Joydeep Goswami: Just to add, Subha, I think we have made reductions in R&D over the last year. It’s been very strategic in terms of specific aspects of the portfolio that we had considered as longer — much longer time of payoffs or more risky. And we have also — our overall R&D includes spend in certain areas like medical affairs, et cetera, that we were doing to support customers. And as they have matured, right, we have been able to pull back on investment there without affecting innovation.
Operator: And we’ll take a question from Mason Carrico with Stephens.
Mason Carrico: Hey, guys. Thanks for the question. So for high-throughput customers who have already purchased the X, could you talk about the conversations you’re having around the potential fleet expansion? I mean what portion of those opportunities, whether it’s orders or shipments have already come through and how many remain an opportunity this year?
Jacob Thaysen: Yes, I think, I mean, we certainly see a lot of our high-end customers, the high-volume customers that started buying one or two NovaSeq X is starting to consider purchasing more instruments. So they’re using the first few X to validate assays on. And then they want to expand into to — use the additional Xs to actually run in production, but very few customers have still gone into production mode. And thereby, there is a real big opportunity in front of us. I think that less than half of our high-volume customers have purchased X so far. So I think there’s still a lot of opportunities there. But I’ve also mentioned some of the high-volume customers that have purchased one or two have now put orders in for 10 instruments. So I think we’re still in the very early stages, and there should be a lot of opportunities here, both in ’24 and ’25 to drive more placements.
Joydeep Goswami: Yes. I’d just add, we weren’t expecting to see that before the launch of the 25B flow cell, right? So really, you’re in very early innings there, and we do expect to see those fleet expansions come in, in this year.
Operator: And we have a question from David Westenberg with Piper Sandler.
David Westenberg: Hi, thank you for taking the question. I’m actually going to hit on some of the competition coming in. A couple of different things we saw at AGBT, for example, a combination of spatial and sequencing on one platform. How do you see that stacking competitively? Would you pursue a strategy like that? And then on Ultima in the $100 genome, some of the specs look significantly better than it did a couple of years ago. How do you feel stacked up against the $100 price with some of your key bells and whistles? Thank you very much.
Jacob Thaysen: Yes. Thanks, Dave. And of course, we’re tracking, of course, everything that is happening out in the market and we take our competition very seriously. But I think you’ve also heard me on the multiomics place. I think you’ve heard me speak multiple times about multiomics. So we have an intention also to be in that space. I think we were not talking about moving forward as a starting point with proteomics here with our relationships with Stemologic. But I think you can see that — actually, we believe there is many more modalities that can be available on the instrument. So I think the — where we — where Illumina is doing is that we will go out and provide that insight when we’re ready to put something in the market and speak less about it when it’s more in the future.
Secondly, we feel with the NovaSeq X where we come out with a very attractive price point for a lot of different applications and not only a very few ones. So I think we feel that we have a very attractive solution. But I also remind you that it’s not only the cost per sequencing — that anymore, that is relevant, but also you need to look at the whole cost of the whole workflow, how many manual steps you have, how much waste you are, instrument spending and so on. So I think if you dig into the details, you will actually realize that Illumina has a very attractive and very differentiated platform.
Operator: We’ll take a question from Conor McNamara with RBC.
Conor McNamara: Hey, guys and thanks for taking the questions. Appreciate it. Just a financial question on margins. You’re guiding to 18% in Q1 and 20% for the whole year. So how do we think about the cadence of the margin progression? And I guess, same on tax rate, just you talked about a mid-20s for the core Illumina tax rate, how should we think about that in ’24?
Jacob Thaysen: Yes. So the tax rate, again, is something that should be — you should expect to be relatively constant as you go into — and again, for core Illumina into 2024. And this is, again, core Illumina, right? We are not giving guidance this year yet on the consolidated number. In terms of the operating margin cadence, again, that is typically that does go up as the gross margins tend to go up as we move into greater volume through the year. In terms of operating margin, you will see a decrease in potentially in Q2 as the merit and the other inflation-related aspects come into play. But then you will see after that, a quarter-on-quarter increase as we move into the rest of the year. And then, of course, I think on the — sorry, just one other thing, right?
I know there’s been some movement in terms of the R&D capitalization piece, but that is something we’re monitoring very carefully. It is past the house, but it still needs to get through the Senate and the President signing. If we get that, you can expect a further improvement in the tax rate, right? But we are not building that into our assumptions at this point.
Operator: And our next question will come from Sung Ji Nam with Scotiabank.
Sung Ji Nam: Hi, thanks for taking the question. Just on the MRD assay under development with Janssen, I was wondering if you might be able to comment whether that’s a tumor-informed or a tumor naive approach or something different altogether? And whether that might have — whether there might be potential for that to be developed into an IBD assay in the future for clinical applications? Thank you.
Jacob Thaysen: Yes. Thanks for the question. So again, to remind everyone, the approach that Illumina has is quite unique. It’s a whole genome-based MRD assay. It is initially a tumor-informed assay, but it does have the potential with more data and behind it to at some point, move into a tumor naive, right? In terms of being capable of being IBD, of course, as you know, we have invested very heavily in platforms and technologies and infrastructure that allow us to move assays to BIBD when the time is right, right? So right now, the agreement we have with pharma has been mainly to explore this in various forms. But we can go move into IBD when the time is right.
Joydeep Goswami: Let me also add that we have no intention of providing that through a clear lab — commercial clear lab. We do have our clear lab that, of course, is running very few samples, but we’re not going out and commercialize it through our clear lab. In fact, we’re very interested to work with customers and partners to continue to develop this.
Operator: And we’ll take our next question from Patrick Donnelly with Citi.
Patrick Donnelly: Hey, guys. Thanks for taking the questions. Joydeep, maybe a quick one for you and the follow-up would be probably more for Jacob. But just on the gross margin piece, can you talk about 4Q step down a little bit, came in a little light of where we were. Can you just talk about anything that impacted that in 4Q, the right way to think about the progression there throughout ’24? And then on the gross margin kind of pricing initiatives, Jacob, how are you thinking about just the price side? Again, I know someone mentioned AGBT competitors are making noise, kind of saying they’re seeing discounting in the market, particularly on kind of the mid throughput side. So just curious as you’ve taken a look here, what you’re thinking about on the pricing side? Thanks guys.
Joydeep Goswami: Yes. So Patrick, in terms of sequential decrease in fourth quarter on gross margin, there are several factors there, right? One, revenue was lower. So that has an impact, obviously, in terms of just absorption of fixed costs. We also did have a higher-than-expected X contribution. And that, coupled with more of the partnership revenue, which tends to be lower margin driven, all affected our gross margin numbers. And then lastly, I will say there was a mix shift from 6K consumables to X consumables, and that also had an impact in our overall gross margin number for Q4. I will say, and I think it leads into your question to Jacob. We have made a lot of progress in 2023 in terms of COGS productivity and we started seeing the benefits of that as we rolled out of 2023 and into 2024 as well and beyond.
Jacob Thaysen: Yes. If I — when I’m coming into the company here, Patrick, and looking into pricing and how we are thinking about pricing going forward. First, I will say that Illumina is presenting a premium product and thereby, I think also our customers are seeing that we can command premium pricing in the industry. But I think more importantly is that only talking about cost per gigabase is probably too simplistic for most of our customers. They are more interested in the cost for the whole for sample to insight for the whole workflows. And that is, of course, including sample automation, but probably even more importantly, informatics, which is also a key cost driver for our customers. So really with the Dragon platform and what we have in our comprehensive informatics offering, we actually can provide the customer be a very cost-attractive solution.
