2023-11-28 14:40:23 ET
Illumina, Inc. (ILMN)
Evercore ISI 6th Annual HealthCONx Conference
November 28, 2023 10:50 AM ET
Company Participants
Joydeep Goswami - Chief Financial Officer
Salli Schwartz - Vice President, Investor Relations
Conference Call Participants
Vijay Kumar - Evercore ISI
Presentation
Vijay Kumar
[Starts Abruptly]
Everyone for joining us this morning. Pleasure to have with us Illumina. From the company, we have CFO Joydeep Goswami and from Investor Relations, we have Salli, and I'm Vijay Kumar, cover Life Science tools, MedTech.
Question-and-Answer Session
Operator
Q - Vijay Kumar
But maybe just diving right into it, Joydeep, this has been a pretty remarkable year for Illumina. Shares are down 50%, off 50% to 80% from the peak. You know, when I think about the macro, clearly, that's been challenging, but obviously, Illumina has had its own set of issues. I think, I want to start with this with, you know, some of the better debates that have been -- questions I've been getting, right. I think one of the questions has been, look, Illumina launched a new system, which lowered price per sample from 600 to 200, and there is no price elasticity of demand. We're not seeing volumes of 3 times, and that's why we're seeing some of these numbers, right? So when you think about that price elasticity of demand, how would you respond to that, you know, the question?
Joydeep Goswami
Yes. I think, so, look, it has been a remarkable year on that front, but part of it is focusing on the right things for us, right? So, X was an innovation and has been an innovation that's been really well received by the market. We're proud of that. We are also seeing that interest continue in with the launch of the 25B flow cell, and we continue to believe that it will spur much more interest, much more utilization of sequencing. So -- and we are seeing by the way we are continuing to see growth in sequencing utilization, that's the numbers we have been putting out in terms of how much increase in sequencing gigabase growth we're seeing, both on a quarter-on-quarter, but on a year-on-year basis.
Yes, the numbers have been muted this year for two reasons. I mean, partly it's the macroeconomics, but partly it's also the transition from the 6K to the X. And with the X not fully having wrapped up. Some of those numbers are our headwinds for us into this year. But if I look out long-term, both on our ability and our focus on execution and getting people ramped up on the X and continuing to introduce innovations such as the X, but also being in a market where NGS brings unique value in terms of biology at scale and a large market with a penetration under 10%, there's plenty of room to grow. And for us, it's a question of when rather than if that growth comes.
Vijay Kumar
Or maybe just to ask the question slightly differently Joydeep, what gives you the confidence that this is not -- that this is a transition issue, right? 6K to X, because we have, I don't think we've seen a transition issue in your prior product cycles. Why isn't this a price elasticity of demand question?
Joydeep Goswami
Yes, so I think two things, right? So one, we are seeing that people that are adopting the X already, right? We're seeing more sequencing growth in those customers than in customers that have not adopted the X. So elasticity being spurred by the X and I think it's not just the pricing that's spurring that, right? It's the capability of the instrument in terms of the speed, in terms of integrated bioinformatics, the upfront simplification of workflow, and other benefits that the instrument is providing that is spurring that demand. So I think it's an important question like Vijay, you know, to basically confirm that elasticity is happening, right? Now and elasticity will happen over multiple years as well, right? So this is a -- we see this as a five or six year cycle while that price decline, most of that price decline is, it hits you right up front, but the benefits of that elasticity continue over a longer period of time as well.
Vijay Kumar
And when you say, you know, you are seeing more sequencing activity on X, clearly the system can do more, so obviously you would expect more data, but is that also translating to higher consumable revenues? I think that this is where the question is?
Joydeep Goswami
Yes, so let me break that down into two things. And again, what I was saying is you're seeing more sequencing activity in customers that have adopted X, right? And that's split between the 6K and the X. But let me answer your question to is first I think there's a difference between clinical and research customers and clinical customers it really is incremental right because what you're seeing is -- what you're going to see is assays that have been validated on the 6K will not immediately switch over, right? They will continue and so that provides a baseline that is also growing by the way, as more samples come into with more awareness and more reimbursement, you will continue to see that increase on the 6Ks.
What gets put on the Xs is newer assays that they -- that were marginally viable or not viable at all on the 6K, but that are truly incremental in terms of volume as time goes on, right? So the clinical side is fairly clear on how that transition happens and is incremental. On the research side, it's a little bit more nuanced, right? So the research side, I think most of the adoption of the X is enabling things that truly, again, were more difficult to do on the 6K. So if you are looking at a expansion into a much larger cohort for population genomics studies, or you're looking at a mass movement of a cohort into a multiomic analysis, like proteomics or something else, right? That gets much easier to do with the X.
We've also heard a lot of excitement on expanding the amount of single cells being analyzed or spatial analysis that's being enabled by the X, just because the cost of doing that experiment would have been prohibitive on something like a 6K and now becomes much more manageable on the X, right? So those are the kinds of things that drive elasticity in research customers and give them a reason to adopt the X. And for us to see incremental revenue growth as well, despite the drop in prices.
And again, I would encourage you to look at this as a multi-year cycle, right? Because X, in the first year after adoption, you do see more of an immediate year-on-year price decline, that becomes much lower in subsequent years, although the volume wrap-up happens year-over-year.
Salli Schwartz
We also have on the customers, especially on the research side, that might be transitioning some of their work over a decline in their 6,000 consumables, because they don't need as many of those. So those offsetting trends, so you might be seeing nice uptake on the X, but it's offset some degree with the 6,000. And this year we've had more intensity on that front. Next year we should see those lines cross and start to see more uptake on the consumable side that's only partially offset by the 6,000 consumables coming down. So there's a lot of moving trends here to pay attention to.
Vijay Kumar
Got it. You brought up several points, but maybe let's start with the clinical rate. You mentioned the transition here might be more gradual into an X. I think the question I get from investors is, well, if you can do two X more number of samples, right, wouldn't I need to use just like fewer chips going forward, whether the transition happens next year or three years from now? And I think part of it, I think turnaround time matters for that, you know, customer class, but talk about like why this transition shouldn't be an impact in clinical?
Joydeep Goswami
Yes, in clinical a couple of things, right? So one, volumes in clinical continue to ramp up and we mentioned this even before X came on the scene, right? You're seeing volumes ramp up very, very quickly. And I think with increased reimbursement and greater awareness of the benefits of NGS-mediated panels, I think that's only going to increase, right? And then you're seeing trends like MRD and MCED further expand that number of samples coming. So growth in clinical volumes is something, especially on the oncology and genetic disease testing side, we have seen for a long time and these trends continue to be very strong.
The second thing I think on the clinical sequencing side is important to keep in mind is what I mentioned earlier again, right? This was on the assays that are already validated on the 6K, you will see them continue on the 6K for a while. In fact, you know, if I go back to the high seek to the 6K transition, we still have assays that are run on the high-6s right now, which is astounding, right? It's been six plus years and people, you know, are so locked into a validated assay that they don't see a reason really to go through that validation again. So what you get then is incremental volume coming on, on the X, right? So this is incremental growth rather than swapping out something that's running on the 6K and replacing it with same volumes and then, but just running it on using less flow cells as you articulate it, right? So that clinical side of the story is very strong and it's accretive.
Vijay Kumar
Understood. Maybe to ask the questions slightly differently, Joydeep, and maybe Salli, you can chime in as well. Like when I look at your consumable guidance for this year, the pull-through rate, the million going down to 700k to 900k. I think is the most recent update we've had. That dropped on, I think what some of my people have been negative sort of bearish are saying, look, because you can do more, that's exactly why you're seeing. And I think you gave some color on this transition like we're seeing the specific to ex-customers right the disruption, but maybe elaborate on that and why you feel like that 700k to 900k pull through that we're seeing right now is a temporal trend that we issue?
Joydeep Goswami
Yes, so again lots to unpack in that so first of all let me say you know we had expected that and we continue -- we will continue expect that pull through on the 6K instruments will go down as people transition to the X, right? So no surprise there. This year we had anticipated that number to go to that 800k to 900k, it's not 700k, but it's 800k to 900k. And as of Q3 projections, we are seeing that number stay in that range, but towards the low end of the range.
I will also remind you that pull through is also a calculated metric, right? So it's a revenue divided by the number of instruments out there, especially in a transitionary year, if people are reducing their inventory level or reducing the amount they're using the X, sorry, the 6Ks before they transition the X, you are going to see that number hit.
The last thing I will say is, and Salli mentioned this earlier, right? We have not seen the full switch over to the X just as of yet. First, people waiting for the 25B flow cell because that is the real workhorse in that on the X. And especially for many of these early adopters, they're heavy users of the X, right? So they're really waiting for that 25B flow cell. So that just came out this quarter. People are just starting to validate their workflows on the 25B. So you will see that transition happen once they've finished validation. And our best guess is in the first half of next year, right? That's when you really start seeing a ramp up in in ex-consumables.
But you know, we do expect that your pull through on the 6K will go down over time. Let's know and it's going to be an amalgam of research and clinical, so that the reduction will not be as sudden as people have expected.
Vijay Kumar
Understood. And when you think about that pull through per box, I know it's a metric that the street focuses, but may not give an accurate picture, right? When, like you mentioned 25B flow cell launch, like when customers do adopt, do you expect the overall utilization of chips on 25B to exceed the 6K?
Joydeep Goswami
Yes, we do expect it. The pull through you mean, right?
Vijay Kumar
Yes.
Joydeep Goswami
We do expect it to exceed the 6K.
Vijay Kumar
And I think on your third quarter call, you mentioned something about the disruption that you're seeing. This is very specific to customers who bought an X, is that true? Is this…
Joydeep Goswami
That's correct. Yes, the disruption, the transition where we've seen a reduction in 6K purchases is much more specific to customers that have either ordered an X or already received an X.
Vijay Kumar
Got it. And when you look at those customer base who have not ordered an X, they are still at trend line levels, barring macro?
Joydeep Goswami
They are definitely a trend line levels, barring macro, correct.
Vijay Kumar
Okay, and these customers who ordered an X, right, let's say you're doing a certain dollar amount of business with them, once they bought the X, do you expect the dollar amount of business with these customers to grow over time or should it decline because of this transition and then start increasing?
Joydeep Goswami
For a particular customer, you will see that decline for a period of time and then increasing. Now, the period between the decline and the ramp up is going to be smaller than what you've seen this year, right? This year was a little peculiar because the 25B wasn't available till Q4. So you saw a decline and a sustained decline before the wrap-up starts to happen finally in Q4.
Vijay Kumar
Got it. So just maybe if you could give us like a customer analogy of rate, once this customer buys an X, what happens to their purchasing patterns? How long does the transition last now that we have a 25B flow cell? And what drives the reacceleration? Is that restocking which drives the reacceleration or is that more experiments?
Joydeep Goswami
Yes, so, you know, it's way too early for me to give you kind of timeframes on, you know, how long it's going to be very different for different customers. However, just thinking about it structurally, right? You do see a little bit of the -- we'll see the burn down before the X gets installed and adopted. Typically most customers run a few validation runs, right on their end. This could take, depending on the customer about a quarter or slightly less than a quarter to slightly more than a quarter, right? Again, it depends on the customer. We are trying our best to make sure that we have service engineers and field application specialists available so that the wrap up time is as short as possible for any customer.
Once they finish that validation, that's when you talk about two things coming in, right? They start ramping up their experiments on the X, so that is a sustained pull through of X consumables. And there is a period of initial ramp up as they first stock up in terms of inventory? And again, it's hard for me to predict at this point how much inventory they'll take on initially. But that's after post-validation is where you really see that ramp up occur.
Vijay Kumar
I see. And once we -- I guess, once we get through this validation phase and they're ramping up, that dollar level of business in that normalized environment should that be back at trend line, what this customer is doing when they had a 6k instrument or should it be about?
Joydeep Goswami
Trendline of pull through, so we do expect that the -- you will see an increase in the volumes, the sequencing volumes, right? So as far as the trend line is trend line of increase over time, yes, that should be similar or maybe slightly accelerated given the higher capabilities of the instrument.
Vijay Kumar
Got you. Then maybe looking at your near-term right? Q4, when I look at the guidance rate, obviously, last year, you had an easy comp. Your guidance is still contemplating, I think, sequencing consumable declines of mid-singles against this easy comp. -- which would imply like despite having launched the 25B flow cell, it's not having a material impact in Q4. Like can you just walk us through the Q4 assumptions.
Joydeep Goswami
And compared to year-on-year over last year.
Vijay Kumar
Either year-on-year or sequentially wide things should be from 3Q?
Joydeep Goswami
So again, for two reasons, right? One, remember that in Q4, we are seeing just the validation runs of the 25B, right? And it was also launched late October. So you have part of the quarter cutting off holidays. So it is a little bit muted but more because of the timing of the launch and the validation piece of it. The other thing that if you look year-on-year, you are seeing a little bit more of that impact of burn down on the 6k inventories and the fact that we are not expecting a budget flush this year, which we did get a little bit of that last year, not a huge amount, but we are expecting less of that this year than last year.
But I would really look at the -- what we're looking for in Q4 is a healthy kind of reaction to the 25 in the market enough customers kind of starting to validate it and getting that initial order and both of those so far seem to be playing on.
Vijay Kumar
Can you just maybe elaborate on the last point on how many customers have received their 25B flow cell at this point in time? And what's been the experience? I think early on in the X launch, we had some software issues in any software issues.
Joydeep Goswami
Yes. So no. So the software, the issues that we had mentioned in the Q2 earnings call on Q3 in August, right? We have been resolved, right? So we -- even at that point, we had mentioned we had been working on it and we started deploying solutions and the deployment of those solutions has gone off really well, right? And then when we launched the 25B, we also updated the software again so that not only supports the 25B, but also improves the performance on the 10 flow cell as well. And as far as we can tell right now, both of those changes and the launch of the 25B have been incredibly well received by customers.
Vijay Kumar
Got you. And then maybe switching over to instruments. I think on third quarter, the comments around orders and backlog, I think, was what caught people. When you look at your order intake in third quarter, it slowed down to 50 systems. You did cite macro challenges. But again, like your exposure is different rate diagnostics versus rest of tools when they talk about China biopharma. Why is Illumina seeing these macro challenges? And is that different from your peers?
Joydeep Goswami
Well, it's -- China has a similar impact on most of us, where it's an issue of liquidity and then maybe for us a little bit more on 1 of our major competitors being from China, right? So that's -- China was somewhat expected, but it did get worse as we looked into the second half of the year than expected.
On the other side of the thing, what we meant by macroeconomics there was less to do with -- we had much more to do with people slowing down the timing of their purchases, right? So I want to reiterate, right, the interest in the size of our funnel remains incredibly strong. What was surprising for us a little bit was we had expected that funnel to convert at higher rates in Q3 and Q4. And that didn't happen in Q3. And obviously, that's kind of what you're saying. So the interest is there. The speed at which the funnel is converting right now is slower. We do believe that given the high level of interest and with the introduction of the 25B flow cell, that over the next few quarters, we'll see that in that conversion rate pick back up. But right now, that's -- we have to come out and give you guidance based on what we were seeing in the market.
Salli Schwartz
And in terms of magnitude, it it's slower, but we're looking at instead of 60 orders going to 50 orders. So obviously, we'd like to get back to 60 and then some, but 50 orders is was still a pretty decent quarter, all things considered in the environment we’re in.
Vijay Kumar
Understood. And then that a slowdown in decision making was that perhaps specific diagnostic customers or government academic customers?
Joydeep Goswami
No, it was quite widespread actually. So let me -- on the academic side, we definitely are seeing more cautiousness and waiting to see how funding will be in 2024 before they decide to spend a certain amount of money. On the clinical side, it's a tale of two cities, really, right? We're definitely seeing strong interest in orders, including fleet expansion orders from customers that are well funded, right? So nothing -- no slowdown, no kind of pullback on any of that. Where we did get impacted on the clinical side is with a lot of customers that have had funding challenges or are seeing things not so rosy into next year. There has been a much more market slowdown on those orders converting.
Vijay Kumar
Understood, thinking product that funnel remains healthy. Is that like how -- when you look at that funnel, what gives you the confidence that still a healthy funnel as and it's not stale just given the macro?
Joydeep Goswami
Yes. So first of all, we continue to add new opportunities to the funnel, right? So that's one thing that hasn't slowed that hasn't stopped, as Salli was saying, right? So the next question around stale. Well, so the reps usually go back and you'll reconfirm with the customer that, hey, are you still interested? Is this just a matter of timing? Or you don't have line of sight to the budget anymore, you're not interested, right? In which case, you would actually take things out of the funnel rather than just leave them in there? And you look at, as you pointed out, we look at what is staleness of the funnel and whether these things are actually going to happen or not right? So that's being evaluated on a -- or actually on a weekly basis by the sales team and the sales leadership.
Vijay Kumar
Understood. And I think you used to disclose advanced pipeline. I'm curious that advanced pipeline has also slowed down?
Joydeep Goswami
It has. Again, so we were making here's how that works, right? The advanced pipeline are things where people either had line of sight to budget and definitely have interest. And that's -- and then they give you a timing of when that budget is coming through, so when they will want the instrument. There's no probability of that pipeline converting in a particular quarter, and we did see the probabilities shift, and that's what caused us to rewind that. It's not that the pipeline strong with the speed at which that pipeline converted actually did reduce for us in Q3 and Q4.
Vijay Kumar
Yes, I think another question that comes up is, again, sort of related to the price elasticity of demand because the X can do more, your existing 6,000 customers perhaps they just need to purchase one in lieu of two 6,000 systems. Have you seen that like when you see these customers buying are they swapping out two existing systems with 1 times?
Joydeep Goswami
So not to our knowledge. And again, let's break this down under a few things, right? So one, let me start with -- there are about 1,000 customers, of which about 75% have 1 times, right? So it's not -- they're not going to swap out to for one. The remainder do have multiple Xs and there's a distribution there of how many exits they have -- sorry, how many 6Ks they have. So of the people that are ordering and you split that into research and clinical, right? On the clinical side, I'll reiterate what I said before, right? These are customers that will continue to utilize their 6Ks on validated assays. So it's not a swap there. They're adding Xs to go after new assays, which are much more sequencing intensive, right? So either more samples or more sequencing per analysis or bolt.
On the research side, their -- most of the demand we have seen our people that are very high sequencing users. And they had planned increases in sequencing activity for which they are moving to the X for those specific cohorts or specific types of types of analyses, right? The last thing I would say, yes, it is always possible that just buying an X, just to do exactly the same amount of sequencing as you would have done before. That is a possibility. However, that's never played out in our history, right? People buy instruments to do much more sequencing. And given where we are in terms of penetration of our -- the TAMs we plan, it's highly unlikely that one would say we have saturated when we are at less than 10% penetration into some of these very large TAMs.
Vijay Kumar
Understood. And before we switch on to GRAIL and China, we'll say them towards the end I just wanted to touch on margins. Your gross margins now in 65%, 66%. Can it get back to like 70% where you were before the macro issues?
Joydeep Goswami
Yes, it can. And it will, right? It is -- the gross margins this year, remember, we had anticipated a decline in gross margins because of two things, right? One, your mix changed a little bit this year, more instruments just again being the first year of a major instrument launch. So that tends to pull down margins. The other thing that happened was that the margins on the X itself, the instrument and the consumables are going to be lower than the 6K margins, again, as we are ramping up production. So both those were anticipated.
There was a further impact on -- because volumes were lower-than-expected, revenues were lower-than-expected, that tends to impact your gross margins because your absorption in the plants, our absorption of fixed cost is lower. So that did impact the gross margins this year we have corrected a lot of that. And going into next year, a lot of these factors start to turn. So you will see a sequential year-on-year margin improvement next year. And then, of course, we're taking additional measures to improve productivity, which should allow us to get back to those high-60s to low 70s gross margins over time. So I think that was most of your question.
Salli Schwartz
I would just add, if you look back at 2017, 2018, when we launched the NovaSeq X 6000, you saw a similar fall off in gross margin and then a recovery afterwards for some of the same reasons that Jordi is talking about now.
Vijay Kumar
So when I -- which was my follow-up question, raise. So if I look at the last cycle, Salli, I think it took like 4 quarters for you to hit the -- from the bottom to get back normalized. So we're assuming Q4 of ‘23 is the bottom? Should we apply a similar sort of full quarter to get back to or price levels?
Joydeep Goswami
It depends a little bit on how the macroeconomic situation. That absorption factor will take a little bit longer to play out. But I think what you should expect is sequential improvement of gross margins as we get into next year in subsequent years.
Vijay Kumar
And sequential. Is that on a quarterly basis Joydeep?
Joydeep Goswami
Well, generally, you should. But again, quarter-on-quarter, Q4 tends to generally be the highest margins because you have the most volume in that last quarter. Obviously [Indiscernible] from that point of view. But in general, that's what you see, right? Q1 tends to be about the lowest in the year and Q4 tends to be the highest. So I don't -- I'm not -- I don't think I can tell you exactly which are you going to get sequential growth. But for the next few quarters, I think you should see that sequential improvement.
Vijay Kumar
Understood. And then on margins, operating margins, right, if gross margins are -- that's a longer-term high-60s, 70s, -- is there any reason why your operating margins for core Illumina can get back like 30%? And is there like a time frame and I don't want to specific it's more hey, it's like five or 10 years out, I think that would be a disappointment, right? How do you think about.
Joydeep Goswami
I think you're absolutely right, right? And this is kind of has been our commitment that we do commit to operating leverage and strong operating leverage going forward. And that would -- that comes from -- so there's nothing structurally that prevents us from getting back into that the high 20s to 30% operating margin on the core business side.
So a couple of things on that front, right? Obviously, the efforts that we are driving to improve productivity, both R&D, but also OpEx productivity the things that we're driving to improve gross margin, all of those help in the long run to get us back to those numbers. The two things that we said we are not going to do is obviously try to accelerate that to the extent that it will harm our ability to sustain our technological leadership. So although you will see R&D productivity in R&D as a percentage of revenue come down over time, we're not going to do that at a speed at which it impacts our ability to innovate and put products that are category defining.
The second part is we take the -- our ability to serve our customers in the geographies that we serve very, very seriously, right? So you're going to see us continue to invest those fronts. Of course, we'll get more productive. We are obviously working on technology to allow us to serve these customers much more efficiently. You'll continue to see that. but the timing is going to meter that out so that we continue to be able to serve our customers as well.
Vijay Kumar
Understood. I think obviously, with a lot of management change here. What's been Jacobs sort of priorities here in the first few months? And what is he doing that's different what direction is he taking the company to?
Joydeep Goswami
So Jacob has been around for about 60 days now. Obviously, this is a lot of time spent on ramping up and coming up to speed with our businesses. And it's been a great experience for me right? Because I think part of it is coming from the industry and having a knowledge of the NGS and life sciences and Tools and Diagnostics business. It's almost like we speak the same language, right? So it's -- the transition has been very smooth until now and I don't see any reason for that to change.
He has been spending time, again, other than coming up to speed, it's already been jumping into portfolio reviews for what's in the pipeline for us. What decisions we're making on the X and near-term launches. And of course, into the budgeting process that we are in the midst of right now, right? So all those three are as expected. We've also started to think about his sort of move on modifying the strategy for us in the longer term, which areas he wants us to focus on more and less, right? So that's still work in progress that we'll have to come back to you at some point next year.
Vijay Kumar
Got you. And just longer term, when you look at the business, is Illumina still a double-digit top line company when you think about that longer-term operating model?
Joydeep Goswami
Look, I think we have a market that is very large with very little penetration right now. So we are bullish on growth and our ability to continue to take our fair share of that growth in these markets. We continue to believe in NGS to be able to transform how biology is done, both on the research and the clinical side. And I don't -- and we're doing everything we can to expand the utility of NGS in these markets and especially Illumina NGS in these markets for our customers.
Vijay Kumar
Understood. I think most of your peers have taken the view that first-half ‘24 will look very similar to back half of ‘23 with some normalization in back half of ’24, but just given the X launch and the transition issues, for Illumina, should fiscal ‘24, should we see revenue growth? Or are there any dynamics like the pluses and minuses we should think of?
Joydeep Goswami
Yes. So I think you're right. I like the rest of our peers, we see ‘24 playing out similar to where '23 was, right? For us, the upsides really are around speeding up of transition to the X and the customer spending on more Xs coming through wrapping up, because of they see the data on the 25B, they see a little bit more certainty in terms of their funding. So those things should be positive. There's obviously, we are dependent on somewhat our customer is getting funded on the clinical side as well, right, and ramping up on MRD and MCED will be key drivers on that front as well.
And then China depending on where it gets -- if it gets better, we should benefit from that as well. On the downside, it's pretty much the same factors, right? But it go the other way, anything that further clouds people's ability to spend on instruments, both on high throughput and mid-throughput will be a headwind. And China could be a further headwind, right? It's hard to predict what will happen in China. Clearly, we and others in our industry were wrong about how China would evolve in ‘23. So we are monitoring the market carefully. We are making sure that we are serving our customers as well, and we are evolving our strategy to play in China the right way going forward.
Vijay Kumar
And when you say fiscal ‘24, similar to ‘23, I think fiscal '23 organic revenue base business was down -- are we still looking at declines for '24 or…
Joydeep Goswami
Yes. So again, remember, this was meant less to be a guidance. We're not giving guidance at this point. This was really -- consensus out there was for 10% plus growth in 2024, and we felt like we should at least make sure people are not running around with that expectation, right? So we will come back in February and give you a much cleaner look at what ‘24 is going to look like. What Jacob, when he said it was ‘24 was going to look similar to ‘23, it was more in the dollar numbers, right, that we expect revenue to be roughly about in the range of what '23 was.
Vijay Kumar
Got you. And assuming the gross margins, we see some expansion next year. So we should see some operating margin expansion is that a fair statement?
Joydeep Goswami
You'll see operating margin fairly close to where you expect to see fairly close to where we are this year. And you're right. We do expect that gross margin will be higher and we do expect that our headcounts will be lower next year than they are this year, right? So those -- the cost reductions that we took this year will be in effect next year on a full-year basis.
What's offsetting that really is the variable compensation normalization that you will see going from this year into next year. And that's really the fact that this year we are not paying a substantial portion of the variable compensation and the stock-based compensation that was due to our executives and our employees just because of our performance, right? But next year, we do expect pay it if we hit our numbers, and that will be the headwind.
Vijay Kumar
And should that variable comp reset -- offset the GMX and lower…
Joydeep Goswami
Yes, it does do that.
Vijay Kumar
Okay. So flattish operating margins. Maybe last year on GRAIL. I know we were supposed to get a jurisdictional hearing at some point in Q4. What's the update on the hearing?
Joydeep Goswami
You're talking about the European cortices. Yes, so that is still on track, I think, for mid-December time frame.
Salli Schwartz
Or the EU Court of Justice, and then we do have a decision coming up, we expect by the end of the year for the Fifth Circuit Court.
Joydeep Goswami
The FTC, Yes.
Vijay Kumar
Okay, okay. And then I think on third quarter, press release had -- I think mentioned a special committee on GRAIL. Who's on this committee? Or what is this committee doing? Like why do we need a special committee?
Joydeep Goswami
Yes. So this is a special committee of the Board on GRAIL. The idea really of the special committee was to expedite decision-making on several of the GRAIL issues, right? These are complex. These are evolving based on what we see from the European Commission, from the FTC, from some of the legal cases. So it was really to form a small committee that could get together on a more regular basis and make decisions or at least facilitate making decisions on some of these issues. We haven't given the composition or the names of the people on the committee, but it is consisting of both new and old board members that have experience and divestitures have experienced in financial issues of this magnitude.
Vijay Kumar
Got you. Maybe in the last minute here, I think in the past, you mentioned strategic interest remains high in GRAIL. And I think there has been skepticism on the street on there's a trial like churn Illumina outlay like $1 billion plus of cash like spin the soft let you just elaborate on when you say strategic interest.
Joydeep Goswami
Yes. So look, I want to emphasize, right? It's early in the process. Even before the divestiture order came out, we had received inbound interest in GRAIL. But realistically, we are filing a Form 10 before the end of the year. So that really kicks off the ability for us to engage with others that have an interest in GRAIL either through a some sort of a sponsorship and a spend solution or an outright sale. And let's wait till that. I mean that's the first time we'll note there's a counterparty and to what extent there's interest well.
Vijay Kumar
Understood. And if the better view is, look, there is no strategic interest in an asset like grail because it's burning cash. Your response would be -- your response on that skepticism would be like that couldn't be further from the truth?
Joydeep Goswami
At this point, I think we have -- our advisers are telling us there is interest in the market, and there is interest in what GRAIL brings to the market, what rail brings in its leadership in the MCED space, right? But again, I mean, these are market-based transaction, so remiss if I told you something here that I jumped the gun a little bit on playing the process out.
Vijay Kumar
Fantastic. I think with that, we're at the end of time. Joydeep, Salli, and thanks for your time this morning.
Joydeep Goswami
Thanks. Appreciate it.
Salli Schwartz
Thank you.
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Illumina, Inc. (ILMN) Evercore ISI 6th Annual HealthCONx Conference