Q1 2023 Pacific Biosciences of California Inc Earnings Call

Speaker 1: The.

Speaker 1: continues...

Speaker 2: welcome to the PACBio first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and 1 on your touch-tone sound.

Speaker 2: Please note this event is being recorded.

Speaker 2: I would now like to turn the conference over to Todd Friedman, Senior Director of IR. Please go ahead.

Speaker 3: Thanks, Chaps. Good afternoon and welcome to PacBio's first quarter 2023 earnings conference call.

Speaker 3: Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available in the investors section of our website at www.pacb.com or as furnished on form AK on the Securities and Exchange Commission website at www.scc.gov.

Speaker 3: With me today are Christian Henry, President and Chief Executive Officer, and Susan Kim, Chief Financial Officer.

Speaker 3: Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance, and others, including expectations regarding our financial guidance, our REVIO and ANSO systems, and their commercialization plans.

Speaker 3: the future availability, uses, accuracy, coverage, advantages, quality, or performance of, or benefits or expected benefits of using Pac-File products or technologies, including our Revio and Ontho systems, and expectations with respect to customer demand for our products and technologies and growth in our business.

Speaker 3: You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially than those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we file with the SEC, including our most recent report on the

Speaker 3: and certain financial information on a non-gap basis during call. The non-gap information is not prepared under a comprehensive set of accounting rules and should only be used to supplement and understanding of companies operating results as reported under US GAP.

Speaker 3: Management believes that non-GAAP financial measures combined with US GAAP financial measures provide useful information to compare our performance relative to forecasts in strategic plans and benchmark our performance externally against competitors. Reconciliations between historical US GAAP and non-GAAP results are not only a concern, but also a concern for our performance.

Speaker 3: are presented in tables within our earnings release. For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the items indicated in our press release.

Speaker 3: In addition, please note that today's call is being recorded and will be available for audio replay on the investor section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call.

Speaker 3: Finally, we will be hosting a question and answer session after our prepared remarks today. We ask that analysts please limit themselves to one question only so that we could accommodate everybody in the queue. With that, I will now turn the call over to Christian. Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today.

Speaker 4: Last October , we unveiled Rebio, a long-range sequencer that is 15 times more powerful than our previous generation sequencer.

Speaker 4: The system enables researchers to analyze what we believe are the most complete genomes in the industry, with paradigm changing scale and economics.

Speaker 4: And as we saw in Q4, these features captured the imagination of scientists and researchers across the community, and we started 2023 with a backlog of 76 systems. In March, we began shipping the Revio system at scale to customers around the world.

Speaker 4: I'm pleased to say our launch of Bravios progressing extremely well and is ahead of our targets.

Speaker 4: The demand for our new system continues to be robust, so much so that orders for Revio in the first quarter outpaced our shipments of Revio, resulting in a net increase of instrument backlog.

Speaker 4: This sets us up favorably to deliver on our growth targets for the rest of 2023.

Speaker 4: During the first quarter, we delivered 32 Revio systems, surpassing our expectations and demonstrating that our robust manufacturing capabilities can scale and deliver on new instrument launches. With Revio manufacturing capacity scaling up in the first quarter,

Speaker 4: and customers beginning to ramp down SQL 2e and 2e consumable spending, PacBio still delivered record revenue of $38.9 million in the first quarter.

Speaker 4: The initial customer reception of Revio, its robust fuel performance and our ability to scale manufacturing has given us the confidence to raise our full-year guidance. We now expect revenue to be $170 million to $185 million for the full year.

Speaker 4: year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total high-fi capacity in the market for our cumulative sequel to and 2e install base.

Speaker 4: This is extremely important for our growth as the increased demand for long-read sequencing is clear. And I believe our customers will ramp and fill their sequencers with both new projects and existing samples that may have been sequenced using other short-read technologies.

Speaker 4: Before I move on, I'd like to congratulate our global service and support teams.

Speaker 4: They were essential to the successful launch of the platform. I'm happy to report that all 32 instruments have been installed.

Speaker 4: in all regions and have completed their first sequencing runs. Additionally, the platform's early field performance has exceeded our expectations.

Speaker 4: For runs with sample libraries that are 15 kilobases and higher, our customers average above 90 gigabases of output per smart cell, with many customers exceeding 100 gigabases per smart cell. That's 400 gigabases per 24 hour run on Ravio.

Speaker 4: To put that in perspective, SQL 2E generates just 30 gigabases of sequence in 30 hours.

Speaker 4: The strong early field performance has given us the confidence to accelerate some shipments in April and we are now actively shipping instruments according to our manufacturing plan.

Speaker 4: I'd like to take another minute to discuss the composition of customers who have already received Reveal.

Speaker 4: They are a diverse group that spans 10 countries and includes commercial service providers, academic core labs, children's hospitals, pharma, and agriculture.

Speaker 4: These customers are expected to use their radio from large-scale human genome projects and human disease research to plant, animal and microbial research.

Speaker 4: The scalability and flexibility of Revio can power multiple OMIC applications and is expected to ultimately drive a diversified customer and installed base as the product launch progresses.

Speaker 4: To highlight the specifics behind a few of our customers in the past quarter.

Speaker 4: We start with Grand Olmics, a long-time PAC-Bio service provider based in China, who successfully implemented Revio and is now preparing to run large-scale cohort studies, PANGENOAM projects, and biodiversity sequencing efforts.

Speaker 4: In its first sequencing run, the company reported an average SmartSell yield of over 102 gigabases for SmartSell with median Q scores of 230 or better.

Speaker 4: Additionally, the Australian Genome Research Facility or AGRF, they plan to implement Rebio to offer long reads at extraordinary scale and affordable cost to its customers. We've also shipped Rebio to multiple sequencing centers.

Speaker 4: that plan to use Rebue to scale up long reads for the NIH's All of Us program.

Speaker 4: These examples were just a few as many other early radio customers were willing to share their excitement for the platform and their initial experience on social media.

Speaker 4: I'll look forward to many more of these posts this quarter and into the future.

Speaker 4: Radio opens the door to large-scale genomics and we are currently tracking several multi-thousand sample genome project opportunities.

Speaker 4: Revio has already enabled us to win some of these projects and we are in discussions with several other potential partners.

Speaker 4: Revio not only gets PacBio a seat at the table for these large-scale programs, but it makes us a top competitor as we can deliver what we believe is the most complete, highest value human genome.

Speaker 4: This means potentially more insights into genetic disease, a better understanding of cancer, and ultimately improving human health.

Speaker 4: We take pride in delivering our customers the high quality complete sequencing products and services.

Speaker 4: Delighting our customers after all is one of our core values and is a critical part of our mission. So I'm incredibly pleased with our initial results from our in-progress annual customer survey showing a net promoter score of over 60.

Speaker 4: a significant improvement over last year and higher than other sequencing providers have reported. Our survey closes in a few days and I look forward to relaying more feedback.

Speaker 4: We've also continued to see interest from NewPack Bio-Instraemic customers as one-third of the Ravios systems ordered in the first quarter were from brand new customers and over one-third of the systems in our sales pipeline for the remainder of 2023 consist of new customers.

Speaker 4: interest from New Pack Bio Instrument customers as one third of the Revio systems ordered in the first quarter were from brand new customers and over one third of the systems in our sales pipeline for the remainder of 2023 consists of new customers. In fact,

Speaker 4: Our largest instrument ordering Q1 was from a new customer, a European genomic testing lab, looking to incorporate high-fi genomes to investigate rare disease cases.

Speaker 4: The customer ordered multiple systems.

Speaker 4: They indicated that one of the key factors to implementing Revio was the ability to sequence thousands of high-fi genomes under a thousand dollars of genome so that they can shift from short-read exomes directly to long-read genomes.

Speaker 4: Another new customer, a hospital in Canada, decided to reallocate a portion of its budget for a high throughput short read sequencer towards a acquiring a revio and expanding its capabilities in highly accurate long read sequencing.

Speaker 4: Gravio is also reigniting legacy PAC-Bio customers interest in leveraging long reads as well Cornell Medical Center ordered Gravio for their genomics core, which will be their first PAC-Bio instrument since their RS2. Their team is looking forward to partnering with PAC-Bio.

Speaker 4: and is shared with us that they plan to move several active short-read projects in applications like Humanhole Genome, RNA, and Epigenetics to Revio once their system is installed. In the near term, we expect most Revio shipments will be to existing SQL 2 and 2 eCustomers.

Speaker 4: which is why we've been investing so heavily in expanding our install base over the past couple of years.

Speaker 4: Since the end of 2020, we have grown our SQL 2E install base by 150% and more than doubled our SQL 2 and 2E customers.

Speaker 4: This has helped set the foundation for a multi-year product transition. After our strong launch, we believe the customer conversion cycle to Revio still has a long runway, as only about one-fifth of our nearly 300 SQL2E customers have placed orders for Revio. As we turn our focus to our groundbreaking short read sequencer, Onso,

Speaker 4: I'm pleased to report that our beta program has been quite successful and our partners continue to sequence on their systems.

Speaker 4: We have recently enabled each site with our latest 2 by 150 Pairdend chemistry, delivering increased sequencing robustness and reliability over our previous versions.

Speaker 4: Regarding its performance, we are excited to share that the beta sites are seeing output that achieves our commercial specification of 800 million paired end reads and regularly gets over 90% of the reads between Q40 and Q50.

Speaker 4: Our beta partners are running samples where low variant allele detection is critical, such as circulating tumor DNA and gene editing analysis. And they're looking forward to sharing additional data from these challenging data sample types.

Speaker 4: On the operational side, our manufacturing team is finalizing scale up plans for ONSO. We've completed our first ONSO pilot manufacturing builds in-house with the first runs going well. And on the commercial front, I'm pleased to announce that we've already received multiple ONSO orders as we continue to build our sales pipeline. We believe ONSO is likely to be available for commercial shipment around the end of the second quarter.

Speaker 4: As one would expect, there's been a lot of attention on Revio and OnSto platforms, but we continue to make great progress on improving the sequencing workflow. During the quarter, we launched our latest high-throughput nanobind extraction kits to enable fast, reliable, and scalable, large-fragment DNA extraction.

Speaker 4: across blood, cells, and tissue samples.

Speaker 4: This new offering lowers extraction time to less than two hours, minimizes sample input, and eliminates the need of harmful chemicals or mechanical homogenization.

Speaker 4: The new high-through protocol is automated for a complete walkaway solution, enabling labs to scale their pack bios sequencing.

Speaker 4: Also on the front end workflow we partnered with Corteva Agro Science.

Speaker 4: We released end-to-end workflows that streamline DNA extraction through library preparation, enabling thousands of samples to be sequenced annually.

Speaker 4: Porteva received its first revios during the first quarter and is beginning to transition sequencing over to the platform.

Speaker 4: On the Informatics front, we continue to develop the tools for researchers to make impactful discoveries. For example, some of the recent tools that we've been developed include Smart Analysis to Phase DeNovo Assemblies.

Speaker 4: Target or TRGT for tandem repeat genotyping and visualization, paraphrase to help call highly homologous genes, and H-High-FyCNV for identifying large copy number variants across the genome.

Speaker 4: Rolling out new and improved ways to interpret long-redata and collaborating with third-party providers is a key pillar to our Informatic Strategy and will help further drive adoption.

Speaker 4: Rolling out new and improved ways to interpret long-redata and collaborating with third-party providers is a key pillar to our Informatic Strategy and will help further drive adoption of our platforms.

Speaker 4: In addition to making the workflow more accessible, we developed kits to power customers' research across various OMIC applications.

Speaker 4: In Transcript Domics, our recently launched Mossy Kit has already been ordered by a hundred of our customers since its launch late last year.

Speaker 4: Maseek addresses transcriptomics and single cell research, which are incredibly important and rapidly growing areas in sequencing.

Speaker 4: For example, in a preprint in March, researchers at UCLA and other institutions used PacBio Isoce to build a full-length transcriptomatless of the developing human brain.

Speaker 4: mapping over 200,000 unique isoforms

Speaker 4: Over 70% of which had never been detected before.

Speaker 4: This can allow us to understand better risk variances associated with neurodevelopmental disorders and help us reshape our understanding of brain development and disease. And then, just a few weeks ago, in cancer research, another free print described the first Isoforn resolution

Speaker 4: colorectal cancer transcriptomic atlas using PacBio ICC.

Speaker 4: to identify several hundred dysregulated transcript structures in tumor cells Both studies used our legacy isocique solution on sequel to but with new solutions like mossy and the expansion into bulk isocique

Speaker 4: Along with the throughput of Gravia, we can further enable these groundbreaking studies, which ultimately may translate into improved clinical research outcomes.

Speaker 4: With that, I'll turn the call over to Susan to discuss our financial results in more detail. Susan?

Speaker 5: Thank you, Christian. As discussed, we reported 38.9 million in product service and other revenue in the first quarter of 2023, which represented an increase of 17 percent from 33.2 million in the first quarter of 2022.

Speaker 5: Internal revenue in the first quarter was $20.7 million, an increase of 33% from $15.6 million in the first quarter of 2022. The increase in revenue was primarily driven by the launch of Revio in the first quarter, which is sold at a higher ASP than our previous SQL 2.0 and 2.0e platform.

Speaker 5: We ended the quarter with an install base of 32 Revio systems and shipped six SQL 2e systems.

Speaker 5: Turning to consumables, revenue of 14.0 million in the first quarter grew 10% from 12.7 million in the first quarter of last year, with approximately 10% of consumable revenue coming from radio systems and the remainder from other platforms and other consumables. We expect revenue as a percent of total consumables to increase...

Speaker 5: revenue of 19.1 million was roughly flat compared to the first quarter of 2022. As a higher ASPN review offset, a record is equal to 2E placement quarter for the region in the first quarter of 2022. As a reminder,

Speaker 5: Last year included 18 sequel to ease delivered to the Broad Institute. For Asia Pacific, revenue of 12.0 million grew 43% over the prior year. Time and grew approximately 40% year-to-year and posted its highest revenue since the second quarter of 2021.

Speaker 5: as customers in the region are taking to Revio and as the country recovered from last year's COVID-19 related lockdown.

Speaker 5: Japan also showed strength as consumables continuing to grow on top of its record consumable quarter in Q1 of 2022.

Speaker 5: Finally, Amia revenue of 7.9 million grew 38% over the prior year period, with changes in FX rates representing approximately a 5% headwind in the region year-to-year.

Speaker 5: The region had its highest interest revenue quarter in over a year as customers like the Welcome Sanger Institute, Radboot University, and MBRU received their first revios to scale their long-regenome project.

Speaker 5: Moving down the P&L, a gap gross profit of $9.8 million in the first quarter of 2023 represented a gross margin of 25% compared to a gap gross profit of $14.2 million in the first quarter of 2022 which represented a gross margin of 43%.

Speaker 5: First quarter, 2023 non-GAPRO's profit of 9.9 million represented a non-GAPRO's margin of 26 percent compared to a non-GAPRO's profit of 14.3 million or 43% in the first quarter of last year.

Speaker 5: Gross margin declined year-over-year due in part to interest mix as Revio-Inference sold during the quarter had a lower margin primarily due to customer loyalty discounts provided and higher initial manufacturing costs.

Speaker 5: Additionally, gap and non-gap growth profit in the first quarter reflected adjustments of approximately 3.5 million primarily related to excess consumables in inventory, resulting from a faster than expected decline in demand for SQL 2E consumables due to the product transition to Reveo.

Speaker 5: This accounted for an approximate 900 basis point headwind on Gross Margin in the quarter. While we expect Gross Margin to expand during the remainder of the year, Gross Margin could fluctuate depending on the pace at which equal to 2E usage declines and revio manufacturing is scaled.

Speaker 5: GAP operating expenses were 101 million in the first quarter of 2023 compared to 91.7 million in the first quarter of 2022.

Speaker 5: Non-GAP operating expenses were 88.7 million in the first quarter of 2023, representing a 4% decrease from non-GAP operating expenses of 92.7 million in the first quarter of 2022.

Speaker 5: The increase in gap operating expenses primarily reflects an increase in the fair value of contingent consideration liability during the first quarter of 2023 of 12.3 million related to the milestone payment to Omniome shareholders.

Speaker 5: Non-GAP operating expenses declined year over year, primarily driven by the transition of Revio from development to commercialization. Regarding headcount, we ended the quarter with 793 employees compared to 769 at the end of Q4 2022 and 774 at the end of the first quarter of 2022.

Speaker 5: Operating expenses in the first quarter included non-cash share-based compensation of 16.0 million compared to 20.9 million in the first quarter of last year.

Speaker 5: Gap Net Loss in the first quarter of 2023 was 88.0 million or 36 cents per share compared to a Gap Net Loss of 81.5 million in the first quarter of 2022 or 37 cents per share.

Speaker 5: Non-GAP NetLoss with 75.5 million representing 31 cents per share in the first quarter of 2023, compared to a non-GAP NetLoss of 82.3 million representing 37 cents per share in the first quarter of 2022.

Speaker 5: Turning to our balance sheet items, we ended the first quarter with $875 million in unrestricted cash and investments compared with $772 million at the end of the fourth quarter of 2022. The change in cash reflects net proceeds from our public offering in January of approximately 189 million.

Speaker 5: less cash burn of approximately 86 million, which included our annual employee bonus payout and a prepayment for future inventory in the first quarter of 2023.

Speaker 5: As a reminder, we expect to pay the on-the-arm shareholders approximately $200 million in cash and equity dependent upon the achievement of a milestone in connection with the commercial shipment of the OnSew platform.

Speaker 5: Inventory balances increase in the first quarter to 62.0 million representing 2.1 inventory turns compared with 50.4 million at the end of the fourth quarter of 2022 representing 1.6 inventory turns.

Speaker 5: The increase in inventory primarily for a flat purchases of revio and onch, on-site instrument and consumables inventory. Accounts receivable increase in the first quarter of 29.6 million compared with 18.8 million at the end of the fourth quarter of 2022, while our DSO 56 days declined in the first quarter compared to a DSO of 70 days in the fourth quarter of 2022.

Speaker 5: Turning to guidance, as discussed earlier, given the successful launch and positive customer reception toward Reveo, we are increasing our guidance for 2023. We now expect revenue in the range of 170 million to 185 million, representing a growth rate of approximately 33 percent.

Speaker 5: to 44% compared to 2022. The lower end of the range continues to assume a year-over-year decline in consumables as customers transition to REBIO. The high end assumes consumable revenues slightly higher compared to 2022. Service and other revenues still expected to be lower compared to 2022.

Speaker 5: We continue to ramp up manufacturing capacity and expect to reach our planned production rate for 2023 during Q2. As such, we expect to continue to increase reviential shipments every quarter this year, and as a result, we expect revenue to be more weighted toward the second half.

Speaker 5: Moving down the P&L, we expect the 2023 non-GAP gross margin, which will exclude the amortization of intangible assets to be lower than our previously guided range of 36% to 40%, due to inventory reserves and Q1 resulting primarily from the decline and demand of CQ2 and two e-consumables due to customers' product transition to Rebio.

Speaker 5: We expect margin expansion beyond 2023 as review placements will help drive a mixed shift toward higher margin consumables and higher volume and optimization drive lower manufacturing unit costs. We continue to expect non-gap operating expenses to grow less than 5% in 2023 compared to 2022.

Speaker 5: Additionally, we expect interest in other expenses to have a minimal impact on our full-year EPS as interest income on our cash and investments is expected to offset our interest expense from the convertible debt.

Speaker 5: We expect the weighted average share count for EPS for the full year to be approximately $255 million, reflecting the recent sale of common shares and shares expected to be issued as part of the on-the-on-the-on milestone later this year.

Speaker 4: I'll hand it back to Christian for some final remarks. Christian? Thank you, Susan. As you can see from our prepared remarks, we're off to a strong start for the year.

Speaker 4: We're driving the rapid adoption of radio with over one third of our sales funnel being new to PacBio instrument customers.

Speaker 4: and existing customers sharing how they plan to increase the amount of long-range sequencing with the platform's 15-fold throughput capacity increase.

Speaker 4: For also, our beta program is progressing well, and we are scaling our operations with an eye toward commercial launch at the end of this quarter. We look forward to more customers getting their hands on Q40 plus accuracy and becoming the only company with both leading long and short-read technologies in the market. Financially, we remain well positioned with 875.

Speaker 4: million in cash and investments on our balance sheet. We believe our strong financial position allows us to drive toward both our growth targets and our goal to become cash flow positive during 2026.

Speaker 4: 2023 is the first step in this journey of becoming a multi-platform, multi-product company. And we look forward to updating you on Revio and on so throughout the year. And with that, I'll turn it over to the operator so that we can begin the Q&A. Thank you. You will not begin the question and answer session. To ask a question, you may press star then one on the touchstone sound. If you use a speakers on, please pick up your hands before pressing the keys. To withdraw your question, please press...

Speaker 2: star, then two. We ask that you please limit yourself to one question. If you have additional questions, you may re-enter the question to you.

Speaker 2: And at this time, we will pause momentarily to assemble our roster. And the first question will come from Dan Brennan from TB Cowen. Please go ahead. Great. Thank you. Thanks, Vingan. The question is congrats on the quarter. I'm so glad you just, um —

Speaker 2: I'm just trying to get a flavor for any other color around that in terms of the extent of that and or the funnel, things of that nature. And then I have a quick follow up. Thank you.

Speaker 4: Great, and Dan, thank you. So, Revia's exceeding my expectations on a number of different fronts. First, our ability to execute and get the product shipped on time, get the product working in the hands of our customers with very, almost straight out of the gate, and then seeing the actual run performance.

Speaker 4: how our customers on real world samples are getting, you know, at least 90 G per smart cell, but oftentimes over 100. So the overall performance of the system this early in the launch is actually quite encouraging for me and the ability for us to deliver on that. The second piece is the breadth of...

Speaker 4: The breadth of applications and the breadth of demand quite frankly.

Speaker 4: You know, I think that it demonstrates it. We've seen orders from people doing microbial research to whole human genomes Plant animal research, you know really very broad and I tried to highlight that in our Ritten remarks that that this really is a broad adoption of the platform and people really do need the throughput that Radio brings to bear and and so Although I was hopeful that would happen

Speaker 4: What would that early traction suggest about the utilization of REVO? Yeah, you know, Dan, it is really impossible for me to really kind of predict the future, but a couple of things that I can kind of comment on. You know, first of all, the consumable shipments for REVO were higher than we had modeled, even straight out of the gate. And so, you know, what that says is there's enthusiasm to get going. Second, in my prepared remarks, we talked a lot about there are lots of customer conversations that we have where people are moving short read projects to long read. And so what that means to me is that, you know, we're not going to be able to get through

Speaker 4: And so those are both two encouraging signs. So far, you know, since you know as you said most of these systems were delivered anywhere from mid to late March and so it's still way too early to to really have a read but

Speaker 4: The one other thing I would say is people are using their systems. Hundreds of smart cells have been run, hundreds upon hundreds have been run, and overall the results are, the performance is quite high, which helps the new instrument funnel, of course. But it also helps you say, hey, this is going to be a robust product.

Speaker 4: that customers can run hard and over time. So that's about all I could say on it now, but we'll watch from quarter to quarter and try to give color where we can. And as we get a few quarters into this, start to report some of those, you know, kind of pull through metrics and our perspective on where they're going. But it's a bit early yet, Dan. Yeah.

Speaker 2: Thank you. And the next question will come from David, Weston Berg from Piper Sandler. Please go ahead. Hi. Thank you for taking the question. And I echo Graz on this really great instrument order.

Speaker 6: in placements here. I want to start off with the gross margin here. I know that you had some people that bought SQL 2 in year, like last year. I think they got a discount. And then I was just wondering here, how should we think about gross margins?

Speaker 4: Is that all the headwind in the guidance for this year or is there more than that? I think all those questions are probably for Susan actually. I'll take a stab at starting and then maybe we'll pass it to Susan. First of all, the pricing strategy and launch strategy for Revia was really developed around the notion of deliding our customers. And making sure that the transition from SQL to Revia was as painless as absolutely possible. Through lots of experience that we've had over the years.

Speaker 4: We know these product transitions are tough. And so we set up a loyalty discount program that says, you get X amount of discount if you bought a sequencer in 22, X minus something for 21. And I believe even for 2020. So we gave all of our install base a bit of a discount with the heaviest discounts being.

Speaker 4: that in 2022. So as a result, the first 76 orders were virtually all discounted pretty reasonably, and that program ended in February . And so when we'd look at our financials and our projections over the year, we would expect a low water mark of ASP to be this quarter.

Speaker 4: If you move to the gross margin and the charge, the charge that we took in Q1 was really based on the consumable demand expectations for SQL 2. And so what I mean by that is we're seeing customers transition to Ravio faster than maybe we had predicted because these things are extremely difficult to predict and we needed to make sure we had enough inventory capability if the transition was slow or if it was fast. It seems as though it's happening faster than we model. And as a result, we took about a $3.5 million charge. Most of that amount is related to consumables.

Speaker 4: Back in Q4, if you remember, we did take a charge as well, and that was for the SQL2 instrument. And so at this point, you know, we anticipate that we're through most of those excess inventory issues. And so, you know, we don't see...

Speaker 4: we don't see significant material amounts of issue going forward. I guess it's the best way to characterize it.

Speaker 4: This is a very instrument revenue heavy year, and so next year you start to see more of the consumable revenue as our install base for Revio has grown. And so that's going to help in terms of our gross margin expansion that you'll start to see more of in 2024 relative to this year. But the other thing, Susan, we probably should point out is that we expect this to be the low water market gross margins for this Q1 being the low water mark for this year. Exactly. And we expect it to improve quarter by quarter and then get the leverage like we talked about really in 2024. Exactly. Yeah. So hopefully that answers your question. Thank you. The next question will come from Kyle Mixon from Canaccord. Please go ahead. We will go to Joe?C recommendedhh.comfor!!!

Speaker 7: Hey guys, thanks for taking the questions. Congrats on the strong start out of the gate here, living on to the hype so far. I wanted to just ask two, I guess, a multi-part question. First on the guidance update, you literally raised the guide by the B in the first quarter, yet Revy was ahead of expectations. And you said, I think Christian, the 32 Revy was matched the total high-fight capacity in the field currently, pretty interesting data point. Maybe just provided a bit more detail on some of the assumptions for their midter of the year. It

Speaker 7: at this point, both like companies specific and macro. And just to kind of frame that, I'm curious how much conservatism you are baking in. Maybe it's too early. What would kind of let you beat this $185 million high end? And then secondly, you received over 32 revio orders in the first quarter. That compares to the 76 you put up after that huge ASHG coming out event.

Speaker 7: I guess how are you thinking about orders going forward? I mean, could a run rate be half this 32 number? I'm just kind of curious about that. And I guess importantly, would you end the year still at, like with a backlog of instruments?

Speaker 4: Okay, Kyle, that's a lot to unpack. So, first of all, and by the way, thanks for joining us, Kyle. The guidance, you know, you could see what we did was we still have a pretty broad range of guidance. And the reason why we have that broad range is really driven by still trying to understand how fast the sequel to consumable decline affects us and how fast Revio ramps up. And so that's still a question mark for us, tactically, in the course of 2023 and our revenue performance for the year. The good news is that we, you know, right now we see a lot of excitement and we see a lot of Revio ramp up. So if you look…

Speaker 4: into the future of the company, it bodes extremely well for us to grow our consumables significantly over the next several years and grow our gross margins like Susan was talking about before. So we left the range pretty wide because of that. We did increase the

Speaker 4: the guide modestly. You know, we had a very nice quarter and a strong beat, and you're right, we raised by that amount roughly. And the thinking there is that, you know, we do see an incredible funnel continuing to build, and we do see continued opportunity to do, you know, to do really, really well this year.

Speaker 4: But it is the first part of the year and what we want to do is see how the year unfolds and if there's opportunity to clarify the guidance on the high end further over the course of the year as we get deeper in, we will. But it was the first quarter, it was a great result. I'm really proud of the team. The demand curve continues to look strong. The order book continues to look really robust. And so, you know, we definitely see a lot of opportunity this year. But right now we're just, you know, we're just taking, we're taking stock of the fact that we had a great Q1 and we'll see how the rest of the next few quarters unfold. Let's see, did I get all of that?

Speaker 4: So, you know, as I said before, we did have, you know, we did have more than 32 orders in Q1. You know, the reality is, our objective is to be shipping much more than that on a getting orders for much more than that on a quarter by quarter basis. But the revenue, but the orders in any particular quarter are going to...

Speaker 4: likely be variable dependent on a lot of different factors and so I think you know when you look out towards the remainder of this year you know our objective is to of course do better than what we did for orders in q1 but it may be lumpy from quarter to quarter but I'm balanced

Speaker 2: I see that growing over the course of the year and into next year. Thank you. The next question will come from Teges, Savon from Morgan's family. Please go ahead.

Speaker 8: Hey guys, good evening. So Christian, one on the hardware side and then a couple of the consumables. So on the instrument side for the review, can you just walk us through what your key learnings were in terms of the customer feedback you received during that April ship and pause that you had called out earlier in the year. And then on the consumable side of things.

Speaker 8: You know, you've talked about sort of max pull through on the box, you know, being about 400 K or so, so about 30, 35% of the max pull through rather. Any early insights from these placements around the slope of that ramp? Is this sort of a two-year dynamic in your mind or could it be sort of a more of a longer term thing? And then then my final sort of consumable question here is, can you just share some color around the process and duration of the workflow for long-read sequencing? I mean, you highlighted the new NANOBINE extraction kits, but rather than any other sort of key areas you feel you need to.

Speaker 4: many times already on this call, the runs have gone really well and we're seeing above spec output generally across all of our customers. We are seeing one of the challenges, I guess, if there was one I would point out is that

Speaker 4: The loading characteristics of loading your DNA onto the smart cell to get the optimal performance out of the 25M smart cell is a little bit different than the 8M sort customers have been getting up to speed it basically for their sample type or their application optimizing the the amount of some.

Speaker 4: DNA loading that has to happen. So that's that's an area where we're you know, we probably have learned a little bit and perhaps can put some new processes in place to make that big better and particularly as we scale to even higher density smart cells down the road, you know, we'll take that learning and implement it.

Speaker 4: into our development program. So those are some of the things, you know, on balance of the the launch is going extremely well. It's actually been excellent. And I think customers so far are pretty darn satisfied. I'm with any particular, we're still going to have run failures, run failures are

Speaker 4: our targets spec right now, which is good. We actually think we can do better. And over the course of this quarter, we'll make further enhancements to the platform to decrease run failures. But they're really a very small portion of all the runs that have heart failures.

Speaker 4: at this point. So we launched the system in a very, very robust way. And with respect to Max pull through and early insights, you know, the truth is there's not enough run data out there to even, you know, glean those insights. The only data, so to speak, is the enthusiasm.

Speaker 4: of the customer base and they're, you know, that they have been buying their consumables probably faster than I expected, which is good. And they are running their systems, getting into, you know, most of the time for the higher throughput labs, what they'll do is they'll

Speaker 4: run the systems in kind of development mode until they really lock the workflow down and then they'll really scale up. And so we're seeing that happen with our higher throughput customers, which is encouraging and, you know, people starting to set target dates on, hey, I'm going to start my full scale up on this date or that date. So those are all pretty good, but we're not going to really have any.

Speaker 4: you know, fundamental insights. The one thing I would say is you kind of mentioned that two-year time horizon to potentially get to kind of the optimal throughput, you know, or pull through for a particular customer. First, I think that number's gonna be highly variable amongst the customer base. But more importantly, you know, I think that ramp will be much faster than two years. I think it's...

Speaker 4: I think we should be thinking kind of in the, you know, I don't know, somewhere between 12 and 18 months to where you start to see you start to see that. So hopefully that gives you a little bit of color there. And then lastly on improving the process upfront for, you know, automation. We do, the system today is fully automated. We do have

Speaker 4: protocols. The nanobind was the latest in improving workflow for high-through, but the biggest bottlenecks are ensuring an size selection. We continue to innovate and work on new ways in which we can do that.

Speaker 4: The overall sequencing workflow isn't much longer than short read technologies. It's not really a major. The time is not really a major consideration. It's really just making sure that it's automated so that you're able to walk away at high quality libraries.

Speaker 4: put them on the sequencer and with the way we designed Rebios you can load, you know, you can load your next run at any time while the sequence is running. And so to really maximize the capability of the sequencer, you know, you can load the sequencer every day and basically run the sequencer 24 hours a day, seven days a week. So that's what we're focused on.

Speaker 4: you know, continuing that. And then, as I said, I guess I'll go one step further. The, you know, on the back end, we continue to launch lots of new tools to help drive sample throughput through the sequencer. Thank you. And the next question will come from Sung Jin Nam from Scotiabank. Please go ahead. Hi. Thanks for taking the question. And congratulations on the.

Speaker 5: including the customers achieving performance characteristics above your expectations, if there are any differences between new users versus existing users. And also, just on Ansel, if you are seeing kind of the orders related to bundling with the review at this point, thank you.

Speaker 4: Yeah, great. So, with respect to the, you know, with respect to new versus existing customers, you know, the workflow is essentially the same for SQL 2.0 to Revio. And that's a real benefit of Revio. And so, we are seeing that the existing SQL 2.0 customers typically can get ramped up a bit faster than the new customers.

Speaker 4: But the system has a lot of innovations to make it easier to use relative to any product that we've ever had in the past. And I think that will help our new customers make sure they get very high quality DNA out of the gate using our nanobind technology.

Speaker 4: and then get those high quality samples onto the sequencers. And so I don't, you know, I do think the ramp for new customers will be longer before they're kind of at full capacity. Probably, I don't know, 30, 40, 50 percent longer maybe. But I don't think, given the ease of use of Revio, I don't think it's going to be, I don't think it's going to really be that onerous by far.

Speaker 4: It's really exciting to see the demand curve and the power of our sales channel starting to ramp up. And so now, you know, we're finishing the late stages of development, getting ready for manufacturing at global scale.

Speaker 4: lot to talk about with respect to Anso. Which is, you know, when you think about it, launching two major platforms in the same year with a little company like PacBio is a pretty significant task, and when we get it done, hopefully a pretty significant achievement. So, look forward to telling you about it more.

Speaker 4: on our next call after hopefully we have orders shipping the product and then it's getting out in the wild. And thank you the next question will be from Julia Kim from JP Morgan. Let's go ahead.

Speaker 9: Hi, good afternoon and congrats on a strong quarter. Christian, you mentioned on the pair of remarks about POCC programs that are being brewed in a pipeline. Obviously, we appreciate the strength at the Broad for all of us that you mentioned, but could you give us more color on the other POCC programs and where we are in terms of discussion and the cycle? And then regarding the revio mix, a third being from short-read users, is that a positive surprise to you? And how are you thinking about this mix going forward as probably the cost on both the short and long recites continue to go down?

Speaker 4: Yeah, I think that, so thanks, Julia. I'm going to try to be quick here, but, you know, with respect to the Radiol mix and short read samples coming onto the platform, you know, that's not surprising at all because we've achieved the economics and throughput that's enabling. And it's actually kind of the fundamental piece of the thesis here is that we're going to be able to take market share.

Speaker 4: and be able to expand the market with the unique capabilities of Reveo. So I think it just helps, you know, the taking samples from existing projects helps us grow faster and get the Reveo further up the speed sooner. But I'm not that surprised by it because of the capabilities. With respect to Popsie, you know, there are lots of projects that are cooperating right now.

Speaker 4: I don't want to get into specifics of any one project because for competitive reasons quite frankly, but there are early stage and there's mid stage and there's some late stage projects. The later stage ones are the ones probably we could focus on and we would expect to be???500 syllable of flat??.

Speaker 4: achieving or basically winning or participating in those programs as early as later this year. So it was important to talk about in the prepared remarks to give people a sense of, you know, the radio has made it such that we can be a strong competitor and the projects have taken notice of Rabiel.

Speaker 4: And so not only are we reaching out, people are reaching out to us. And I think it's that combo that's really powerful. And if we can win, you know, some of these deals, of course that will be great for our growth.

Speaker 2: So that's what I'll say about that for today. And thank you. The next question is from John Sauerbeer from UBS. Please go ahead.

Speaker 3: Hi, thanks for taking the question and congrats on the quarter. Just a couple quick clarifying ones here. You know, China was pretty strong in the quarter. Just any thoughts on how that ramps throughout the year in reopening? And then just to follow up to that last question, on the third of new customers to pack bio, are those

Speaker 4: all new to Longrei customers? Do you have a sense on how many of those might be, maybe existing Oxford Nanocorp customers that are converting over? Thanks. Yeah, so first of all, China was really strong result, 40% growth in the quarter and really, it continues to be strong.

Speaker 4: China's always can as we've learned over the last 24 months can be variable, but I do think radio and actually also are both them.

helping us allay any headwinds that maybe other companies have with respect to China. So new product portfolio certainly helps there. So we see that business continuing to be strong in the year. With respect to new customers, yeah, most of those, when we talk about new customers, they're generally new to Long Read. They certainly may have done.

some Long Read program projects with service providers, but they're generally new to Long Read. Some of them have tried out Oxford and some of them haven't, but I don't know the exact breakdown. What's interesting is that although we both have Long Read technologies, we both attack different parts of the market and so we don't see each other.

as much as maybe one might think. We still do, but maybe not as much as one might think. But it's exciting to see the industrialization, the scale, the cost advantages of Revio excite even Oxford Dannaport customers. And the next question will be from Ross Osborne from Cantor Fitzgerald. Please go ahead. Hi, congrats to the quarter and thanks for taking our questions.

So I guess first off I'll re-ask Kyle's question regarding color on your comment that Revio places matched HiFi demand in the market as I do not believe it was addressed But did think that was an interesting comment and then for my question Can you just walk us through how you're balancing meeting stronger than anticipated Revio demand while trying to launch Anzo without cannibalizing the strong Revio demand

Sure, those are good questions Ross. So just a little bit of color. What we were trying to point out with that comment was that with Revio launching, we are now increasing the capability for customers to generate HiFi data. And we think that the more HiFi data that is created, that will drive demand for even more HiFi data. And so…

essential to driving the flywheel for long-term growth. So that was really the reason for the comment. The last question of balancing demand and thinking about making sure we have a great Onso launch, that's something that I think about every single day. I think it's really important right now as Onso is showing a lot of promise and we do think there's a lot of good opportunities. And the way we're managing that is that we have specialist folks that are focusing principally on Onso. We still have one unified commercial organization, but we're definitely ramping up the intensity of focus on Onso. We don't think that that is impacting our revio focus.

And in particular, if you look at over the last six months, we've really pushed the revio story hard so that we could drive and create a big funnel and now we can execute on it. And now we're in a position to continue executing on that funnel and we're building the Onso funnel. We still need to continue to demonstrate the power of Onso and the data. And so you'll see us continue to publish a lot more data and that will help drive the commercialization. But you're right, it is a balancing act and it's gonna require.

This concludes our question and answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.

Thanks, Chad. And thank you all for joining our call. That concludes it for today. We look forward to catching up with many of you at our conferences and investor events this quarter and updating you on our Q2 progress this summer. Thank you and talk soon.

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