Illumina, Inc. (ILMN) Earnings

Management highlights

### Core Business Performance and Market Position - Q2 2026 marked the fastest revenue growth rate since CEO Jacob Thaysen joined the company, driven by strong demand for Illumina sequencing technology from clinical customers, who are the company's primary growth driver. - 95+ NovaSeq X placements in the quarter, with sustained high demand more than three years after the platform's launch; strong multi-unit orders from large clinical customers for new clinical trial capacity expansion. - Illumina holds a durable market position in clinical sequencing supported by deep customer relationships and a large existing installed base. ### Product Innovation and Multiomics Expansion - Launched the whole genome MRD research workflow for NovaSeq systems, currently in early access, designed to reduce customer assay development timelines and costs. - Expanded spatial biology capabilities with the recent launch of StrataMap Spatial, a sequencing-based spatial workflow, adding a new offering to the Illumina ecosystem. - Post the Somalogic acquisition, the rebranded SomaScan and SomaSeq proteomics offerings are generating strong customer interest, enabling combined proteomics and genomic analysis. - Launched BioInsight, a multiomics data and AI offering for pharmaceutical drug discovery, anchored by the BillionCell Atlas genome-wide perturbation dataset program for disease biology research and AI model training. Over 300 million cells have been delivered to date, with 6 total biopharma partners (3 added post-quarter-end) and first revenue already booked.

Guidance

- Full-year 2026 rest-of-world organic revenue growth guidance was raised to greater than 5%, up from the prior 2-4% range. Reported revenue guidance was lifted by $50 million at the midpoint to a range of $4.60 to $4.64 billion. - Full-year clinical sequencing consumables growth guidance is now mid-teens (raised towards the high end of prior guidance), while research and applied sequencing consumables are still expected to see mid-to-high single-digit declines in 2026. Overall rest-of-world organic sequencing consumables growth is now guided to mid-single digits. - Sequencing instruments are expected to grow low single digits rest-of-world organic in 2026, with elevated unit placements continuing in the second half though year-over-year growth will moderate. The majority of the consumables revenue benefit from recent strong NovaSeq X placements will spill over to 2027, as customers typically take 6-9 months to reach normalized utilization. - Full-year non-GAAP operating margin guidance is maintained at 23.4% to 23.6%. Diluted EPS guidance was raised to $5.30 to $5.40, an increase of $0.12 at the midpoint vs. prior guidance, representing 11% YoY growth at the midpoint. - Q3 2026 guidance calls for ~4.5% rest-of-world organic revenue growth, reported revenue of $1.14 to $1.16 billion, non-GAAP EPS of $1.33 to $1.38, and non-GAAP operating margin of ~24% (150bps sequential expansion driven by higher consumables mix and efficiency gains). - Management reaffirms the 2027 target of high single-digit full-year revenue growth, with new multiomics products expected to add 1-2 percentage points of incremental growth in 2027.

Segment performance

Illumina reported total Q2 2026 revenue of $1.16 billion, up 9.5% year-over-year (6.5% organic, 8.1% organic excluding greater China). 1. Sequencing Consumables: Revenue of $775 million, 5% YoY growth organic ex-China. Clinical markets, which represent ~65% of total sequencing consumables revenue, grew 15% YoY organic ex-China (US-Canada grew over 20%), while research and applied markets declined 7% YoY organic ex-China. As of Q2, 83% of total sequencing volumes and 78% of clinical volumes have transitioned to the NovaSeq X platform. 2. Sequencing Instruments: Revenue of $125 million, 31% YoY growth organic ex-China, driven by strong NovaSeq X and MiSeq i100 sales. Over 95 NovaSeq X instruments were placed in the quarter, alongside 10 NovaSeq 6000 units. 3. Sequencing Service and Other: Revenue of $154 million, 14% YoY growth organic ex-China, lifted by early revenue from the BillionCell Atlas multiomics dataset program for biopharma partners. 4. Microarrays and Other: Revenue of $105 million, 21% YoY reported growth (includes SomaLogic acquisition contributions), but declined 4% organic ex-China. Non-GAAP gross margin was 68.2%, and non-GAAP operating margin was 22.5%, above guidance despite higher-than-expected freight and memory costs. Non-GAAP diluted EPS was $1.31, up 10% YoY.

Risks & headwinds

- Higher-than-expected memory and freight costs have created cost headwinds that the company has had to offset through operational efficiency actions and partial cost pass-through to customers. - Near-term regional macro and geopolitical headwinds have slowed growth in the Europe, Middle East, and Latin America regions, particularly stemming from conflict in the Middle East. - Mid-throughput instruments, which serve project-based research work, remain more muted due to broader macroeconomic pressures on research budgets. - A full recovery of the research and applied markets is still uncertain, and management has not built any meaningful improvement in this segment into 2026 guidance. - Transition of customers from older NovaSeq 6000 systems to the NovaSeq X platform could create temporary margin dynamics as customers run both platforms in parallel during conversion.

Analyst Q&A

• Q: With stronger-than-expected clinical growth in 2026 and no observed "clinical cliff", why should investors not expect 2027 growth to exceed the current high single-digit target? /

  A: Management confirms strong clinical market momentum will continue for years, and recent elevated NovaSeq X placements reflect this strong demand. Growth will moderate slightly from the 2026 first half pace as placements normalize from the current elevated run, and management remains committed to delivering the previously outlined high single-digit 2027 target while continuing to build out strong customer value proposition. The current strong momentum creates upside opportunity over time.

• Q: As customers transition to NovaSeq X, is Illumina over-earning on consumables while customers run both old and new platforms in parallel, and will this create a future headwind once older platforms are decommissioned? What explains the sequential slowdown in clinical consumables growth? /

  A: Management notes that many customers are still purchasing NovaSeq 6000 units to continue running existing assays, and platform transition has historically been gradual, so it will not create meaningful headwinds. The sequential slowdown in overall clinical growth is driven by short-term disruptions in the Middle East and Latin America; U.S. clinical growth still remains above 20%, and full-year clinical growth guidance was raised to mid-teens, reflecting strong underlying momentum.

• Q: Why is Q3 2026 organic growth expected to step down from Q2's 8.1%, and are there any one-off factors driving Q2's strength? What is the medium-term opportunity for AI-related revenue from BioInsight? /

  A: The Q3 step-down reflects normal seasonal phasing (Q3 is typically slower than Q2 for Illumina) and easier year-over-year comparisons from elevated instrument placements in the second half of 2025. Q2's strong placement activity is not a one-off, as clinical customers are building capacity ahead of expected future volume growth. BioInsight and the BillionCell Atlas already generate early top and bottom-line revenue, and the dataset provides a strong foundation for predictive AI biological models for drug discovery, representing significant long-term growth opportunity.

• Q: With memory costs still rising and supply constrained, how will this impact second half 2026 and 2027 results, especially as you integrate GPUs for new products? /

  A: The bulk of current higher memory costs are already reflected in Q2 2026 gross margin results, and the company has secured extra inventory for the next several quarters to meet demand. A key strategic cost advantage for Illumina's instruments is that they do not use GPU architecture, relying on a more cost-efficient alternative architecture that avoids exposure to high GPU pricing and supply constraints. The team has a track record of offsetting cost headwinds via operational efficiency improvements, and management feels it has the issue well in hand.

• Q: How strong is clinical growth geographically and by application, and has application mix shifted recently? /

  A: Clinical growth is broadly based across all regions except China, with the U.S. remaining the clear leading growth driver. Oncology is the fastest-growing application, with therapy selection still the largest oncology revenue segment, and minimal residual disease (MRD) emerging as a new fast-growing driver of momentum. Rare disease and screening applications (including NIPT) are also growing steadily, so the strength is broad-based with oncology leading at this stage.