Illumina Reports Q2 2026 Results: Full Earnings Call Transcript

On Thursday, Illumina (NASDAQ:ILMN) discussed second-quarter financial results during its earnings call. The full transcript is provided below.

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View the webcast at https://illumina-earnings-call-q2-2026.open-exchange.net/registration

Summary

Illumina reported strong Q2 2026 performance with revenue growth of 9.5% year-over-year and EPS growth of 10%, driven by robust demand for NovaSeq X placements and increased clinical market consumables.

The company raised its 2026 guidance for revenue growth and profitability, expecting full-year organic revenue growth greater than 5% and mid-teens growth in clinical consumables.

Strategic initiatives include expanding multi-omics capabilities with new product launches like StrataMap Spatial and strengthening the BioInsight platform, including the Billion Cell Atlas project.

Operational highlights include over 95 NovaSeq X placements in Q2 and significant progress in transitioning customers to this platform, with 83% of volumes now on NovaSeq X.

Management emphasized ongoing cost management amidst rising memory and freight costs, and continued confidence in long-term targets with a focus on clinical market expansion and multi-omics integration.

Full Transcript

OPERATOR

Good day, ladies and gentlemen. Welcome to the second quarter 2026 Illumina earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to Head of Investor Relations, Connor McNamara.

Connor McNamara, Head of Investor Relations

Hello everyone, and welcome to Illumina's second quarter 2026 earnings call. Today we will review our financial results released after market close and provide prepared remarks before opening the line for questions and answers. Our earnings release is available in the Investor Relations section of illumina.com. Joining me today are Jacob Tyson, 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 the financials.

We will be discussing certain non-GAAP financial measures, and a reconciliation to GAAP can be found in today's release and in the supplementary data on our website. Unless otherwise stated, all growth rates are presented on a year-over-year reported basis. Organic growth adjusts for the impact of currency and acquisitions, and Rest of World organic growth also excludes Greater China. Due to our inclusion on China's unreliable entity list, this call is being recorded and the replay will be available on our website.

It is our intent that all forward-looking statements made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the SEC, including our most recent Forms 10-Q and 10-K. With that, I will now turn the call over to Jacob.

Jacob Tyson, Chief Executive Officer

Thank you, Connor, and good afternoon, everyone. We had a great first half of 2026, including another strong quarter in Q2, and I couldn't be prouder of what the Illumina team delivered. Revenue grew at the fastest rate since I joined the company, driven by increasing demand for Illumina technology as customers expand clinical applications. Our deep relationships with leading U.S. clinical customers and large installed base reinforce the durability of our position in these markets.

Margins also came in above our guidance despite higher-than-expected cost. I want to thank our teams for their focus and commitment for our customers and shareholders. Our first half results put us in a strong position as we look ahead. We are raising our 2026 guidance for revenue growth and profitability by remaining committed to executing against our long-range targets. Today I'm going to focus on three areas: our performance in the quarter and the trends we are seeing across our end markets; how we are expanding the value of our platform through new workflows and multi-omics capabilities; and the progress we are making against our long-term strategy and financial targets. Let me start with how the quarter came together. Rest of World organic revenue grew 8.1%, above the high end of our guidance, and demand for NovaSeq X remained high more than three years after launch, with more than 95 placements in the quarter. Together with disciplined expense management, this translated into both margin and EPS above guidance.

Clinical markets, which represent approximately 65% of sequencing consumables revenue, remained our primary growth driver. Rest of World clinical growth was broad-based across regions and applications, with particular strength in our U.S.-Canada region. Strong instrument placements over the past three quarters are expanding customer capacity and will support consumables growth for many quarters to come. Placements will vary from quarter to quarter, but demand remains elevated.

In research and academic markets, results improved from Q1, but customers remain cautious as they navigate funding uncertainty. We saw some signs of improvements late in the quarter, but it's too early to call a recovery. These customers remain an important source of innovation and help drive clinical adoption over time. Our expanding multi-omics portfolio gives customers more ways to analyze biology and broadens how we can support these markets over time.

Let me turn next to innovation. Our strategy is to deliver the highest-quality insights for the lowest end-to-end cost. The updates we made this quarter advance that goal by expanding what customers can do on NovaSeq X and increasing the value of the Illumina ecosystem. Within core sequencing, NovaSeq X remains central to our approach. Customers are investing in the platform not only for what it enables today, but because they see a clear path to use it for years to come.

The roadmap we laid out earlier this year gives them confidence that the X will continue to support their workflows over time, helping sustain demand for the platform. We recently launched our Whole Genome MRD Research workflow, a tool designed to help customers shorten assay development timelines and lower development costs. The solution runs on NovaSeq systems and is now in early access with select customers. Beyond core sequencing, we're expanding our multi-omics offerings consistent with the strategy we laid out in 2024.

This summer we expanded our portfolio with the launch of StrataMap Spatial, our sequencing-based spatial workflow. This launch broadens our capabilities in spatial biology and gives researchers another way to study tissue biology through the Illumina ecosystem. We are also seeing sustained proteomics momentum following the close of our SomaLogic acquisition. Our newly branded SOMAscan and SomaSeq offerings are generating strong interest and helping customers connect proteomics and genomic insights.

And in BioInsight, we're expanding our data and insights offerings to help pharmaceutical customers advance AI-enabled drug discovery. BioInsight brings together sequencing, perturbation tools, compute power, and AI to build high-quality multi-omics datasets and interpretation tools. These capabilities can deepen understanding of disease pathways, infer causality, and enable more predictive biological models. One of the first key BioInsight initiatives is the Billion Cell Atlas, a genome-wide perturbation dataset that deepens understanding of disease biology and generates data for AI models.

We are producing this data at an unprecedented scale and with the quality and consistency needed to support biological discovery. With over 300 million cells delivered to date, biopharma interest continues to grow. We have started booking revenue from our Billion Cell Atlas, and we added three new partners subsequent to quarter end, bringing our total to six. While still early, these milestones are an encouraging sign of the opportunity ahead. Later this year, we look forward to sharing additional BioInsight updates as we expand how customers can use biological data to accelerate discovery.

Turning to our improved 2026 outlook, we are increasing our full-year revenue outlook to reflect both our Q2 outperformance and our expectations for the remainder of the year. The momentum we are seeing, especially from our clinical customers, gives us greater confidence as we enter the second half. We now expect full-year Rest of the World organic revenue growth greater than 5%. We expect the pace of growth in the second half to remain broadly consistent with the first half, although the mix will shift.

Consumables revenue will continue to grow from a higher installed base, while instrument growth moderates against tougher comparisons following several quarters of elevated NovaSeq X placements. The expanding NovaSeq X installed base will also add further consumables growth beyond 2026 and support our path toward high single-digit revenue growth in 2027. We are also raising our EPS outlook, reflecting Q2 outperformance, higher revenue expectations, and continued expense discipline.

Ankur will provide the details in his remarks. Our updated guidance reinforces our progress toward the long-term financial targets we laid out in 2024, and we remain focused on achieving them. We operate in a healthy market with significant untapped opportunity. By continuing to deliver innovative technology that improves customer workflows and expands their capabilities, we expect to maintain our leadership as the market evolves. With three consecutive quarters of growth, we enter the second half from a stronger position.

Our teams are energized by the response to our recently launched end-to-end workflows. That interest confirms that we are solving the right problems and reinforces our innovation priorities. We are also strengthening the team leading this work. We recently welcomed Michael Sullivan and Julie Coletti to our management team, adding deep commercial and legal experience as we scale the business. We are equally pleased to welcome David King and Dan Skoronsky to our board.

Their experience across healthcare, diagnostics, and R&D will be valuable as we advance our clinical and innovation priorities. I want to thank the entire Illumina team for their focus and commitment, and our customers for the trust they place in us. With that, I'll hand it over to Ankur to walk through the financial details before we move to Q&A.

Joydeep Goswami, Chief Financial Officer

Thank you, Jacob, and good afternoon, everyone. I will walk through our second-quarter financial results, provide additional color on revenue, expenses, earnings, the balance sheet and capital deployment, and then discuss our updated outlook. Before I get into the details of the financial performance, let me provide a high-level view of how the second quarter played out for Q2. Our revenue and earnings results came in ahead of our expectations and guidance.

Revenue grew 8% on an organic basis, ex-China. Margins were ahead, and EPS of $1.31 grew 10% year over year, and we placed more than 95 NovaSeq X instruments. Now turning to the details, during the second quarter Illumina's revenue of $1.16 billion was up 9.5% year over year and 6.5% on an organic basis, with currency and acquired revenue together contributing approximately 3 percentage points to our reported growth rate. Rest-of-world organic growth rate was 8.1%.

Sequencing consumables revenue of $775 million was up 5% year over year on both a reported and organic rest-of-world basis. High-throughput volume drove most of the revenue growth as the NovaSeq X install base continues to expand, and pull-through increased year over year. Sequencing consumables revenue in clinical markets grew 15% ex-China, with the U.S./Canada region continuing to grow above 20%. We saw slower growth in the Europe, Middle East and Latin America region largely due to ongoing near-term dynamics in the region.

First-half growth was approximately 17%, a slight acceleration versus the second half of 2025, reflecting continued adoption of sequencing-based diagnostics and more sequencing-intensive applications. We are raising our growth outlook in clinical markets towards the high end of our prior guide and now expect mid-teens growth for the year. Sequencing consumables in research and applied markets declined 7% rest of world, and year-to-date trends have remained consistent with our outlook entering the year, though we were encouraged by the trends in the quarter, including 9% revenue growth quarter over quarter.

We believe it's still too early to predict the timing of an end-market recovery and continue to expect mid- to high-single-digit declines for research and applied consumables in 2026. We made further progress in the quarter transitioning customers to the NovaSeq X. As of Q2, approximately 83% of volumes and 59% of revenue had transitioned to the platform. Despite continued transition dynamics, sequencing consumables posted strong growth. Approximately 78% of clinical volume is now on the X, and we continue to expect clinical volumes will reach 80% to 85% conversion by the end of 2026.

On sequencing activity, total sequencing gigabase output on our connected high- and mid-throughput instruments once again grew more than 30% year over year, with clinical growth well above that. Sequencing instruments revenue of $125 million was up 31% year over year in Q2 on both a reported and rest-of-world organic basis, driven by increased sales of NovaSeq X and the iSeq 100. We made significant progress with our supply investments in the quarter, allowing us to place over 95 NovaSeq instruments in Q2 as demand remains strong for the platform, especially among some of our largest clinical customers, where we saw several multi-unit capacity expansion orders, including for the start of new clinical trials. We also placed over 10 NovaSeq 6000 units, as some customers plan to remain on that platform for years to come. Sequencing service and other revenue of $154 million was up 14% on both a reported and rest-of-world organic basis. As Jacob mentioned in his prepared remarks, we are gaining traction in our Billion Cell Atlas program, resulting in higher data revenue from biopharma customers.

Microarrays and other revenue of $105 million was up 21% reported and included SomaLogic revenue, which continues to track towards the high end of our deal expectations. On a rest-of-world organic basis, microarrays and other revenue declined 4%. Moving to the rest of the P&L, non-GAAP gross margin of 68.2% came in slightly better than our expectations, especially given product mix from the relatively high sales of instruments in the quarter, and we also absorbed higher freight and memory costs in this quarter.

Non-GAAP operating expenses were $530 million and include SomaLogic expenses. In addition, we had approximately 60 basis points of deferred compensation this quarter, which is EPS-neutral with an offset in other income. Non-GAAP operating margin was 22.5% for the quarter, above our guidance, driven by higher volume, and the team did an excellent job in absorbing increased inflationary effects. Looking below the line, non-GAAP net interest and other expense was $8 million in the quarter.

Our non-GAAP tax rate was 20.5%, and average diluted shares were approximately 153 million, reflecting continued share buybacks. Altogether, non-GAAP EPS of $1.31 per diluted share grew approximately 10% year over year and approximately 13% excluding the dilutive impact of acquisitions. Moving to cash flow, the balance sheet and capital allocation for the quarter: cash flow provided by operations was $201 million for the quarter, which is below the usual trend due to timing of tax payments and higher inventory as we secured supply for critical components for the next few quarters.

Capital expenditures were $39 million, and free cash flow was $162 million. We repurchased 0.9 million shares of Illumina stock for approximately $122 million at an average price of $129.07 per share. At quarter end, we had approximately $1.8 billion remaining under current share repurchase authorizations, and we intend to continue to repurchase shares opportunistically. We ended the quarter with approximately $1.17 billion in cash, cash equivalents and short-term investments, $1.99 billion in total debt, and a leverage ratio of approximately 1.6 times gross debt to last-12-months EBITDA.

Overall, we had a great second quarter and first half of 2026, allowing us to raise our full-year guidance and reinforce our confidence in the progress we are making towards our long-term targets. Now turning to our full-year 2026 guidance: starting with revenue, we're raising our rest-of-world organic growth guidance to greater than 5%, up from our prior range of 2% to 4%, and raising our reported revenue guidance by $50 million at the midpoint to $4.60 to $4.64 billion.

This reflects the Q2 beat and also our increased expectations for the second half of the year. We are also expecting to come in towards the high end of our previously stated guidance for sequencing consumables and instruments. For rest-of-world organic sequencing consumables growth, we now expect mid-single-digit growth, including mid-teens growth in clinical and mid- to high-single-digit declines in research. This reflects a modest revenue benefit from our outperformance in X placements over the last two quarters, though most of that benefit will come in 2027 as our clinical customers typically take at least six to nine months to reach normalized consumables pull-through levels. Sequencing instruments are now expected to grow low single digits rest of world organically in 2026. Demand for NovaSeq X remains robust, and we expect unit placements to remain at elevated levels in the second half of the year, with some moderation in year-over-year growth rates. We are maintaining our operating margin guidance of 23.4% to 23.6% with our higher revenue expectations for the year. This equates to diluted EPS guidance of $5.30 to $5.40, an increase of $0.12 at the midpoint versus our prior guide, and a year-over-year growth of 11% at the midpoint and 14% ex-acquisitions.

Moving to Q3 2026 guidance, we expect rest-of-world organic revenue growth of approximately 4.5% and reported revenue of $1.14 to $1.16 billion, non-GAAP EPS of $1.33 to $1.38, and non-GAAP operating margin of approximately 24%. This equates to approximately 150 basis points of margin expansion sequentially, driven by higher consumable mix and the increased benefit of cost actions and improved efficiency. Our solid H1 performance and rapidly growing clinical install base provide a strong setup for continued consumable growth for years to come.

We're seeing an increase in X placements to meet increasing volume demand, which will help accelerate consumable revenue growth as recent placements come online. In addition, we are beginning to see revenue contributions from our Billion Cell Atlas and our growing customer interest in our multi-omics portfolio, and we still believe new products will add 1 to 2 of growth next year. Taken together, we continue making progress towards our 2027 financial targets.

In closing, I want to thank the Illumina team for their continued focus and disciplined execution throughout the quarter. We are off to a great start in 2026, and I'm extremely encouraged by the progress we've made in returning Illumina to long-term sustainable revenue and earnings growth. Thank you for joining our call today. I will now invite the operator to open the line for Q&A.

Puneet Souda, Analyst

Installs in the second half, and just given the backdrop of the clinical growth that you're seeing here, it appears there's really no clinical cliff. I mean you're cruising through it; you know you're already above 5%, as you pointed out, for a guide for this year. So why should we not contemplate something higher than a high single-digit revenue growth for 2027 that you outlined before? Thank you.

Jacob Tyson, Chief Executive Officer

Well, Puneet, thank you very much for those comments. And we are definitely also very pleased with the performance we had in the quarter. And first and foremost, I truly believe, and I'm very convinced, that the growth and the momentum we see in the clinical market will continue for years to come. And the elevated placement we have had in the first half of the year speaks to that. As you know, when we place instruments, eventually we'll start to see the consumables run on those instruments, and that will drive continued growth.

As we laid out, I think 18 months ago, we laid out a logic around 50 to 60 placements per quarter, and we have clearly over the last few quarters here been running stronger than that. And that really speaks to what is happening in the clinical space right now. So while we do see some moderations back up and down from each quarter, we still believe that the elevation will continue into the second half of the year. So we feel good about that. But there will, of course, be a little bit of ups and downs in that.

Talking about the clinical cliff, I agree it's not a cliff, it's a wave, and we are surfing it, as you're saying. We think there is a lot of momentum there and, yeah, I think there's a good opportunity for continuing that momentum. Talking about '27, right now at this point I'm still very committed to delivering on the high single-digit growth. But we will continue to focus on building a very, very strong value proposition to our customers, and then we'll see where it takes us.

OPERATOR

Your next question will come from Tycho Peterson with Jefferies. You may now unmute and ask your question.

Tycho Peterson, Analyst at Jefferies

Hey, thanks. Wondering if you could address a couple things. The sequential slowdown in clinical consumables, and, you know, one of the debates we've been having with investors is as customers transition to X, are you over-earning on consumables? Because at some point the 6Ks get decommissioned. So how do you think about kind of that, you know, potential headwind as customers running both in parallel eventually wears off?

Jacob Thaysen, Chief Executive Officer

Yeah, Tycho, thank you for that. And I will start by the laboratory. One is that we continue to see that we have an expansion of volume on the X and we continue to see quite a number of 6Ks being in action for running the current assets. In fact, we did see some customers actually purchasing a few 6Ks this quarter to continue their operation. So of course eventually they'll move over to X, but we don't see that as it's a standard part of the business.

We have seen that evolution also from fundamentally HiSeqs. It's only a few quarters ago we still had HiSeqs running in our portfolio. So I don't think that that is, will be considered any true headwinds for us. And from the clinical performance, you know, the momentum continues to be high and, as Ankur was mentioning, we continue to have strong confidence and that's why we are raising our guide for the clinical consumable growth up to mid-teens, which is improvement from what we looked at in the beginning of the year.

If you look into the details for the 20% growth we had last quarter down to 15 now, I mean first of all it's still very strong but we still continue to see us running faster than 20%. So that momentum is really strong. There's been some in-and-outs especially in the Middle East and Latin America. I think we all know the situation in the Middle East and that is impacting at least short term the growth rate. So I wouldn't put more into it than that.

But I think the headline here is that mid-teens growth is strong and is still beyond what we started the year with and is still very much, you know, driving high single digit growth for us for next year. Towards that.

OPERATOR

Your next question will come from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst at Evercore ISI

Hi, Jacob and Ankur, thank you for taking my question and congrats on a nice print here. Hey, just on, on if I, if I take a step back on the performance in the quarter, can you walk us through on phasing in the quarter? Were there any one-offs? Because when I look at your guidance for third quarter. Right. Four and a half, rest of the world, why is that stepping down from 8? Why is 8 not sustainable? And, and sort of what are you assuming for AI-related revenues or AI?

Is that a theme? That could be a bigger theme for the stock when you look at the medium term. Thank you.

Jacob Thaysen, Chief Executive Officer

Yeah, Vijay, so again thank you. And we are very excited about the placements we're doing right now, which we also believe is elevated. This is not a one-off but we do see that many of our clinical customers are investing into the future. They're building out the installed base, they're getting ready for the volume that they can see in their funnel. So we are seeing that right now. And you know, there's a little bit of a compare that in the first part of last year, the install base or the placements of instruments were a little bit different than the second half.

We started to see the momentum slowly starting in second half and that's why you will see the comparison in the instruments is a little bit different. We actually expect that the consumable will continue to be strong. In fact, we do believe that that momentum will continue to step up and will be the main growth driver into next year. So, so that is the main driver for that. If you look at AI, yeah, I mean, we are very excited about what we're doing with Buy Inside.

We have now delivered more than 300 million single, single cell to our customers. In the Cell Atlas, we have added three more pharma partners. So we now have six pharma partners. And in the end, what the customers are very excited about is that that data can help really first and foremost create insight, direct insight to their drug discovery programs. But on top of that, which is really where there can be power in this, is that it starts to be the foundation for strong AI models of biology that will start to be predictable in how you think about biology.

So this is something we're excited about. It's still early days. We are making money already from day one on this, both on top line and bottom line. But I think there is a significant opportunity over the next period of time on that.

OPERATOR

Your next question will come from David Westenberg with Piper Sandler. David, I can see your line is open. We're not able to hear you just yet.

Connor McNamara, Head of Investor Relations

Why don't you put him back in the queue and move on to the next question?

OPERATOR

Sure. Our next question will come from Mike Ryskin with Bank of America.

Mike Ryskin, Analyst at Bank of America

Hey, can you guys hear me?

Jacob Thaysen, Chief Executive Officer

Yes. Yeah. Hey, Mike.

Mike Ryskin, Analyst at Bank of America

Oh, wonderful. Thank you.

Jacob Thaysen, Chief Executive Officer

I'll take it.

Mike Ryskin, Analyst at Bank of America

All right, maybe I'll just follow up on that 3Q/4Q pacing through the rest of the year question. You know, it is a little bit of a surprising step down for the third quarter. But then even more importantly, 4Q's guided a little bit higher than we would have had. Is there anything unusual in terms of seasonality that you're anticipating? Maybe you can talk about any purchasing in the quarter. You know, obviously you've had a lot of boxes placed. You talked about the backlog last quarter, if there was any stocking or anything like that.

And also kind of tied to that, I know you've got an extra week in the fourth quarter. Just remind us what impact that's having on your revenue assumptions for 4Q and then also on margins and EPS, just make sure we're modeling that correctly. Thanks.

Jacob Thaysen, Chief Executive Officer

Thanks, Mike. And again, I want to start with the headline here, is that the momentum we've had here in the first half I think is going to speak to the opportunity ahead of us. As I say, our clinical customers are building out their installed base now to really be ready for the growth that they're seeing. And so instead of looking at a step down, I actually think that Q2 was very, very strong and Q3 always is a little bit lower than Q4. So I think that's a normal basing for us.

So I'm not too worried about that. I think this comes in as we expected, but overall I see the underlying trend being strong. But Ankur, let's get your view on this.

Ankur Dhingra, Chief Financial Officer

Yeah, thanks, Jacob. Mike, in terms of thinking about phasing Q3/Q4, think about it as usual seasonality from Q3, where Q4 usually is our largest quarter for the year and expected to remain so. And then the second part, your question about the extra week. Yes, we have one extra week this year in Q4, which would largely be a consumables story. You would expect maybe half a point or so of revenue contribution that could come from that extra week in terms of run-rate days.

And that's part of the thinking. Now going back to a slowdown comment. Overall, from our perspective, the business is holding very well. The consumables growth story is the one that's remained steady through the year and the variability is almost always around the instrument placements. We do expect elevated level of instrument placements to continue in the second half of the year, but you know that that elevated level started in the second half of the year last year.

OPERATOR

Our next question will come from Dan Leonard with RBC.

Dan Leonard, Analyst at RBC Capital Markets

Thanks a bunch. Hi Jacob. Hi Ankur. Follow-up question on the clinical growth rate. So can you discuss the breadth of the growth you're seeing in clinical, just given that the US grew greater than 20? I think you mentioned your largest clinical customers were especially strong when it came to instruments. I want to understand how narrow versus broad that strength is. And then separately, can you talk about whether you've seen any shift in application mix from those customers over the past couple of quarters here.

Thank you.

Jacob Thaysen, Chief Executive Officer

Yeah, thanks, Dan. And so let me start by just positioning it again. I mean overall, clinical, the opportunity in the clinical space really shifting NGS into health care is still in front of us. I think there is a huge opportunity for really becoming standard of care in health care over the next period of time. So I think overall I'm very excited about that and I think that will drive the momentum in that space for many quarters or many years to come.

But the performance we have continues to be broad-based. Obviously there are some ins and outs on this, but if you look at the regional level, as you mentioned, US continues to be the main driver of the growth here. But all the other regions except China are still growing very nicely. If you look from an application perspective, oncology continues to lead the pack here. And if you look at oncology, we are seeing a shift towards now MRD starting to drive momentum.

But still from a dollar perspective the therapy selection is still the bigger one. But MRD is coming and later we will see MSAID also start to be a real contributor to this growth. But that we don't really see that really in the number today. The rare diseases and screening, NIPT screening and so on, is still growing very nicely. But oncology is the leader of the pack at this point. But again broad-based but right now driven mostly out of, still with leading out of, US.

OPERATOR

For our next question we'll return to the line of David Westenberg with Piper Sandler. Feel free to unmute and ask your question. Hey, we still can't hear you. Yeah, I'm not hearing you yet, David. All right, well we can move down the queue. We'll take our next question from Subu Nambi with Guggenheim.

Subu Nambi, Analyst at Guggenheim

Hey guys, can you guys hear me?

Jacob Thaysen, Chief Executive Officer

Yes. Hey Subu.

Subu Nambi, Analyst at Guggenheim

Hey guys. Great print. A couple of questions on memory cost. Prices are still rising and allocations continue to be strained. How are you thinking about the trajectory into second half especially with a stronger 4Q instrument placements and into 2027 particularly as you integrate more GPU-based compute for next gen product. And I have a follow up.

Jacob Thaysen, Chief Executive Officer

So Subu, I mean overall as you've seen over the last three years, the Illumina team have actually done quite a great job in compensating for the headwinds that we've seen in front of us both on the top line but definitely also on our cost structure. And there's been plenty over the last few years. I think last year it was a good example where we delivered even 200 basis point improvement even in a relatively flat environment. So the team really knows how to deal with these headwinds.

But obviously memory cost and freight costs have definitely been a headwind. We didn't anticipate the level we have seen. So I'm really pleased with how the team has continued to operate and find ways that we can compensate for this additional cost, but those costs are real. We are of course also sharing some of that cost increase with our customers, but we're also doing a lot of things to drive operational excellence to also compensate that way.

So I think we are moving on many multiples and I think that speaks to the power of the Illumina team and I'm really excited about how the team is leaning in to fix that. So we feel good about that. We feel good, we have a hand on that. Obviously there are costs that we have a good line of sight to now that we need to deal with, but we have proven that we can take care of that and we will continue to do so. I think you had a follow up.

Ankur Dhingra, Chief Financial Officer

Yes, Subu, let me add just a couple points. Thanks, Jacob. Subu, the higher cost of memory is part of our Q2 results. So you can take that as a starting point run rate; bulk of that is already in our results for gross margin. And as I mentioned in my prepared remarks, we did secure additional inventory and supply during the quarter for next several quarters to be able to address any, or at least de-risk, any near-term movements in the memory prices here.

The second part of your question around how does that extend into GPUs, etc., and new products? One of the unique strategic advantages we have from a cost structure perspective is that our instruments do not use the GPU architecture. Our instruments use a different architecture which is significantly, relatively less expensive and cost efficient than the GPU architectures. And, as I mentioned, we've been securing supply for next several quarters here.

Subu Nambi, Analyst at Guggenheim

Super helpful, thank you so much for that, Ankur and Jacob. My follow-up: you had a couple of stronger-than-expected placement quarters — like, come on. We are in the fourth year of instrument launch and these are the instrument numbers. Something definitely to pause and think about. Was this at all a function of the market waiting for more competitive information, and related, how much of this is a function of an improving funding environment? Thank you so much.

Jacob Thaysen, Chief Executive Officer

Yes, Subu, I think it speaks to again the opportunity — I mean, the value proposition we have with our customers. And so they feel, with the conversations we have with them, they continue to see that Illumina is here to help them be successful. The innovations we continue to move onto our X platform also prove that there is a lot of leeway in that platform, so it is the platform to invest in. So I think it speaks to how we continue to drive innovation and, of course, also that this is a very healthy market.

So I think that's a combination that is winning right now.

OPERATOR

Your next question will come from the line of Mason Carico with Stephens.

Harrison, Analyst at Stephens (on behalf of Mason Carico)

Hey, this is Harrison on for Mason. Thanks for taking the questions. Within this quarter's NovaSeq X placements, did the clinical/non-clinical split move at all versus recent quarters? Could you give us the latest on what you're hearing from research customers on order timing and budget releases this quarter? Has anything in the underlying order pattern shifted versus last quarter, even if the headline number doesn't move much?

Jacob Thaysen, Chief Executive Officer

Yeah, I think overall we continue, of course, to see the majority of placements going into the clinical space, and we expect that to continue. Even with an improved environment in academic research, the opportunity in clinical will continue to be the strongest one, and thereby also we expect most placement there. That said, we did place also in the academic research space, so there is definitely also opportunity in that space. But underlying, I mean overall you want to.

Ankur Dhingra, Chief Financial Officer

Yeah, I can comment in general around the research space as well. So in terms of mix of placements, it is still about 70/30 — 70% being clinical and the remainder still going into the research space. I would like to still remind you we have a very international business and the research spans across the world, not just in the U.S. In terms of research market trends during the quarter, during the latter part of the quarter we did see some increased activity overall in terms of funding releases in the U.S. and the increased activity in terms of requests, quoting, etc. I would still say, as I said in our prepared remarks, we're not assuming any meaningful improvement in that market or revenue for us for the rest of the year. But directionally, during the latter part of the quarter there was some improvement.

OPERATOR

Your next question will come from Kyle Mixon with Canaccord.

Kyle Mixon, Analyst at Canaccord Genuity

Hey guys, thanks for the questions. A nice quarter. So this quarter you guys talked about sort of multiomics solutions — I think StrataMap was announced. You know, these are all really promising; got single-cell proteomics, etc. But how do we kind of track that going forward? How do you know the strategy is working? Will you kind of break that out going forward, maybe next year? And how are you accounting for all these products and the revenue contribution, I guess in the fourth quarter, for example?

Jacob Thaysen, Chief Executive Officer

Yeah, Kyle, I mean overall we are excited about our portfolio, as we have mentioned also in our strategy updates, which we provided in '24, which is playing out now. So our strategy is working very well. Look, I mean at that point, and still, we are mostly focused — of course the biggest opportunity is to move our customers and convert our customers over to the X platform and really make sure that that becomes the platform for the future. I think that has been proven now.

I think we are seeing that momentum happening. The second leg in that strategy was to start to drive into multiomics. We believe that the future belongs to multiomics. Obviously, genomics and DNA sequencing will continue to be the backbone of any biological insights, but you need multiple layers — both from different omics, so from the genome all the way up to the proteome, but also from different ways of looking at it, from bulk, single cell, but also into spatial.

So Illumina wants to provide that to our customers not only as library preps or sequencing, but end-to-end workflows that support the challenges the customers are seeing, and also combine that from a software perspective so you can truly get insights across the different modalities. And I think that is the future — that's where the power is, where we really unlock the understanding of biology — and that's why we have really been doubling down on that.

What we also said in '24 was that we expected that the growth would be here in the latter part of the strategy period — here coming into the part of '26, '27 — that we will start to see that being one to two points of additional growth and incremental growth. And that is playing out as we expect. We're very excited about StrataMap. It just came out. We are seeing significantly more interest in it than we had planned for ourselves, so I think it bodes well for that platform.

But that's not the only one we have out there. TruePath is having a lot of momentum out there. I think that's going to be a really, really strong platform for the future. We could keep going on the different platforms. I just want to stop there and say there's a lot of excitement about multiomics and what we're doing with our applications and serving our customers. Yeah.

Ankur Dhingra, Chief Financial Officer

And in terms of giving you color, Kyle, most of the multiomics products like single cell or TruePath, etc., show up in our consumables revenue because they're part of the consumables workstream. And then the Billion Cell Atlas or any other related bioinsight revenue will show up in our services, and we'll keep talking about it like we did this quarter about the contribution from revenue from our Billion Cell Atlas.

OPERATOR

Our next question will come from Jack Meehan with...

Jack Meehan, Analyst

Good afternoon, guys. Had a follow-up for Ankur just on the margin progression throughout the year. So you did 22.4% this quarter, going to 24% next quarter. It's a little bit of a decent step up. I was wondering, how much of this is related to mix versus maybe other factors? And maybe related to that, any color you can share in terms of just revenue assumptions for consumables versus NGS instruments for the third quarter would be really helpful.

Thank you.

Ankur Dhingra, Chief Financial Officer

Yeah, sure, Jack, great question overall. And as you recall, even at the start of the year we had this discussion about the step-up in margin during the year given the situation with tariffs and all the cost actions that we had put in place, with our expectation that we would see higher set of results in the back half of the year. And that thesis has been playing out. If you look at Q2 at 22.5% operating margin, I mentioned we had a little bit of a deferred comp — which is EPS-neutral — effect.

So excluding that, we had about 23% operating margin in Q2. So it's a 100-basis-point step-up from here into Q3, and some of it is coming from higher mix of consumables. But we also have several cost actions within our gross margin mix that we anticipate to play out during the Q3 timeframe, and similarly additional cost actions coming up in Q4 as well. So we feel generally good about the pacing of actions. Most of them, I'm anticipating, would show up on the gross margin side of things.

OPERATOR

Our next question will come from Casey Woodring with JPM.

Jaden, Analyst at JPMorgan (on behalf of Casey Woodring)

Hi, this is Jaden on for Casey. Just one on the mid- and low-throughput instruments. Could you walk us through how low- and mid-throughput instruments performed in the quarter, and then within mid-throughput specifically, are you seeing customers being constrained given the end-market environment, and how should we think about that going forward for the rest of the year? Thank you.

Jacob Thaysen, Chief Executive Officer

Yeah, let me start by addressing this by again positioning that we have the broadest range of instruments in the industry, where the X is really addressing the high throughput, which is really, I would call it, production-like sequencing, while the low and mid throughput is more project-based sequencing to a large extent. And thereby, they also have different — you know, there's a different kind of drivers that will impact this. And of course, when you are in high throughput, you see that you drive operations and it's really driving revenue for these customers using that.

Also, while if it is project-based, there might be a different math that goes into it, and thereby also the mid throughput particularly is more sensitive to the macro environment, which we have seen for quite a long time now. But we feel really good about the mid throughput. We continue to see good placements in that space. I think midterm we will see some momentum in that space also with the investments we're doing into that space also. So we feel really excited about that.

If you look into the low throughput, we came out with the iSeq 100 a little more than a year ago. That is a very exciting instrument and we have a lot of placements of that. We continue the momentum we started last year. So that is a market space that is working very well for us right now. It's also in a cost range where, again, you get into a place where most labs can afford their instruments and get to sequencing, and the value proposition is really strong for our customers.

So high-end and low throughput is very strong right now. Mid throughput is more muted because of the macro environment.

OPERATOR

Your next question will come from Dan Brennan with TD Cowen. Dan, I can see that you're unmuted. We're not able to hear you. You may need to select a different microphone input. All right, we'll move on to the next. Are there any more questions in the queue? There are no more questions in the queue. So this does conclude the Q&A section of the call. I'll now turn the call back over to Connor McNamara for closing remarks.

Connor McNamara, Head of Investor Relations

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

OPERATOR

This concludes today's call. We thank you for your participation. You may disconnect at this time, and have a great day.

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