gross margin increased in Q2 and YTD 2024 due to a more favorable mix of sequencing consumables and operational excellence initiatives[148](index=148&type=chunk) - GRAIL goodwill and intangible impairment for Q2 and YTD 2024 totaled **$1,886 million**, comprising **$1,466 million** goodwill impairment and **$420 million** IPR&D intangible asset impairment[154](index=154&type=chunk) - Core Illumina SG&A expense decreased by **$311 million (84%)** in Q2 2024, primarily due to a **$271 million** gain recognized on GRAIL CVR contingent consideration liability[152](index=152&type=chunk) - Unrealized loss of **$328 million** on retained investment in GRAIL drove the fluctuation in other (expense) income, net in Q2 and YTD 2024[156](index=156&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) Illumina's cash and cash equivalents decreased by **$128 million** in YTD 2024, primarily due to the GRAIL Spin-Off and related funding, partially offset by new debt. The company maintains sufficient liquidity through operating cash flows and credit facilities, but faces significant obligations including the EC fine and contingent consideration for GRAIL CVRs - Cash and cash equivalents at June 30, 2024: **$920 million**, a decrease of **$128 million** from December 31, 2023[161](index=161&type=chunk) - GRAIL Spin-Off resulted in deconsolidation of **$968 million** in cash and cash equivalents[161](index=161&type=chunk) - Accrued **$481 million** as of June 30, 2024, for the European Commission fine, which is accruing interest at **5.5%** per annum[162](index=162&type=chunk) - Borrowed **$750 million** on the Delayed Draw Credit Facility in June 2024 for GRAIL Disposal Funding[163](index=163&type=chunk) - Contingent consideration liability for GRAIL acquisition was **$131 million** as of June 30, 2024[167](index=167&type=chunk) - Anticipates current cash, cash equivalents, short-term investments, operating cash flows, and Revolving Credit Facility are sufficient to fund near-term capital and operating needs for at least the next **12 months**[170](index=170&type=chunk) Key Cash Flow Activities (in millions, YTD 2024) | Activity | Amount | | :------------------------------------ | :----- | | Net cash provided by operating activities | $157 | | Net cash used in investing activities | $(89) | | Net cash used in financing activities | $(191) | [Critical Accounting Policies and Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies and estimates remain consistent with those disclosed in the Annual Report on Form 10-K for fiscal year 2023, with the exception of changes to income tax accounting as detailed in Note 1 - No material changes to critical accounting policies and estimates during YTD 2024, except for income taxes as disclosed in Note 1[178](index=178&type=chunk) [Recent Accounting Pronouncements](index=41&type=section&id=Recent%20Accounting%20Pronouncements) For information regarding recent accounting pronouncements applicable to the condensed consolidated financial statements, refer to Note 1, "Organization and Significant Accounting Policies" - Refer to Note 1. Organization and Significant Accounting Policies for a summary of recent accounting pronouncements[179](index=179&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=41&type=section&id=Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There were no substantial changes to the company's market risks in YTD 2024 compared to the disclosures in the Annual Report on Form 10-K for fiscal year 2023 - No substantial changes to market risks in YTD 2024 compared to the Annual Report on Form 10-K for fiscal year ended December 31, 2023[180](index=180&type=chunk) [Other Key Information](index=41&type=section&id=OTHER%20KEY%20INFORMATION) This section covers additional important disclosures including controls, legal proceedings, risk factors, and corporate governance updates [Controls and Procedures](index=41&type=section&id=Controls%20and%20Procedures) Management confirmed the effectiveness of the company's disclosure controls and procedures and reported no material changes to internal control over financial reporting during Q2 2024 - No changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting during Q2 2024[182](index=182&type=chunk) - CEO and CFO concluded that disclosure controls and procedures are effective as of June 30, 2024[183](index=183&type=chunk) [Legal Proceedings](index=41&type=section&id=Legal%20Proceedings) For a comprehensive discussion of the company's legal proceedings, including those related to the GRAIL acquisition, refer to Note 8, "Legal Proceedings," within the Condensed Consolidated Financial Statements section - Refer to Note 8. Legal Proceedings for a discussion of legal proceedings[184](index=184&type=chunk) [Risk Factors](index=41&type=section&id=Risk%20Factors) The company faces significant risks, primarily from ongoing legal and regulatory challenges related to the GRAIL acquisition and Spin-Off, including potential substantial tax liabilities, continued obligations for GRAIL CVRs, and the impact of new FDA regulations on Laboratory Developed Tests (LDTs) - The GRAIL acquisition remains subject to ongoing legal and regulatory proceedings in the U.S. and EU, potentially leading to significant financial penalties and increased costs[185](index=185&type=chunk) - The Spin-Off could result in substantial tax liability if it does not qualify for tax-free treatment[192](index=192&type=chunk) - Illumina remains the obligor on the contingent value rights (CVRs) issued in connection with the GRAIL acquisition, which may be difficult to estimate or comply with[194](index=194&type=chunk) - The FDA's Final Rule on Laboratory Developed Tests (LDTs) may subject newly developed LDT products to regulatory clearance or approval, potentially impacting the business[196](index=196&type=chunk)[200](index=200&type=chunk) [Share Repurchases and Sales](index=44&type=section&id=Share%20Repurchases%20and%20Sales) The company did not repurchase any equity securities or engage in unregistered sales of equity securities during the quarterly period ended June 30, 2024 - No purchases of equity securities by the issuer during Q2 2024[201](index=201&type=chunk) - No unregistered sales of equity securities during Q2 2024[202](index=202&type=chunk) [Adoptions, Modifications or Terminations of Trading Plans](index=44&type=section&id=Adoptions%2C%20Modifications%20or%20Terminations%20of%20Trading%20Plans) During Q2 2024, Charles Dadswell, the General Counsel, modified an existing 10b5-1 trading plan for the sale of up to **8,904 shares**, effective until April 18, 2025 - Charles Dadswell, General Counsel, modified an existing 10b5-1 plan on May 14, 2024, for the sale of up to **8,904 shares**, terminating on April 18, 2025[203](index=203&type=chunk) [Other Information](index=44&type=section&id=Other%20Information) The Board of Directors approved amendments to the company's Amended and Restated Bylaws on August 5, 2024, which include updates to stockholder meeting requirements, director nominations, indemnification, and a new federal forum provision - Amended and Restated Bylaws became effective on August 5, 2024[204](index=204&type=chunk) - Amendments include adding a federal forum provision, updating stockholder meeting requirements, clarifying director nomination and business notice procedures, and aligning indemnification provisions[205](index=205&type=chunk) [Exhibits](index=44&type=section&id=Exhibits) This section lists all documents filed as exhibits to the Form 10-Q, including various agreements related to the GRAIL Spin-Off, credit facilities, and certifications - Exhibits include the Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement, Stockholder and Registration Rights Agreement, Fourth Amendment to the Amended and Restated Supply and Commercialization Agreement, and the 364-Day Delayed Draw Credit Agreement[206](index=206&type=chunk)[207](index=207&type=chunk) - Includes certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[207](index=207&type=chunk) [Form 10-Q Cross-Reference Index](index=47&type=section&id=Form%2010-Q%20Cross-Reference%20Index) This index provides a cross-reference to the specific pages within the Form 10-Q where each required item of the SEC's quarterly report is addressed - Provides a cross-reference to the parts and items requirements of the Securities and Exchange Commission Quarterly Report on Form 10-Q[210](index=210&type=chunk)

Illumina, Inc. (NASDAQ:ILMN) Q2 2024 Earnings Conference Call August 6, 2024 4:30 PM ET Company Participants Salli Schwartz - Vice President of Investor Relations Jacob Thaysen - Chief Executive Officer Ankur Dhingra - Chief Financial Officer Conference Call Participants Vijay Kumar - Evercore ISI Conor McNamara - RBC Capital Markets Patrick Donnelly - Citi Doug Schenkel - Wolfe Research Dan Arias - Stifel Tycho Peterson - Jefferies Subha Nambi - Guggenheim Securities Puneet Souda - Leerink Partners Sung Ji ...

Revenue and Financial Performance - Core Illumina revenue for Q2 2024 was $1.09 billion, down 6% from Q2 2023 and up 3% from Q1 2024[2] - Total revenue for Q2 2024 was $1.112 billion, a decrease from $1.176 billion in Q2 2023[26] - Core Illumina revenue for the six months ended June 30, 2024 was $2.148 billion, a 4% decrease compared to $2.235 billion in the same period last year[33] - Consolidated revenue for the three months ended June 30, 2024 was $1.112 billion, a 5% decrease compared to $1.176 billion in the same period last year[33] - Product revenue for Q2 2024 was $927 million, a decline from $1.001 billion in Q2 2023[26] - Service and other revenue increased to $185 million in Q2 2024, up from $175 million in Q2 2023[26] - Exchange rate effects negatively impacted consolidated revenue by $5 million for the three months ended June 30, 2024[33] - Hedge gains positively impacted consolidated revenue by $4 million for the three months ended June 30, 2024[33] Operating Margins and Profitability - Core Illumina GAAP operating margin for Q2 2024 was 40.5%, with a non-GAAP operating margin of 22.2%[2] - Core Illumina non-GAAP operating margin guidance for fiscal year 2024 was raised to a range of 20.5% to 21%[2] - Core Illumina's Non-GAAP operating profit for the three months ended June 30, 2024, was $242 million, or 22.2% of revenue, while consolidated Non-GAAP operating profit was $84 million, or 7.6% of revenue[44] - Core Illumina's GAAP gross profit for the three months ended June 30, 2024, was $743 million, representing 68.0% of revenue, while Non-GAAP gross profit was $758 million, or 69.4% of revenue[44] - Core Illumina's GAAP gross profit for the three months ended July 2, 2023, was $760 million, or 65.5% of revenue, while Non-GAAP gross profit was $777 million, or 67.0% of revenue[47] - Core Illumina's GAAP gross profit is $1,436 million, representing 66.9% of revenue, while Non-GAAP gross profit is $1,466 million, or 68.3% of revenue[49] - Core Illumina's GAAP gross profit for the six months ended July 2, 2023 is $1,446 million, or 64.7% of revenue, while Non-GAAP gross profit is $1,478 million, or 66.1% of revenue[51] - Non-GAAP gross profit is a key measure of the effectiveness and efficiency of manufacturing processes, product mix and average selling prices[52] Earnings Per Share (EPS) - Core Illumina GAAP diluted earnings per share for Q2 2024 was $0.41, and non-GAAP diluted earnings per share was $1.09[2] - Core Illumina non-GAAP diluted earnings per share guidance for fiscal year 2024 was introduced in the range of $3.80 to $3.95[2] - Non-GAAP diluted earnings per share for the three months ended June 30, 2024 was $0.36, compared to $0.32 in the same period last year[36] Net Income and Loss - Net loss for Q2 2024 was $1.988 billion, compared to a net loss of $234 million in Q2 2023[26] - GAAP net loss for the three months ended June 30, 2024 was $1.988 billion, compared to a net loss of $234 million in the same period last year[37] - Non-GAAP net income for the three months ended June 30, 2024 was $57 million, compared to $50 million in the same period last year[37] - Core Illumina GAAP net income for the six months ended June 30, 2024 was $135 million[41] - Core Illumina Non-GAAP net income for the six months ended June 30, 2024 was $329 million[41] Impairment Charges - The company recognized $1,466 million in goodwill and $420 million in intangible asset impairment related to the GRAIL segment in Q2 2024[5] - Goodwill and intangible impairment charges totaled $1.886 billion in Q2 2024, significantly impacting the operating loss[26] - Goodwill and intangible impairment charges for the three months ended June 30, 2024 were $1.886 billion[37] - GAAP goodwill and intangible impairment is $1,889 million, or 86.3% of revenue, primarily driven by a $1,466 million goodwill impairment[49] Cash Flow and Liquidity - Free cash flow for Q2 2024 was $48 million, compared to $58 million in the prior year period[6] - Free cash flow for Q2 2024 was $48 million, down from $58 million in Q2 2023[29] - Cash and cash equivalents decreased to $920 million as of June 30, 2024, from $1.048 billion at the end of 2023[22] Assets and Equity - Total assets decreased to $6.081 billion as of June 30, 2024, from $10.111 billion at the end of 2023[22] - Stockholders' equity dropped to $1.436 billion as of June 30, 2024, from $5.745 billion at the end of 2023[23] Research and Development (R&D) Expenses - Research and development expenses were $325 million in Q2 2024, down from $358 million in Q2 2023[26] - Core Illumina's GAAP R&D expense for the three months ended June 30, 2024, was $241 million, or 22.1% of revenue, while Non-GAAP R&D expense was $325 million, or 29.2% of revenue[44] - Core Illumina's GAAP R&D expense for the three months ended July 2, 2023, was $274 million, or 23.6% of revenue, while Non-GAAP R&D expense was $345 million, or 29.3% of revenue[47] - GAAP R&D expense is $660 million, or 30.2% of revenue, while Non-GAAP R&D expense is $658 million, or 30.1% of revenue[49] - GAAP R&D expense for the six months ended July 2, 2023 is $699 million, or 30.9% of revenue, while Non-GAAP R&D expense is $685 million, or 30.3% of revenue[51] Selling, General, and Administrative (SG&A) Expenses - Core Illumina's GAAP SG&A expense for the three months ended June 30, 2024, was $60 million, or 5.5% of revenue, while Non-GAAP SG&A expense was $358 million, or 32.2% of revenue[44] - Core Illumina's GAAP SG&A expense for the three months ended July 2, 2023, was $371 million, or 31.9% of revenue, while Non-GAAP SG&A expense was $355 million, or 30.2% of revenue[47] - GAAP SG&A expense is $588 million, or 26.9% of revenue, while Non-GAAP SG&A expense is $707 million, or 32.3% of revenue[49] - GAAP SG&A expense for the six months ended July 2, 2023 is $839 million, or 37.1% of revenue, while Non-GAAP SG&A expense is $697 million, or 30.8% of revenue[51] Tax Provisions - Q2 2024 GAAP tax provision was $12 million, representing a decrease of 0.6% compared to the previous period[57] - Non-GAAP tax provision for Q2 2024 was $16 million, accounting for 22.3% of the total[57] - YTD 2024 GAAP tax provision was $28 million, reflecting a decrease of 1.4%[57] - Non-GAAP tax provision for YTD 2024 was $28 million, representing 28.8% of the total[57] - Q2 2024 Core Illumina GAAP tax provision was $35 million, accounting for 35.0% of the total[60] - Non-GAAP tax provision for Core Illumina in Q2 2024 was $55 million, representing 24.2% of the total[60] - YTD 2024 Core Illumina GAAP tax provision was $80 million, accounting for 37.3% of the total[60] - Non-GAAP tax provision for Core Illumina YTD 2024 was $108 million, representing 24.9% of the total[60] - Q2 2024 included $104 million in incremental non-GAAP tax expense[57] - YTD 2024 included $117 million in incremental non-GAAP tax expense[57] Corporate Transactions - The company completed the spin-off of GRAIL into a new public company on June 24, 2024[2] - The company acquired Fluent Biosciences, developer of an emerging and highly differentiated single-cell technology[11] Operating Loss and Profit - Consolidated GAAP operating loss for the three months ended June 30, 2024, was $(1,637) million, or (147.2)% of revenue, primarily due to a goodwill and intangible impairment of $1,886 million[44] - Consolidated GAAP operating loss for the three months ended July 2, 2023, was $(88) million, or (7.5)% of revenue, while Non-GAAP operating profit was $82 million, or 7.0% of revenue[47] - Consolidated GAAP operating loss is $(1,749) million, or (79.9)% of revenue, while Non-GAAP operating profit is $117 million, or 5.4% of revenue[49] - Consolidated GAAP operating loss for the six months ended July 2, 2023 is $(152) million, or (6.7)% of revenue, while Non-GAAP operating profit is $103 million, or 4.5% of revenue[51]

Revenue Performance - Revenue decreased 1% in Q1 2024 to $1,076 million compared to $1,087 million in Q1 2023, primarily due to a decrease in sequencing instruments revenue [134]. - Core Illumina total product revenue decreased by $47 million, or 5%, in Q1 2024, primarily due to a $44 million decrease in sequencing instruments revenue [138]. - Total revenue for Q1 2024 was $1,076 million, a decrease of 1.0% compared to $1,087 million in Q1 2023 [21]. - Product revenue decreased to $876 million, down 5.0% from $922 million in the same period last year [21]. - Service and other revenue increased to $200 million, up 21.2% from $165 million in Q1 2023 [21]. - The company generated $979 million in revenue from the Americas, down from $1,076 million in Q1 2023, while revenue from Europe increased to $279 million from $261 million [47]. Profitability and Margins - Gross margin increased to 62.0% in Q1 2024 from 60.3% in Q1 2023, driven by a favorable mix of sequencing consumables and operational cost savings [134]. - Gross profit for Q1 2024 was $667 million, compared to $655 million in Q1 2023, reflecting a gross margin improvement [21]. - Loss from operations was $(111) million in Q1 2024, an increase from $(64) million in Q1 2023, due to a $59 million increase in operating expenses [134]. - Operating expenses rose to $778 million, an increase of 8.2% from $719 million in Q1 2023 [21]. - Total operating expenses as a percentage of revenue increased to 72.3% in Q1 2024 from 66.1% in Q1 2023 [136]. - The net loss for Q1 2024 was $126 million, a significant decline from a net income of $3 million in Q1 2023, representing a 4,300% decrease [149]. Cash and Investments - Cash, cash equivalents, and short-term investments totaled $1,115 million at the end of Q1 2024, with approximately $614 million held by foreign subsidiaries [135]. - Cash and cash equivalents increased by $60 million from December 31, 2023, totaling approximately $1,108 million as of March 31, 2024 [153]. - Net cash provided by operating activities in Q1 2024 was $77 million, up from $10 million in Q1 2023 [165]. - The company invested $36 million in capital expenditures and $12 million in strategic investments during Q1 2024 [167]. Regulatory and Legal Matters - The divestiture of GRAIL is expected to be executed by the end of Q2 2024, following the European Commission's approval of the divestment plan [130]. - The company is subject to ongoing legal and regulatory proceedings regarding the acquisition of GRAIL, which may result in significant financial penalties and operational restrictions [176]. - The FTC issued an order requiring the company to divest GRAIL, reversing a previous ruling in favor of the company [177]. - The company is currently facing regulatory challenges regarding the acquisition of GRAIL, including a prohibition decision from the European Commission and a divestiture requirement [11]. - The European Commission imposed a fine of approximately €432 million, representing the maximum fine of 10% of the company's consolidated annual revenues for fiscal year 2022 [186]. - The company filed an appeal against the European Commission's Prohibition Decision on November 17, 2022, which found the acquisition incompatible with the internal market in Europe [98]. Taxation - The effective tax rate was (15.3)% in Q1 2024 compared to 103.9% in Q1 2023, primarily due to the impact of research and development expense capitalization [134]. - Effective tax rate in Q1 2024 was (15.3)%, compared to 103.9% in Q1 2023, influenced by $21 million tax expense from capitalizing R&D expenses and $18 million from GRAIL pre-acquisition losses [149]. Future Outlook and Strategic Initiatives - The company anticipates sufficient funds to meet near-term capital and operating needs for at least the next 12 months [162]. - The company is focused on implementing cost reduction plans, which may incur higher costs than anticipated [11]. - Management's outlook includes expectations for growth and market position, contingent on successful product development and regulatory navigation [12]. - Macroeconomic factors such as inflation and supply chain pressures are expected to continue impacting sales and operations in 2024 [133].

Illumina, Inc. (NASDAQ:ILMN) Q1 2024 Earnings Call Transcript May 2, 2024 5:00 PM ET Company Participants Salli Schwartz - Vice President, Investor Relations Jacob Thaysen - Chief Executive Officer Ankur Dhingra - Chief Financial Officer Joydeep Goswami - Advisor Conference Call Participants Doug Schenkel - Wolfe Research Puneet Souda - Leerink Partners Vijay Kumar - Evercore ISI Dan Brennan - TD Cowen David Westenberg - Piper Sandler Subha Nambi - Guggenheim Securities Sung Ji Nam - Scotiabank Tejas Savant ...