Q2 2023 Pacific Biosciences of California Inc Earnings Call
Yeah.
Hello, and welcome to the pack by a second quarter 2023 earnings conference call, all participants will be and listen only mode. So did you need assistance. Please signal a conference specialist by pressing Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions.
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Please note this conference is being recorded.
Would now like to turn the call over to Todd Friedman head of Investor Relations.
Go ahead.
M J good afternoon, and welcome to pass by the second quarter.
Earnings Conference call earlier today, we issued a press release outlining the natural result, we will be discussing as baseball.
Copying which is available on the Investor section of our website at Www Dot <unk> Dot com.
For me K available on the Securities and Exchange Commission website at Www Dot <unk>.
That's.
With me today are Christian.
The Chief Executive Officer.
Mmk mask off.
Officer.
I'd like to remind you that we will be making forward looking statements, including statements regarding predictions progress.
Guidance and others, including.
Regarding our financial guidance operator.
Revenue in auto systems, and there are commercialization.
The Super ability availability, you says FRC coverage advantages Halloween or performance of our benefits or expected benefit.
Of using tactile products or technologies, including a rabbit and auto systems expectations with respect for acquisition of appetite Biosciences.
And its products in psychology, and expectations with respect to customer demand of our products and technology and grew up in our business you.
He snapped unto relies on forward looking statements because they are subject with pumpkin bread and uncertainty that could cause our actual results to differ materially from those protective or discuss including those inheriting developing commercializing products.
We refer you to the documents filed with the I C C, including our most recent form sent to you in 10-K and a recent press releases to better understand the risks and uncertainties that can cause the actual results to differ.
Any obligation to update or revise these forward looking statements.
But at all.
During the call. They will also prevent certain financial information on a non-GAAP basis non-GAAP information is not prepared under a comprehensive set of continental and should only be used to supplement an understanding of the company operating results as reported under you left gaps.
The non-GAAP financial measures compatible with us GAAP financial measures provide useful information to compare our performance relative to workout and strategic plans and benchmark performance external.
Reconciliation between historical UFC out the non-GAAP results are presented.
Within our earnings release.
[noise] appears we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable efforts.
Uncertainty regarding among other matters certain acquisition related.
During the year, including amortization itself the ecology.
Also discuss Ah recently announced acquisition Tombola.
For more information, we have posted a presentation, which can be can be found on our investors section of our website at www Dot <unk> dot com.
Please note that today's call is being recorded and will be available.
An investor section of our website shortly after the call and Doctor is electing to use the audio replay precaution of forward looking statements made on today's call me different or change materially effort solution of July call.
Finally, we will be hosting a question and answer session. After our prepared remarks, we'd have to analysts. Please limit themselves to one question. So that we could accommodate everybody him too.
I will now turn the call over to Christian.
Thank you everyone joining our call in today's prepared remarks, I'll update you on several aspects of our business first I'll discuss backfires record performance in the second quarter and highlight our commercial activities second I'll comment on radio field performance and customer uptake in its first full.
Quarter since launch.
Next I'll highlight are recent commercial launch of our of on so and our acquisition of apps on Biosystems, which was announced earlier today.
And then Susan I'll take us through the financials and guidance in more detail and finally at the close with half a year behind us all share how we're executing against our twenties twenty-three priorities I set forth at the beginning of the year.
Starting with Q2 performance the rapid adoption of ravioli drove another record quarter pack buyout as rieger revenue by 34% compared to the second quarter of last year.
[noise] exceeded $40 million in quarterly revenue for the first time in our history with each region posting record revenue.
Did an excellent job of scaly manufacturing and ramping installations, which enabled us to ship forty-five Bravia is for revenue and brought our installed base to 77 Raviolis systems as of June 30th the.
Additionally, we exited the quarter with a healthy backlog of ravioli instruments, raviolis momentum and our ability to meet customer demand have further increased or confidence to raise our revenue expectations for 20 twenty-three. We now expect full year revenue to be between 185 and.
190 million, representing 44% to 48% growth over 2022.
A diverse set of customers have demonstrated their commitment to ravioli and we have now received orders for approximately 100 different customers today, including several multi system orders <unk> bundles and steady interest from new customers in fact about 45%.
Aunt of instruments ordered in the second quarter came from new to Pac bio customers.
These included a university in the southeastern United States that had previously used in alternatives long read technology due to the throughput constraints on the sequel to V platform.
Requiring scale reproducibility and accuracy, the customer decided to re-examine the sequencing landscape and decided to invest in raviolis.
They know aim to leverage Hi Fi on several research projects with an emphasis on structural variation in its link to human disease.
New customers in the quarter also included the medical University, Ivins, Brooks, which marks the first <unk> in Austria.
The customer plans to consolidate multi approach workflows used to analyze difficult genes, which included short read sequencing Sanger sequencing and P. C. R and streamline it ended targeted long read panels utilizing hyped by sequencing.
New customer orders in the quarter also included a first instrument order in Indonesia from the Y S. D. S Foundation to group Collaborates with academic institutions and hospitals across the country to promote genomic research and improves health.
They ordered the rabbit answer a bundle to match the best suited sequencing approach with the appropriate sequencing application.
Plan to use long reads in human whole genome sequencing to build a genomic repository across the diverse Indonesian population as well as meta genomics and targeted applications in difficult to sequence genes the.
The customer plans to leverage the accuracy of sequencing by binding on on so to develop targeted panels for liquid biopsy.
Radios increase throughput accuracy indirect methylation detection continued to expand the laundry sequencing into population genomics.
Programs in the second quarter sampled a leading genomic service provider and bio repository based in New Jersey received its first ravioli and expects to start sequencing a cohort of samples for a large scale population genetics program funded by the department of veteran Affairs and.
In the second quarter. The all of US program released data from over 1000 packed bio genomes. This is an important milestone is more long read data entering the public research realm can unlock discoveries, prompting more research and interest in long read genomes exactly the type of flywheel effect.
We've been talking about that can accelerate hi Fi adoption.
Customer utilization in ravioli field performance in the second quarter indicate a strong start to the product launch customers are ramping up their revenue usage with approximately 6 million of our total 13.7 million and consumables revenue attributable to Rev. Dio during the quarter.
This strength is from is from higher anticipated utilization from early customers and some customers building a working inventory of consumables in anticipation of larger projects to come.
It was also encouraging to see customers place larger standing consumables orders during the quarter.
This demonstrates that customers also anticipate a continual flow of samples to keep their ravioli busy for quarters to come.
As a reminder, or utilization and ordering trends, though positive or early and represented the first wave of radio customers I expect that we will better understand normalised reveal pull through some time next year.
Regarding field performance on average customers that are sequencing libraries 15, K B inept continued to hit our specification of approximately 90 gigabases per smart cell.
The heart failure rate continues to improve and is well below our launch targets. Later this year, we anticipate launching system updates that will add more functionality and further improve performance.
Overall, raviolis proving to be reliable in the field.
As customers ramp up their sequencing on <unk>, it's exciting to see the first wave of scientific publications that this new instrument has powered.
In one preprint researchers from Washington University, and the University of Maryland began sequencing on radio and noted that quote.
Highly accurate longer EW G. S. On the pack by Arabia's system is consistent and can generate 30 X genome coverage in one smart cell and quote.
They also found consistency across smart cell's coverage detection of variation methylation and dinovo assemblies.
In another preprint researchers from the international we'd consortium a group of twenty-four institutions reported that sequencing of 80 plant species with <unk> and they describe how this enabling tan genomic analysis with the goals of develop developing sustainable and effective we've been.
Troll methods and to provide insights about the environmental threats that can greatly reduced crop yields.
A third example, a benchmark study by the all of US consortia demonstrated that sequencing data assemblies invariant, calling from ravioli were essentially identical to sequel to I five datasets, but required only one raviolis smart cell instead of three sequel to smart cells.
Additionally, this study compared the latest Pac bio Hi, Fi and Nana poor methods consistent with previous reports they observed that Nana port data resulted in a much higher error rate in in del calling then hi Fi data.
And that certain variant classes had lower precision with duplex Nana poor data compared to standard vanna poor data.
Customers are please not only with <unk> and it's game changing throughput in economics, but also with the quality of service that Pac bio provides with that I am pleased that our our annual customer survey was completed in the quarter, resulting in a final net promoter score of 62.
This demonstrates our commitment to delighting, our customers and we look forward to continuing to offer best in class support to all of our customers around the globe.
Switching gears from long read the short read I'm excited to announce that earlier today, we shipped our first commercial answer system.
The sequencing by binding or SBB chemistry, which is at the core of the answers system was the early stage technology, we acquired from omnium less than two years ago with the promise of delivering customers an extraordinary level of sequencing accuracy.
I congratulate the entire team backfile for developing this technology into a highly differentiated platform designed to offer customers sequencing accuracy of 90% of bases at Q40, plus levels or one error in every 10000 basis.
A specification that we believe no other sequencer currently advertisers.
This is truly monumental a truly monumental moment for Pac bio as it's our second sequencer launched in less than six months.
We believe it positions pack out as the only sequencing company to offer assistance, specifically designed for both long and short read sequencing and marks the next step in our strategic journey to becoming a multiplatform multi omit company that aims to deliver solutions across the genomics ecosystem.
One of the first answer systems is going to the translational genomics Research Institute or T. Gen and early collaborator who found that SBB demonstrated the ability to accurately detect ultra low variance without the need for high complexity error correction in a broad range.
[noise] of applications, including infectious disease and liquid biopsy.
Now that we are shipping commercially we plan to scale manufacturing throughout the second half of 20 twenty-three. Additionally act bio expects to complete the installation of this answer a instrument and ship related consumables later this month.
The milestone payment associated with Pac bylaws acquisition of omnium will be triggered once both the answer instrument and related consumables have been shipped.
Also is expected to address a significant portion of the short read sequencing market, particularly where researchers are looking to find and understand very rare variants as.
As these discoveries are made we believe that these researchers will then want to scale bear experiments, which will require a highly accurate high throughput short read sequencing platform. Therefore, our strategy is to develop a multi product portfolio with both mid and high throughput short read platforms based on our.
S B B chemistry.
As a result of our strategy I'm pleased to share that earlier today, we announced that we entered into an agreement to acquire App ton Biosystems, a bay area based company developing a high throughput short read sequencer using state of the art clustering chemistry optics and image processing.
And working with apt on for the past few months, we found that apt on sequencing platform is capable of generating generating SBB quality data in a high throughput sequencing system.
The combined company, we expect to integrate and further optimize the extraordinary accuracy of SBB chemistry, with the App Dawn's advanced optics and imaging technologies to develop a differentiated high throughput sequencer when launched we expect this platform to deliver billions of reeds for closed cell.
Sequencing I'll put on par with other high throughput offerings, while providing differentiated accuracy and compelling economics.
Increasing density and throughput is one of the key development challenges in launching a high throughput sequencer and Anton will give us a significant headstart in that development, we are bringing over several talented engineers and scientists from abdon lean organization and I've already started planning the development of this next generation.
Sequencer.
Of course, many of you may be wondering how this acquisition will act our operating expenses going forward.
Developing a high throughput short read sequencer has always been on our product roadmap and the acquisition will accelerate our development other high throughput sequencer and is likely to reduce her overall R&D expenses required to develop the system. Therefore, we remain committed to delivering on our long range targets while keeping.
[noise] Opex under 5% compound annual growth through 2026, and this acquisition is not expected to deviate Pac bio from that target in fact, Susan will discuss shortly that we expect the operating expenses to be lower than previously anticipated in 2023.
And with that I'll pass the call over to Susan to discuss our financials Susan.
Thank you Christian.
We reported 47.6 million and product service and other revenue in the second quarter of 2023, which represented an increase at 34.1% from $35.5 million in the second quarter of 2022.
Revenue in the second quarter was 29.9 million an increase at 91.6% from 15.6 million in the second quarter of 2022.
They continued momentum of radio primarily drove the increase in revenue as we ship forty-five radio systems for revenue in the quarter. We ended the quarter with an installed base of 77 radio systems hire a piece in the corner where in part due to the lower customer loyalty discount extended to customers. In addition.
To more new customers, who ordered their first radio and Q2 relative to Q1.
Turning to consumables revenue of 13.7 million in the second quarter declined 5.7% from $14.6 million in the second quarter of last year with approximately 44% of consumable revenue coming from radio systems and the remainder from other systems and other consumables.
We expect equal to into we at the percent of total conceivable walls to decline throughout 20 twenty-three at we continue shifting ravioli and customers transition to the new platform.
Finally service and other revenue with $3.9 million in the second quarter compared to $5.3 million in the second quarter of 2022.
From a regional perspective at Christian mentioned earlier, all beaches posted record revenue in the second quarter.
America's revenue of 24.1 million crew, 10% compared to the second quarter of 2022.
Increased interand places with higher asp's more than offset a year over year decline in consumables and services related to customers transitioning to the new platform.
Instruments include continued adoption from children's hospitals at sick Kids became the first customer to receive a radio in Canada and plans to utilize hi Fi long reeds for assisting fibrosis variant calling project.
For Asia Pacific revenue at 12.9 million grew 61% over the prior year with both instrument Inconsumable revenue growth.
We are pleased to see such strong performance from all regions. In addition to China achieving record revenue in the quarter.
Additionally, we're excited to have onboard at a new distributor D. K S. H, who will provide improved sales marketing and after sales support in southeast Asia as well as back best in class supply chain and warehousing.
We're seeing progress with the new destroy their as they have already booked an order for a reveal onto a bundle in the quarter.
And other customers in APAC are showing signs of initial interested in the answer platform with over 50% of our answer orders coming from the region.
Finally, a near revenue of 10.7 million crew, 87% over the prior year period, driven by instrument growth, which included customers like the University of <unk>, who has been a pack bags or for over a decade and with revenue they intend to see other services, the scientists and researchers across the country.
Moving down the P&L a gap gross profit at 15.5 million in the second quarter 20, twenty-three representing the gross margin of 33% compared to a gap gross profit of 16.2 million in the second quarter of 2022, which represented the gross margin of 46 per cent.
Second quarter 2000, twenty-three non-GAAP gross profit of 15.7 million represented a non-GAAP first March 30th.
Compared to a non-GAAP gross profit of 16.4 million or 46% in the second quarter of last year.
Gross margin declined year over year due in part to instrument next at radio instrument sold during the quarter had a lower Martin primarily due to loyalty discounts provided and higher initial manufacturing costs.
non-GAAP gross margin in the second quarter improved sequentially from the first quarter largely due to a higher average selling prices from lower average customer loyalty discount. In addition to more new customers, who purchased their first radio system.
While we expect gross Martin to expand during the remainder of the year gross margin could fluctuate depending on the pace at which sequel to two we demand decline radio E. S. P N pru's and unit manufacturing of material cost decline.
GAAP operating expenses were $88.7 million in the second quarter of 2023 compared to $84.2 million in the second quarter of 2022, non-GAAP operating expenses were $86.7 million in the second quarter of 2000 twenty-three representing a 3% decrease from non-GAAP operating sense.
Is that 89.6 million in the second quarter of 2022.
The increasing gap operating expenses, primarily reflects an increase in the fair value of the contingent consideration liability during the second quarter, 20th 23 at 2.1 million related to the milestone payment to omnium shareholder compared to a decrease at 5.4 million in fair value of contingent consideration and the second <unk>.
Order of 2022.
non-GAAP operating expenses declined year over year, primarily driven by lower R&D expenses, resulting from the transition of radio from development to commercialization, partially offset by increased sales and marketing expenses, primarily related to increase investment in the commercial organization.
Regarding headcount we ended the quarter with 818 employees compared to 793 at the end of Q wide in 2023 and 782 at the end of the second quarter of 2022.
Operating expenses in the second quarter included non-cash share based compensation is $16.7 million compared to 18.1 million in the second quarter of last year.
<unk> net locked in the second quarter of 2023 was 69.8 million or net loss at 28 cents per share compared to a gap net losses $71.4 million in the second quarter of 2022 or a net loss of 32 cents per share non.
<unk> net loss was 65.6 million, representing 26 cents per share in the second quarter of 2023 compared to a non-GAAP net loss of 76.6 million, representing 34 cents per share in the second quarter of 2022.
Turning to our balance sheet items, we ended the second quarter with 829.9 million in unrestricted cash and investments compared with 874.9 million at the end of the first quarter of 2023.
They're changing cashed primarily reflects our operating loss with interest income offsetting expenses associated with our convertible note exchange.
Inventory balance is increase in the second quarter to 67.6 million, representing two point out and they tried to turn compared with 52.1 million at the end of the first quarter of 2023, representing 2.1 inventory to turn.
The increase in inventory primarily.
<unk> T mobiles inventory.
Accounts receivable decreased in the second quarter to $24.1 million compared with 29.6 million at the end of the first quarter of 2023, resulting in our D. S. L 51 days declining in the second quarter compared to a D. S. L 56 days in the first quarter of 2023.
Turning to guidance as discussed earlier, given the continued momentum and <unk>. We are increase are increasing our guidance for 2000 twenty-three. We now expect revenue to be $185 million to $190 million, representing a growth rate of approximately 44% to 48%.
Compared to 2022. This represents an increase of 10 million at the mid point.
Our guidance it seems modest sequential growth in revenues system placement in the third and fourth quarters.
Moving down the P&L, we expect 20 twenty-three non-GAAP gross Martin, which will exclude the amortization tangible assets to be in the range of 32% to 34% we.
We expect margin expansion beyond twenty-three as radio placements will help drive a next shift toward higher marching consumable and higher volume and manufacturing efficiency striding lower unit costs.
We now expect non-GAAP operating expenses to grow less than previously expected at 3% to 4% growth compared to 2022.
As mentioned earlier today passed by a required at time upfront consideration of approximately 85 million and an all star transaction, consisting of approximately 6.3 million shares of passed by a common stock plus an additional 25 million in soccer cash at <unk> option.
Payable in connection with the achievement at 15 million and cumulative revenue related to the commercialization of a high throughput sequencer based on <unk> technology for an overall transaction valued up to approximately 110 million.
We expect that go for development expenses related to the acquisition to be absorbed within the non-GAAP operating expense growth guidance at 3% to 4% compared to 2022.
Additionally, we expect interest income to more than offset interest expense for the remainder of the year.
Pacifier expense expect to complete the installation of the first answer instrument and ship related consumables. Later this month the milestone payment associated with Pac bylaws acquisition of omnium will be triggered what's both the answer instrument and related consumables have been checked.
As a reminder, this commercial milestone represents $200 million with approximately half being paid in cash and have an equity.
We expect the weighted average share count for E. P. S for the full year to be largely unchanged at approximately $255 million on.
A hand, it back to Christian for some final remarks Christian thank.
Thank you Susan.
With half the year now behind US I wanted to provide a status update on our five strategic priorities for 20 twenty-three are.
Our first goal was to drive rapid adoption of <unk> by converting existing sequel to in two weeks customers and attracting new customers in.
In the first half of this year 40 per cent of our system orders were to new Pac bio instrument customers and looking at the pipeline in the second half we continue to expect about 40% to be new customers, which exceeds our expectations.
Further as shown by our ramp and revealed consumable then decline in sequel to consumables customers are eager to begin sequencing on the new platform.
Our second goal was to demonstrate answer is extraordinary level of accuracy in the field and show how it can transform research a needle in a haystack applications as.
As discussed earlier, we heard excellent feedback from our early collaborators in beta sites about the quality of data they get from on so and how that can translate into improved research with one beta customer telling us he's had several runs with raw quality scores above 250 <unk>.
<unk> has not seen using alternative sequencing technologies with.
With the beta program complete and commercial shipments underway, we look forward to getting Q40, plus accuracy into more customers labs, and continuing to adhere customer success stories.
While commercializing revenue in answer was a top priority. This year. It was just as important that we drive our development efforts towards the next generation of long and short read sequences. We continue to make progress on future long reads shifting R&D resources from revenue onto the development of our Benchtop laundry and our ultra high.
[noise] throughput laundry systems further apps on now gives us significant headstart and developing the high throughput version advanced so which will allow us to address one of the largest parts of the sequencing market.
And as I've been communicating I expect Pac bio to deliver new and differentiated instruments at a much faster cadence than the organization that previously delivered.
Next was expanding partnerships across the ecosystem and work flow to drive to S. P B and hi Fi customer adoption.
Earlier this year, we launched the pack Biocompatible program and signed on nearly 20 partners across extraction and library prep automation sample prep and secondary and tertiary analysis, we expect to sign several more partners. This year and we've already seen several examples where these collaborations of <unk>.
The increased pack.
Sing.
Laughs, but certainly not least is our drive toward being our goal of being cash flow positive during 2026.
On top of executing on our product launches the Pac bio team has done an excellent job of unimproved <unk> our financial position.
We achieved record revenues in the second quarter with an expectation of 46 per cent growth. This year at the mid point of our updated guidance.
Discuss we also expect operating expense growth for the year to be 3% to 4% over 2022 levels, which is below our 5% compound annual growth target through 2026.
Additionally, we further strengthened our financial position in the second quarter by exchanging a significant portion of our nose do in 2028 and extending the duration of our debt while lowering our coupon payment.
As you can see it's been an exciting and rewarding first half of the year for us it back bile and we look forward to sharing more as the year progresses and with that I'd like to open up the call to questions operator.
Thank you very much we will now begin the question and answer session to ask a question you May press start that one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys.
To withdraw from the question can you. Please press start then too.
As mentioned in the interest of time, please limit yourself to one question only if you have a follow up you May then re enter the queue.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Matt Sikes with Goldman Sachs. Please go ahead.
Good afternoon. Thank you take my questions congrats on the quarter.
Maybe I just want to start out with sort of a high level question. The <unk> acquisition Christian you've talked about you.
You know being able to leverage the scale up of answer a customer's eventually into high throughput.
But I'm also one reduce open up an additional market for you within a short read the answer cannot address and you take care of the growth in the song would warrant the investment that you're making in terms of R&D and development.
Yeah, Matt. Thank you for the question and thank you for the congrats on the quarter. It certainly opens up more of the market to us and that's why this is that's why if you go back and look at our core strategy from the get go it's been how do we develop multi product multi all my portfolio.
<unk>, so that we could reach customers at different levels of demand and optimize our solutions for the problems that each kind of customers solving also does a great job of reaching the mid throughput part of the market, particularly given how strong the accuracy is it in fact for.
Fewer reads you can actually get more work done because the I agree. So hi, we're gonna employ we're going to deploy that same kind of chemistry. The S. P. B chemistry on the App time platform and that will let us get to the very high end of the market and we we believe that once we develop the system will be capable of delivering a product that.
Delivers billions of Reed for closed cell per run with very competitive economics with anything else out there and so you're you're exactly right. That's part of the strategy is that apt on will enable us to reach part of the market that perhaps on so I couldn't get too and and really round out our.
Offering in in the short read space.
The next question comes from Kyle Nixon Kenacort. Please go ahead.
Yeah. He got it thanks for taking the questions congrats on the corner and the acquisition of congrats to John hand over their laptop can I call you guys. So I guess just two part question is the first time the guidance would you mind, just talking about Christian Susan what you're sort of baking in terms of the macro environment and a second half of the year. It is kind of evolving it's quite fluid, but you guys seem to be able to.
We're optimistic and then secondly, an app on I mean, I guess just.
What what does Pac bio kind of bring to the table to enable apt on to go from like this kind of stopped mode situations kind of competing with you know because these bleeding and emerging companies and and hydro she'll read like a woman and ultimate.
Sure Kyle Thank you very much for the questions you know starting with the start when it starting with the guidance you know we were.
We are looking at our forecasting we are evaluating our performance here to date and you know what we're really seeing in the market is that <unk> is really dry.
<unk>, there's a lot of momentum we have a very strong backlog physician and so just starting from that position of strength I think helps us in the economic backdrop. One thing that was surprising to me is how fast our <unk> customers are starting to utilise their system.
<unk> and driving the consumable revenue and so that encourages us as we kind of look into the back half of the year now the the world around US you know Raviolis certainly you know, it's nice to have a new very powerful product in a in the early part of its product cycle in a in may be what could be <unk>.
See if there's a pretty tough macro environment, particularly in say a in China for example, but but the truth is we've seen very strong demand and we continue to see strong demand. If you look at China's specifically of course, you know we have a small customer base and so I don't I don't think we're I don't think we're at.
Has impacted yet by any of those macro.
Macro headwinds that perhaps some of the larger companies are seeing so you know, we we looked at or what we've done today looked at the backlog looked at the the order forecasts looked at the fact that we're gaining so many new customers with radio and that new customer acquisition really is what's gonna help propel the growth not only in two.
The three by 24 and beyond and so that's that's kind of how we thought about it if.
If you look at you know if we move onto App App time.
Pac bio brings so many things to act on we bring scale, we bring commercial channel, we bring deep experience on how to execute and build create products. In fact, we demonstrated that right I mean in less than two years from the omnium acquisition. We've got we've got the product to market and.
And it's a dynamite product, we're really excited about it <unk> of course, we've we've talked a lot about rabbi over the last six months and you know here's a company, we're able to deliver both products within quarters of each other to the market and so I think the <unk> team kind of saw that.
What what really as exciting as the fact that the app time instrument and <unk> and that capability exists already and in fact in our diligence we have demonstrated that SBB chemistry works right on the platform out of the gate and so what's what's so great about that as it accelerates our <unk>.
Tech development dramatically because we can start on day, one with a working instrument that we can know optimize the chemistry before and we can optimize the instrument to make it consistent with our industrial design, our expertise or manufacturing capability and so we can <unk> we can.
Very significantly speed up the the development. So I think that I I think we bring a lot to the table you know I I do I've built a great relationship with John and you know he's coming across as as well as part of the acquisition. So we're just really excited today and <unk>.
Given the fact that <unk>. The omnium you know the answer a product is getting out the door. We do have resources to be able to take this product on without absorbing a lot more P&L, which I think is exciting.
The next question comes from Jack <unk> with <unk> Research. Please go ahead.
Thank you good afternoon.
First is on consumables is it possible to sure sort of a range of smart fellow utilization, you're seeing <unk> in the field I understand the consumables can be lumpy, but thought the data generation could be a good early proxy for that and then second just maybe more broadly Christian.
<unk> is it possible that call out like where you think you might be gaining share with <unk> versus areas that were legacy Schwerdt Reed, how does that compare to your expectations a few months ago.
Sure. Thanks, Jack for the questions you know with respect to consumers, we're not <unk>, we're not we're not going to break those things out right now as you can imagine what it's still really early in our launch what I can tell you is that that the utilization metrics had been.
At what we expected or even a little bit about what we expected and so we're seeing our customers get off to a good good start which means they understand how to use the system, they've got projects and their and their Google or as I said or in my prepared remarks, you know, we've been seeing more and more standing <unk>.
Orders come in this is huge for us because as we scale as a company. It allows us to optimize our manufacturing so that we know when we're gonna need to be shipping consumables and we know those projects are out there and so I I know I know the whole world wants to know you know is the consumable through pull through what does that.
Number gonna look like and how fast are we gonna get to kind of our steady state and I would stay where I'm at word certainly on the upward slope of that curve right now, but but we're not really prepared to make remarks on you know where where that curve is gonna end up the other than to say that you know we're after a good start probably a little bit better than what we.
Expected.
With respect to you know ravioli, gaining on the short read space or our market share in general you know the one thing.
And I'll just re 0.2 are in our prepared remarks, you know we did have one significant win in the quarter that I that I highlighted where where there was another long read technology entrenched in the account and they are converting basically the vast majority of their business to <unk> because they C D.
Utility of the product versus other approaches with respect to short reads I think we're what we're seeing is that in population scale programs in particular, you're seeing start to take share in the sense of a project that was once it's gonna be completely.
A short read project is now the scientific design experimental designers be thinking through how do we integrate long reads into that and taking a portion of of those and we've seen several of US are examples of those already just did in the first you know first little bit here of the Raviolis story and.
And we're seeing in our funnels actually major opportunities to take 10 tens of thousands of samples hop Fry in these kinds of programs and we'll see how that goes you know over the course of the year, but I think what I think what you're seeing is that the.
Comprehensiveness of Hi, Fi coupled with the <unk> with the performance of <unk> in that simplicity and the ease of use Andy informatics burden is really putting us in a position to make significant gains here and and that's really that's been the strategy all along and here we are starting to really execute on it hopefully that hell.
<unk>.
The next question comes from Dan Brennan with T. D. <unk>. Please go ahead.
Great. Thanks, Thanks for the questions. Congrats on the corner, maybe just a multipart or just Christian you talk several times throughout about the very strong backlog it sounds like brookville could've been notably above one. So first question would be any any color their.
Secondly, and refusing talked about reveal placement a modestly quarter to quarter.
Just wondering any color on what drive the pacing is it manufacturing capacity is.
As a customer readiness is at the sides of your final and could you accelerated further and then the final one would just be an implied in the revenue outlook, while you're not gonna give a pull through number could you. Please help us going through the mix between instruments and consumables.
Sure.
Thanks to answer the questions. So one thing, we we aren't talking about quarters and I've been making a point of this so since J P. Morgan and actually that we're not gonna talk about orders. We did have orders come in on our expectations for the corner. We are in a healthy backlog situations will be talked about.
<unk>.
You know <unk>.
Yeah of course.
It gives us some predictability of on our revenue, but also every instrument that sits in backlog does not generate consumable revenue and does not propel us forward in terms of longterm growth and so our strategy is to try to whittle that backlog down over overtime, which you'll see a start to do.
And we've got manufacturing now basically to a steady state where we can deliver on on what we expect to deliver for the remainder of the year and and we'll see you at the end of the year or or basically as we go forth when we need to increase capacity, if if we need to <unk> capacity, it's at <unk>.
Sarah.
Revenue of pacing itself, you know Susan did say modest increase sequentially kind of moving forward. You know I think we're just taking a a very straightforward approach to kind of continuing to build a business continue to serve our customers well we've been doing some hiring with the fields support team.
<unk> to make sure that we can address issues in the field and so you know when you look at how we push this business forward. We really are trying to think in totality of how do we create amazing customer experiences so that repeat customers get grade data, which create the flywheel more leads for instruments.
For more pull through down the road and so you know when we think about how we deliver for the rest of the year.
We try to we try to think through those things as far as manufacturing goes specifically you know I do think we have.
Capability right now to do to do pretty well over the course of the year and we always can increase capacity down the road, if we need to finally with respect to product next <unk>.
Product mix is gonna be really important in 24 23, as we've been saying all along is going to be a very instrument heavy year, and we'll start to see customers ramping they're they're <unk>. We still you know we still have some questions about how fast sequel to ramps down and revealed.
Ramps up so that that's an area, where we're watching them or trying to understand shake too, though you know we saw the <unk> growing quite a bit and the sequel to starting to ramp down so basically in line with our expectations, maybe <unk>, a little bit a little bit higher than we expected.
In the corridor and I suspect will probably see some of those trends continue.
Continue through the rest of the year. So it's.
It's very instrument heavy gear does it continue to be rude, but <unk> consumables are starting to really shine.
The next question comes from 17 with Scotiabank. Please go ahead.
Hi, Thanks for taking a question uhm and congrats into quarter and the acquisition I'm just trying to sequencing coverage for <unk> I don't know if it's too early to tell or you know I I realize it also depends on the application but.
I was wondering if you might be seeing more of your customers, especially maybe for the population scale you know project, taking advantage of lower coverage.
You know given that that could provide more I'm more attracted economics, just kind of curious what what <unk> you might be seeing there. Thank you.
Thank you said G. That's actually a great question and I. Appreciate it you know with with traditional short read sequencing 30 X coverages is kind of the benchmark.
Truth is that the customer's always are making their own coverage decisions based on the application, but if you compare 30 X short read sequencing with Pac bio sequencing you know I do think more and more every single week customers are are seeing that you know less than 15 <unk>.
Coverage can get you very significant performance relative to 30 X coverage and as a result, you write the economics get even better. If you just use 15 X and you use $995 list price, which is what our list prices for a genome on <unk> you know.
<unk> list, it's it's basically a 500 dollar genome. So you know the.
The economic gap between long and short read is really shrinking quickly when you look at it on coverage metrics and thinking about your experiment and there's no question that the population scale.
Customers are thinking through that and leveraging that that ability to get great low coverage and very high accuracy comparable with 30 Act.
Now in other applications customers are still gonna Wanna do 30 extra perhaps even more brabson. Some oncology some rare disease, you know, where you're looking where you're trying to make a decision about a patient or trying to understand translational research situation and so in those.
Cases, I suspect they might be doing different coverage models other than that but I. It was important for us to start really helping the world understand that you don't need 30 X coverage and are 30 X coverage and laundry is very different than 30 X coverage in short reads and I and I do think I'm I'm actually really thrilled.
The the world seeing that and some of our best customers are actually promoting that so.
That's great.
Great reason for you to be getting into long right.
The next question is from <unk>, Sir again with Barclays. Please go ahead.
Alright, Thanks, guys. So I guess the first one I've just kind of wanted to get a sense of the timing and a strategy there from apt on I understand how it fits in a portfolio et cetera, but I. Just you know you guys are in the midst of the biggest launch of of the company history between the two instruments. You know is there is there a risk.
There that you could be biting off more that you could chew from an organisation I know that a Christian you'll you'll drive them aren't enough.
Trying to think in there from a timing perspective, why not build up some cash <unk> sexual launch out there and then do the deal because it was stolen early stage she'd round I guess.
And then my second one is as you think I know you're not gonna give any orders replacement, but it sounds like the <unk>.
The orders were left in the ship mentioned you guys burned down some backlog is there is there something from the the April time frame, where you were kind of going you know not not full bore there just any kind of color on on the pacing of the orders that have been coming in.
Yeah look thanks for the questions first of all with respect to <unk>, and then I'll get to the I'll get to the backlog.
With respect to <unk> <unk>.
We have had this strategy to build out a multi product portfolio in short reads. We think it's fundamental to address the entirety of the market and to really maximize the value of SBB chemistry Uhm. We have built a team that is it is highly capable of executing and <unk>.
Will still be working on you know anytime you launch a new platform you still working on that platform for a bit of time after but the the app ton technology is far enough along they've been working on it for many years, it's far enough along where there you know we already have a working systems you know the deal is gonna <unk>.
Closed shortly here and we'll have systems in San Diego and in in Menlo Park. So that we could start optimizing that chemistry right away. We think that's really really important because.
Athletes start to gain some momentum with aren't so and S. B B chemistry in particular, we want to convert that momentum into routine usage, perhaps in liquid biopsy applications. For example, and routine uses just gonna require high throughput. It's just there's no two ways about it we believe that.
There is a market window, where we can get a new high throughput product to market in a window that will make it highly competitive with anything else out in the world and so that's so time is certainly of the essence Uhm you are right. We are you know pushing the team hard, but I actually think I'm not pushing I think.
Everyone is pushing need just as hard which is just such a great place to be because of the company's never been in that position before so now is is the best time to plant a tree is 30 years ago. In the next best time is is today and ended with this acquisition of apt on it really gives us an incredible heads.
Start to accelerate the development get get a high throughput product to market have a complete portfolio allows us about to drive not only revenues a stronger gross margins and really go to customers would that complete offering. So we're thrilled with with getting this done today and quite frankly, we need to get.
At the end of the day to keep pushing on our long term goals uhm with respect to the backlog you know as I said a few minutes ago. We are orders for the quarter ended up wherever you were expecting them. You know we're on track for a year with respect to orders and our objective is to burn down some of that back.
Clark we are actively trying to trying to do that over the course of the year. So that we can get more consumable revenue sooner consumable revenue sooner means gross margins get better faster gross margins better get better faster increases our ability to drive to cash flow positive, which is a really important.
Consideration for the company right now I don't think I go into a single strategic planning meeting without talking about cash flows as the first first first item on the agenda, then maybe it's because I'm an old CFO , but I do think it's critical to create sustainability here in in the face of increasing.
And I think we can do.
The next question comes from Rachel that installed with J P. Morgan. Please go ahead.
Great. Thank you for taking the questions and congrats on the street corner. So I wanted to get some of your comments on the gross margin mine <unk> gross margins at 32% to 34% for the year. We also mentioned that that gross margin line could fluctuate based on radio a pain cause superbowl's on sequel to into E. So can you just walk us through.
What's actually contemplated an accurate marching guidance for the year and then how should we think about the library, it's impacting that gross margin progression eight to 2024. Thank you.
So Susan do you want to cover it'd be what's going on I'm twenty-three and all kind of work into 24, yeah. Yeah. So I'm happy to so here, we have faced in <unk> plus marches to E. S. P. N for radio and then also in addition manufacturing efficiencies with manufacturing the <unk>.
Instrument, so if I start out on the a S. P side you see that just in terms of the calculation. The a S. P has improved in Q2 relative to Q1 and given the backlog and N. B. A final. We have ahead of us in terms of orders and and transfer you expect to ship me do expect that the <unk>.
E S. P for the <unk> instrument will be consistent with will be wearing cute too or slightly better. Thank you too. So that was baked into how we estimated arcturus Martin and then also with respect to manufacturing the instrument or manufacturing team has done a great job of improving efficiencies with building that instrument one.
<unk>, we haven't touched time on building that instrument and that touch time has been coming down it's come down in key to relative to Q1, and we are making an incremental improvements in those efficiencies to build <unk> instrument, which is helping our gross margin.
And our gross margins for the year, two or the radio consumables and we are improving in terms of yields and how we're doing their which incrementally reduce the cost to manufacture consumable. So all of that has been factored in when we kite R. R. Yeah, Yeah, and so that's that's helpful. Susan and when do you think about it you know.
Anytime you have a lawn cheer you certainly have lower gross margins, but we also had you know the complexity of a pretty fundamental product transition with sequel to.
<unk> and also kind of the lingering effects of Covid. So Unfortunately, we did have you know we have had higher right off in the first quarter in particular, which impacted our gross margin expectations for the year and so Susan's right as we continued to drive costs out.
Yeah. The system, that's gonna help our gross margins, particularly in 2024 and also a S. P's will will likely kind of achieved steady state by the end of this year and into 2024, and <unk> and and so I think that those are really positive signs and a pop.
Some signals that are <unk> that are gonna help drive gross margins up and finally, you know perhaps most importantly of all is the fact that the <unk> instrument can drive much higher consumable pulled through and therefore, the product mix will start to change I would imagine you know later this year and into 24.
And probably into twenty-five too that you start to see more of a traditional mix of consumables to instrumentation, which will also.
Very significantly help our gross margin over the next few years here. So we're we're managing aggressively at the team's doing a good job, but we have a lot of work to do.
The next question is from pages seven <unk> Morgan Stanley . Please go ahead, and Hey, guys Uhm. Good evening. Thanks for the time Christian I know you don't want to comment on on a review order backlog. So maybe maybe I'll I'll take a different tack on that question because I think it's an important one.
Can you help us sort of frame historically at what point in a product sort of launch cycle would it be normal to see the backlog start to come down and any color on what kind of a backlog or you're looking at you know in terms of where you'll be a dear and heading into 24 [laughter] and then my.
Second question really is on on the on the other side of things you know I know he likes to do that prudently from the 23 <unk>, but as we think about that angel ramp in 24, any any sort of like <unk>. How do you see that interacting based upon your feedback from early customers. Thank you.
Thanks <unk>.
So starting with you know kind of the the backlog in and kind of traditionally what happens when you have a new product cycle Oftentimes you first go to your existing customers and drive you know drive heavy orders in that way and then you work to new customers and so the order book with.
Look like a bit of a.
Yeah, you know kind of an increasing curve in a plateau and then another increasing curve.
Right now I would say, we're kind of in the you know we're still at the tail end of the increase and starting to be in that plateau phase and what what that means is that new customers are are starting to really taking notice they want to see how the data is from the best customers.
They want to make sure. The system you know the system is working as intended if you look at our sales subtle our sales fun else continue to grow and and be strong globally and so you know I I do think our objective is to whittle the backlog down some I do think that we see.
The incredible opportunities for demand too and as a result, we've raised our guidance significantly this year and you know we're off on.
<unk>, a whole new trajectory as a company and I and I think that's really what we're seeing right now so very excited about the order book <unk>. You know, we do have a super healthy backlog that continues to propel US forward. We've got we've got to start whittling that backlog down so that we can make sure we get.
The consumable pulled through and the consumable revenue, which will drive our gross margins as I said before now the answer or App you know what's amazing about on so is that it's an instrument that we can reach with the <unk> same sales team and the same call point and since we have a global organization.
<unk>, we can you know we've seen a lot of opportunity and a lot I I think the majority of the early orders actually are coming out of Asia. For example, so we're seeing strong demand in Asia strong demand in Europe and this is where are the emerging companies. You know just don't have the capability that we have it and the scale and.
So I would expect us in you know will look through the rap in 2023 of manufacturing and making sure the products robust in the market and and providing our world class service and support so that we get great datasets out there we've seen a lot of momentum building in the in the sales funnel and that's.
Why I was so important for us to you know get across the goal line as I said back in June we had you know some validation and verification challenges that we were working through you know we've largely work through those now and we're scaling manufacturing. We're very happy you know the runs that happened over the weekend for the first shipments.
Here were fantastic and so we're just we're really excited about where where that product is going and when you look at 24, you know, we're gonna leverage our scale and really really press our advantage scale wives with a product that I think is has excited a lot of customers and so we'll see how we do.
The next question is from <unk> I was born with Cantor Fitzgerald. Please go ahead.
Yeah, that's on the corner and thanks for taking our questions. So maybe it's just one for us on the laundry market, probably historically I believe the company's view is that you in Oxford did not overlap as much as people think this still the case mcwhorter and in terms of new customers attacked by you or are they new users to laundry or did you, perhaps the more conversion from Oxford This corner.
You know the App.
<unk> those are good questions. It is difficult to you know I wouldn't say customers use multiple technologies and so when you started to say you know conversions.
It's not it's a little more nuanced than that you know, but I do think when you look at scaled users. The the the the the example, we pointed out in our opening remarks was really scaled user moving from Nana poor too <unk> because.
Have the capabilities of <unk> you know in the past, we just never had the throughput or the economics to be truly competitive even though we add higher accuracy easier easier to use workflows et cetera, but the reality is we just.
Scientists couldn't do the experiments they wanted to do now with Red Yeah, we're actually penetrating all over the market with you know with a product that really.
That really meets our customers needs and so I would say that I would say that broadly speaking we.
For for high throughput scale of users it's competitive.
But we are we are seriously making in roads and then there's a part of the <unk> laundry market that <unk> technologies served that we don't serve and that's the kind of single use thousand dollar low low throughput part of market, which we're not really that engaged with.
Because that's not where our focus is and so I would say in the areas, where we are focused were highly competitive and and and you know both I think we already lead that part of the market, but we're gaining traction as well.
Today's final question comes from John salary beer with U P. S. Please go ahead.
Alright, Thanks for taking my question here with you. So I guess now that you're new to two quarters into the the revenue of watch just how are you thinking about the upgrade cycle from here from the sequel to Yo is at 322211 to one any color. There and then we're gonna have to follow up on the on the <unk> any color on the on the backlog mixed on what are.
Standalone onto orders versus ready also combo packages.
Yeah. So John that's a good question I still believe that in the long run, it's it's more more likely to be closer to one to one.
<unk> to the sequel to install base than than say anything else I think in the early days, we have seen probably more than the three to two or or even even two to one kind of.
Range, but I think that's because.
The system is 15 times more capable than the sequel to and so people are scaling into the into the platform.
You know I'm, leveraging a lot of gray hair and a lot of experience with launching platforms that are significantly more powerful than their predecessors, and it's so far it seems like in my experience. Almost every single case, you've seen a dramatic you know ultimately say a coupla years post launch that that.
Old installed based largely does turn over to the new products on close to a one to one basis, it's still too early to see but I don't think our view has changed any since since our last quarter last our last call last quarter, and then lastly, with respect to with.
With respect to the answer platform you know I don't have the numbers right in front of me, but it's about it probably is about half right a little maybe a little bit last little bit less than half are bundled deal of the orders we have so far but I don't have the numbers right in front of me.
My expectation is I I think it's a really powerful unique offering that pack biohazard no. Other company asked the ability to have highly accurate short reason and highly capable long reads you know in a bundled arrangement where you can you know you don't you're technology doesn't drive your experiment.
What kinds of applications and what kinds of answers you are looking for drives what your checking out the what your decisions are and given our ability to you know to work very closely with our customers, perhaps maybe in a different way than others.
I do think can give our customers a lot of confidence that when they come to backfire, we're gonna serve them and you know really focus on on meeting their needs with great technology. So thank you for the question. The only one thing I was gonna add <unk> is with respect to add that so we gave the statistic that there Ah hundred customers that.
I have ordered a radio system and if you compare that eat into the installed base. The sequel to that's about a third of the customers who have a sequel to and so the the vision that <unk> access more and more of the market and more new customers even by the fact that the number of orders coming from new customers is 40% and we <unk>.
That to be the case going for it for the next couple of quarters, they're accessing more of the market and so the installed base of <unk>, we expect it to be much larger than the sequel to share.
Well, perhaps that's a great place for us to wrap up for today.
Sounds good yeah. Thank you all for joining US today. This this will conclude our call and the replay of today's call is available on our best reception and we look forward to updating your throughout the quarter and the rest of you on our progress.
Thank you to call has now concluded.
Thank you for attending today's presentation you may now disconnect.
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