Illumina Inc 2026 Q3 Earnings Call

Hello everyone, and welcome to Illumina's third quarter 2026 earnings call. Today, we will review our financial results released after the market close and provide prepared remarks before opening the line for Q&A. Our earnings release is available in the investor relations section of illumina.com. Joining me today are Jacob Thaysen, Chief Executive Officer, and Ankur Dhingra, Chief Financial Officer. Jacob will begin with an update on Illumina's business, followed by Ankur's review of our financials. As you may have seen in our press release, we recognized certain tariff refunds in the third quarter, which had a positive impact on GAAP and non-GAAP operating income, margins, and EPS, and a negative impact on revenue. These refunds were not contemplated into our previous guidance, and all financial measures discussed today will be on an adjusted non-GAAP basis, excluding the impact of tariff refunds.

Reconciliations to non-GAAP and GAAP can be found in today's release and in the supplementary data on our website. All revenue and revenue growth rates are presented excluding tariff refunds. Organic revenue growth also adjusts for the impact of currency and acquisitions, and rest of world organic growth further excludes our Greater China region. This call is being recorded, and the replay will be available on our website. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Illumina's future events, product outlook, and financial expectations. Actual results may differ materially. 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 SEC, including our most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Jacob.

Thank you, Conor, and good afternoon, everyone. We had a great third quarter with strong clinical sequencing demand and elevated NovaSeq X placements, driving revenue, margin, and EPS above our guidance range. Our strategy is working, and I'm proud of what our team delivered for our customers and shareholders. Our continued disciplined execution and business momentum allow us to raise our fiscal year guidance, and we remain on track to achieve our long-range financial targets. Before I go into details on our results, I want to highlight a few ways our innovation is helping customers answer new questions about biology. Early in 2026, we introduced the Billion Cell Atlas to address one of the biggest bottlenecks in applying AI to biology, the lack of functional data sets. AI models need large amount of data to learn from.

In biology, those models only work if the data is accurate, standardized, and reproducible. These data sets don't exist at scale. There is no internet of biology. Our Billion Cell Atlas was designed to help address these limitations. Now, over halfway complete, the Atlas is advancing toward an unprecedented AI-ready perturbation data set that helps biopharma partners connect genetic signals to cellular mechanisms, strengthening target validation, improve disease understanding, and enable accelerated drug discovery. By working directly with biopharma, we are integrating their input to ensure the proprietary data set is relevant and built to maximize value for both our partners and Illumina. GSK is the latest biopharmaceutical company to join the Billion Cell Atlas consortium to accelerate drug discovery, and we are seeing growing interest from other companies seeking access to the completed Atlas.

We have learned a lot from our partners about how to build these data sets for AI, and we see multiple opportunities to address additional bottlenecks across drug discovery and development. We see this as a large long-term opportunity and look forward to sharing more about our strategy in the coming quarters. Earlier this month at ASHG, we brought together our assays, sequencing platforms, and software to show how customers can benefit using the Illumina BioInsight ecosystem. The most compelling examples came from customers themselves, who showed how combining genomics, transcriptomics, methylation, and proteomics is helping them see biology they could not see before with work spanning bulk single-cell and spatial approaches.

What is resonating with customers is that we are looking at their work from start to finish, making it easier to obtain all the components they need to drive high-quality insights while bringing down the total cost of the workflow. On the analysis side, we launched the BioInsight platform, which brings our analysis application, AI models, and curated biological data together in one place, reducing the need for customers to assemble and manage separate software tools. Through the platform, customers can also access SpliceAI2, our new AI model that predicts how genetic changes affect RNA splicing. In rare disease research data sets, it identified 17% more disease-relevant splice variants than other splicing models. I'm proud of the innovation our teams continue to deliver.

Our view is that the next era of life sciences innovation will be powered not only by sequencing, but also by the software, AI, and differentiated data that unlock the power of the genome. Through BioInsight, Illumina is building the base for AI biology, enabling more powerful foundational models and virtual cell models with the potential to improve our ability to understand and predict biology. As we move nearer to predicting biology, we see a path to using those insights to move healthcare toward a more proactive future, identifying risks sooner, preventing disease where possible, and intervening earlier. Now let me expand on our financial results, starting with our performance in the quarter. Customer demand for the NovaSeq X platform remains at very high levels. In the quarter, we placed over 80 instruments.

This equates to approximately 360 NovaSeq X placements over the last four quarters, more than in our first year of launch. This demand is being fueled by broader adoption of sequencing-based diagnostics and more sequencing intense assays. As these instruments go live, they will support additional consumables revenue for years to come. End market growth rates for rest of world sequencing consumables were similar in Q3 and Q2, with clinical growth of 14% and research and applied declines of 6%. We continue to expect mid-teens clinical growth and mid to high single-digit declines in research and applied sequencing consumables for rest of world for 2026. Let me now turn to our outlook for the rest of the year. We are raising our full-year revenue outlook to reflect Q3 outperformance and a stronger Q4, driven by an increase in sequencing consumable revenue on a larger NovaSeq X installed base.

We are also raising our full year margin and EPS outlooks, and now expect operating margins of approximately 25% in the second half of 2026, up about 400 basis points versus 2024. I am extremely proud of how our teams have managed investments through a challenging environment. With each quarter that passes, it becomes more clear our strategy is working. We are achieving what we set out to do in 2024 and capitalizing on emerging opportunities to drive growth for the years to come. I want to thank our teams for their hard work and commitment to Illumina and our customers for the trust they place in us. I look forward to sharing our 2027 guidance during the fourth quarter earnings call. With that, I will turn it over to Ankur to walk through our results and updated outlook.

Thank you, Jacob, and good afternoon, everyone. I will walk through our third quarter financial results, provide additional color on revenue, earnings, and cash flow, and then discuss our updated outlook. As Conor mentioned earlier, all of our financial metrics will be on a non-GAAP basis, excluding tariff refunds. The reconciliations are provided in our financial disclosures. On a high level, our Q3 revenue and earnings came in ahead of our expectations and guidance. Rest of world organic revenue grew 5%, our operating margin was 25%, 100 basis points above our guidance, and diluted EPS of $1.44 grew 7% year-over-year. Now turning to the details. During the third quarter, Illumina's revenue was $1.17 billion, up 4.7% year-over-year on a rest of world organic basis, with currency and acquired revenue together contributing just under three percentage points to our reported growth.

Sequencing consumables revenue of $792 million was up 6% year-over-year and up 5% on an organic rest of world basis. High throughput volume drove most of the revenue growth as the NovaSeq X install base continues to expand and clinical customers continue to bring their instruments online. Sales in clinical markets grew 14% on rest of the world, and we continue to expect mid-teens growth for clinical consumables in 2026. Sequencing consumable sales in research and applied markets declined 6% for rest of the world. Year to date, trends have remained consistent with our outlook entering the year. Revenue has grown sequentially each of the last two quarters, and we are seeing signs research activity is stabilizing. We continue to expect mid to high single-digit declines for research and applied consumables in 2026.

Moving to the NovaSeq X transition, approximately 84% of high throughput volume and 60% of revenue is now on the X. In research and applied markets, 90% or greater volume has been on the X for each of the last five quarters, signaling the conversion to X is largely complete. Thus, we expect minimal transition pricing headwinds from these customers going forward. In clinical, 78% of volume is currently on the X, and we have seen the pace of conversion slow in recent quarters. This is the dynamic you have heard us talk about. Certain clinical customers are keeping current on-market assays on the 6K while adding X capacity for new tests. We anticipate clinical conversion to reach 80%-85% in the coming quarters, and as such, we expect the year-over-year pricing headwinds from the X transition to be lower in 2027 than in 2026.

As the X conversion is nearly complete, we believe these charts are becoming less relevant in showing the price and volume dynamics impacting our revenue growth. As such, we plan to discontinue showing this slide in our quarterly earnings presentations after Q4 2026. As it relates to sequencing activity, gigabase output growth on our connected high and mid-throughput instruments remained above 30%, showing that demand remains strong. Sequencing instruments revenue of $106 million was down 2% year-over-year in Q3 on a rest of world organic basis. Higher NovaSeq X placements were offset by weaker instrument sales in our Europe, Middle East, Latin America region. X placements were up year-over-year in both clinical and research markets. Instrument sales still account for over 90% of our X placements. Though we are seeing an increasing level of interest in lease-type arrangements with certain research customers.