ILLUMINA INC

RESULTS OF OPERATIONS

To enhance comparability, the following table sets forth unaudited condensed consolidated statement of operations data for the specified reporting periods, stated as a percentage of total revenue.(1)

(1)Percentages may not recalculate due to rounding.

Revenue

The slight decrease in Core Illumina consumables revenue in Q1 2024 was driven primarily by a decrease in microarray consumables, partially offset by an increase in sequencing consumables. Core Illumina instruments revenue decreased in Q1 2024, primarily due to a decrease in sequencing instruments revenue of $44 million, driven by fewer shipments of our high-throughput instruments, given we entered 2024 with a lower backlog of NovaSeq X instruments, as compared to 2023, given significant pre-orders following the launch, and fewer shipments of our mid-throughput instruments, primarily as capital and cash flow constraints continue to impact our customer’s purchasing behavior. Core Illumina service and other revenue increased in Q1 2024 primarily due to increased revenue from our strategic partnerships.

GRAIL service and other revenue increased $7 million, or 35%, in Q1 2024 primarily due to sales of Galleri.

Gross Margin

*Not meaningful.

The increase in Core Illumina gross margin in Q1 2024 was driven primarily by a more favorable mix of sequencing consumables and execution of our operational excellence priorities that delivered cost savings, including freight, and improved productivity. This was partially offset by certain strategic partnership revenue that is lower margin and increased warranty and field service costs.

GRAIL gross loss in Q1 2024 and Q1 2023 was primarily due to amortization of intangible assets of $34 million.

Operating Expense

Core Illumina R&D expense decreased by $18 million, or 7%, in Q1 2024 primarily due to a decrease in headcount and employee related compensation costs, as well as a decrease in lab supply costs, as we continue to focus on our cost reduction initiatives in 2024. The decrease was partially offset by impairment of an IPR&D intangible asset.

GRAIL R&D expense increased by $15 million, or 17%, in Q1 2024 primarily due to an increase in headcount and employee related compensation costs and an increase in lab and consumables spend.

Core Illumina SG&A expense increased by $50 million, or 17%, in Q1 2024 primarily due to an increase in restructuring charges of $33 million, which consisted primarily of lease and other asset impairments, a loss recognized on our contingent consideration liability related to the GRAIL CVRs of $17 million, and accrued interest recognized on the fine imposed by the European Commission of $7 million (interest began accruing on the fine in October 2023). The increase was partially offset by a decrease in facility related costs, as we continue to exit certain of our facilities, and a decrease in headcount and employee related compensation costs.

GRAIL SG&A expense increased by $11 million, or 12%, in Q1 2024 primarily due to an increase in headcount and employee related compensation costs and a slight increase in professional services.

Other Income (Expense)

Total other income (expense), net primarily relates to the Core Illumina segment.

Interest income consisted primarily of interest on our money market funds, which decreased primarily due to a lower cash balance in Q1 2024 as compared to the prior year. Interest expense consisted primarily of interest on our outstanding Term Notes. The fluctuation in other income (expense), net in Q1 2024 was primarily driven by a favorable impact related to our strategic investments. We recognized a net gain of $5 million in Q1 2024 compared to a net loss of $16 million in Q1 2023.

Provision (Benefit) for Income Taxes

Our effective tax rate was (15.3)% in Q1 2024, compared to 103.9% in Q1 2023. The variance from the U.S. federal statutory tax rate of 21% for Q1 2024 was primarily because of the $21 million income tax expense impact of capitalizing research and development expenses for tax purposes, and the $18 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI, the utilization of U.S. foreign tax credits, and the Pillar Two global minimum top-up tax. The income tax expense in Q1 2024 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore.

In Q1 2023, the variance from the U.S. federal statutory tax rate of 21% was primarily because of the $49 million income tax expense impact of capitalizing research and development expenses for tax purposes, and the $44 million income tax expense impact of GRAIL pre-acquisition net operating losses on GILTI and the utilization of U.S. foreign tax credits. The tax benefit in Q1 2023 was also favorably impacted by the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as in Singapore and the United Kingdom.

Other than in Q2 2023, we historically calculated the provision/(benefit) for income taxes for interim periods utilizing an estimated annual effective tax rate applied to the income/(loss) for the reporting period. In accordance with the authoritative guidance for accounting for income taxes in interim periods, we concluded for Q1 2024 that it was appropriate to determine the provision for income taxes utilizing the year-to-date effective tax rate method. Since minor changes in the estimated income/(loss) before income taxes would result in significant changes in the estimated annual effective tax rate, we determined the year-to-date effective tax rate method would provide a more reliable estimate of the provision for income taxes for Q1 2024.

Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” described in “Risk Factors” within the Business & Market Information section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.