Q4 2023 Pacific Biosciences of California Inc Earnings Call
Operator: Ahem, ahem, ahem. Hello and welcome to the PacBio fourth quarter 2023 earnings conference call. All participants will be in listen only mode.
Hello, and welcome to the pack bio fourth quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Operator: Should you need anything, and Daniel, a conference specialist, by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad, and to withdraw from the line, press star, then 1. Bye.
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Todd Friedman: I would now like to hand the call to Todd Friedman, Senior Director, Investor Relations. Go ahead. Good afternoon, and welcome to PacBio's fourth quarter 2023 earnings conference. 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 on the investor section of our website at www.pacb.com or is furnished on Form 8K, available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer. On today's call, we will make four forward-looking statements, including statements regarding We 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 from those projected or discussed. We refer you to the documents that we file with the FEC.
I would now like to hand, the call to Todd Friedman Senior Director Investor Relations. Please go ahead.
Todd Friedman: Good afternoon, and welcome to pack buyouts fourth quarter 2023 earnings conference call 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 on the investors section of our website at www Dot P. H E B dot com or as furnished on form 8-K available on the <unk>.
Todd Friedman: Acuity is an exchange commission website at Www SEC Gov.
Todd Friedman: With me today are Christian Henry President and Chief Executive Officer.
Todd Friedman: Suzanne Kim Chief Financial Officer.
Todd Friedman: On today's call, we will make forward looking statements, including statements regarding predictions progress estimates plans intentions guidance and others, including expectations with respect to our growth potential.
Todd Friedman: Tremendous consumable sales and GAAP and non-GAAP guidance, 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.
Todd Friedman: We refer you to the documents that we file with the SEC, including our most recent forms 10-Q, and 10-K and our press release, our recent press release to better understand the risks and uncertainties that could cause actual results to differ we disclaim any obligation to update or revise these forward looking statements except as required by law.
Todd Friedman: Super Super Super, We disclaim any obligation to update or revise these four forward-looking statements except as required by law. We will also present certain financial information on a non-GAAP basis. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP.
Todd Friedman: We will also present certain financial information on a non-GAAP basis non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U S. GAAP.
Todd Friedman: Management believes that non-GAAP financial measures combined with U.S. GAAP financial measures provide useful information to compare our performance relative to the forecast in preparation for that event. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in the tables within our Earnings. However, for future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year, including future changes in fair value adjustments of contingent consideration and allocation of amortization expense attributable to Please note that today's call is being recorded and will be available for 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 completion of the live call.
Todd Friedman: Management believes that non-GAAP financial measures combined with U S. GAAP financial measures provide useful information to compare our performance relative to forecast and so.
Todd Friedman: T J plants and benchmark our performance externally against competitors.
Todd Friedman: Reconciliations between historical U S GAAP and non-GAAP results are presented in the tables within our earnings release.
Todd Friedman: For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable efforts due to the uncertainty regarding among other matters certain acquisition related items that may arise during the year, including future changes in fair value adjustments of contingent consideration.
Todd Friedman: Allocation of amortization expense attributable to certain acquired intangible assets.
Todd Friedman: Please note that today's call is being recorded and will be available for replay on the investors section of our website shortly after the call.
Todd Friedman: Investors electing to use the audio replay are cautioned that forward looking statements made on today's call may differ or change materially after completion of the live call.
Operator: Finally, we will be hosting a question and answer session after our prepared remarks. We ask that analysts please limit themselves to one question only so that we can accommodate everybody in the audience. I will now turn the call over to you. Thank you.
Todd Friedman: Finally, we will be hosting a question and answer session. After our prepared remarks, we ask the analysts please limit themselves to one question only so that we can accommodate everybody in the queue I will now turn the call over to Christian.
Christian Henry: Thank you.
Christian Henry: Thanks, everyone, for joining our call today. I'll start by recapping our results for the year and the quarter. Then I'll discuss our commercial activity around Revio and Ons. Finally, I'll discuss our latest product launches that we believe will further create value and differentiation around PacBioSQL. I'll then pass it to Susan to discuss financials and guidance in more detail.
Christian Henry: Hey, everyone for joining our call today I'll start by recapping, our results for the year and the quarter.
Then I'll discuss our commercial activity around radio and also finally I'll discuss our latest product launches that we believe will further create value and differentiation around pack bio sequencing.
Christian Henry: I'll, then pass it to Susan to discuss financials and guidance in more detail.
Christian Henry: 2023 marked PacBio's most transformative and successful year in our history. Our team executed aggressive goals to ramp revio manufacturing and scale the install base, which enabled PacBio to grow revenue 56% in 2023 to $200.5 million, which was ahead of our expectations. For the quarter, revenue grew 113% year-over-year to $58.4 million, and we shipped 44 Revio instruments in the fourth quarter, bringing our install base as of December 31, 2023, to 173 Revio systems. We also grew consumable revenue in the fourth quarter to $18.9 million, which included Revio consumables of approximately $12.4 million and represented an annualized consumable pull-through of around $385,000. The demand for long read data continues to grow as total gigabase output on PAC biosequencers grew 68% in 2023 compared to 2022.
Susan: 2023 marked packed buyers most transformative and successful year in our history, our team executed aggressive goals to ramp revenue on manufacturing and scale of the installed base, which enabled Pac bio to grow revenue, 56% in 2023 to $200 5 million, which was ahead of our expectations.
Susan: For the quarter revenue grew 113% year over year to $58 4 million and we shipped 44 radio instruments in the fourth quarter, bringing our installed base as of December 31, 2023 to 173 radio systems.
Susan: We also grew consumable revenue in the fourth quarter to $18 9 million, which included radio consumables of approximately $12 4 million and represented an annualized consumable pull through of around 385000.
Susan: The demand for long read data continues to grow as total gigabases output on Pac bio sequences grew 68% in 2023 compared to 2022.
Christian Henry: We believe this momentum sets us up for another year of growth as we continue to see growing interest in HiFi for larger-scale human genomics and see it becoming more mainstream in genomic testing. The market clearly demonstrates a shift towards long-read sequencing in a growing number of major applications, and I'll share some of the specific examples showing this shift today.
Susan: We believe this momentum sets us up for another year of growth as we continue to see growing interest in hi Fi for larger scale human genomics and see it becoming more mainstream in genomic testing the market clearly demonstrates a shift towards long read sequencing in a growing number of major applications and I'll share some.
Susan: The specific examples showing this shift today.
Christian Henry: With that, our initial view on 2024 is that revenue will be between 230 and 250 million, representing 15 to 25% growth compared to 2023. At the midpoint of this range, we expect Revio system shipments to be roughly flat to slightly up year over year. As we have previously communicated, customers have lengthened their capital purchasing timelines, which impacts the timing of instrument orders and the pace of Revio adoption. However, we do not anticipate these current macro trends to fundamentally impact customers' desire to sequence with hi-fi long reads.
Susan: With that our initial view on 'twenty 'twenty four is that revenue will be between 230 and $250 million, representing 15% to 25% growth compared to 2023 at.
Susan: At the midpoint of this range, we expect radio system shipments to be roughly flat to slightly up year over year.
Susan: As we have previously communicated.
Susan: <unk> has lengthened their capital purchasing timelines, which impacts the timing of instrument orders and the pace of radio adoption.
Susan: We do not anticipate these current macro trends to fundamentally impact customers' desire to sequence with high fine long reads.
Christian Henry: Susan will touch more on our guidance later. Now, turning back to 2023, Revio, our flagship long-read sequencer launched early last year, is making significant progress in transforming how researchers look at the genome, and we're still in the early adoption curve. We're especially pleased with the number of new customers adopting Revio, as nearly 30% of Revio systems ordered in the fourth quarter were from new PacBio customers, and almost 40% of Revio systems ordered in 2023 will be from new PacBio customers. New customers in the fourth quarter included Karolinska University Hospital in Sweden, a Hi-Fi Solves consortium member planning to use Revio to address the limitations of short reads on structural variation, tandem The HiFi Solves Consortium was just announced last quarter, and by creating this collaboration of 15 leading genomics research institutions across 10 countries, we expect best practices to accelerate the impact HiFi can have on human health.
Susan: Susan will touch more on our guidance later now.
Susan: Now turning back to 'twenty twenty-three, rather you know our flagship long read sequencing launched early last year is making significant progress in transforming how researchers look at the G. Now and we're still in the early adoption curve.
Susan: We've been especially pleased with the number of new customers adopting radio as nearly 30% of radio systems ordered in the fourth quarter were from new Pac bio customers and almost 40% of Rev. Yes systems ordered in 2023 were from new Pac bio customers.
Susan: New customers in the fourth quarter included Karolinska University Hospital in Sweden, a hi Fi solves consortium member planning to use radio to address the limitations of short reads on structural variation tandem repeats and phasing to find more answers for genetic disease.
Susan: The Hi Fi solves consortium was just announced last quarter and by creating this collaboration of 15, leading genomics research institutions across 10 countries. We expect best practices sharing to accelerate the impact Hi Fi can have on human health.
Christian Henry: We're also making solid progress on converting existing PacBio customers over to Revio, as about one-third of our SQL 2 and 2e customers have now ordered a Revio. We are still in the early product transition cycle and expect most SQL 2 or 2e users to migrate over to Revio over time. Additionally, we expect customers who have adopted Revio in 2023 to continue to expand their fleets as they fill their Revios to capacity. We're already starting to see this with some customers ordering their second or third Revios in the fourth quarter, like Radboud University, which took its second Revio, expanding its fleet to ramp up its efforts in rare disease research. Additionally, Children's Mercy Hospital of Kansas City ordered its third revision to continue its effort to consolidate tests for genetics and epigenetics, increase efficiency, and improve solve rates while accelerating turnaround.
Susan: We're also making solid progress on converting existing Pac bio customers over to Raphael as about one third of our sequel to in two weeks customers have now ordered a ravi out.
Susan: We are still in the early product transition cycle and expect most equal to our TUI users to migrate over to Ravi out overtime.
Susan: Additionally, we expect customers, who have adopted radio in 2023 to continue to expand their fleets as they fill their radios to capacity, we're already starting to see this with some customers ordering their second or third Rab, yes in the fourth quarter like Radboud University, which took its second Ravi O.
Susan: Expanding its fleet to ramp up its efforts in rare disease research. Additionally, children's Mercy Hospital in Kansas City ordered its third Ravi owe to continue its effort to consolidate tests for genetics, and epigenetics increase efficiency and improve solve rates, while accelerating turnaround time.
Christian Henry: These fleet expansions demonstrate the elasticity and the demand to move samples over to HIFI long reach. 2023 was also a landmark year for PacBio as we launched ONSO, our second major sequencing platform, just months after we started shipping Revio, enabling us to address a multibillion-dollar short-read sequencing market. With Anso, we've gradually ramped up manufacturing capacity and grew shipments sequentially in the fourth quarter. We have now received orders from a wide range of customers who plan to use it in applications ranging from oncology, including research into fragmentomics and targeted cell-free DNA panels, to exome sequencing and metagenomics. One Anso customer is TGen, which is taking advantage of the platform's accuracy to detect rare populations associated with disease in a high background of non-diseased material for applications like early cancer detection and infectious disease research.
Susan: These fleet expansions demonstrate the elasticity and the demand to move samples over to high fine long reads.
Susan: 2023 was also a landmark year for Pac bio as we launched also our second major sequencing platform just months. After we started shipping radio enabling us to address a multibillion dollar short read sequencing market.
Susan: With the answer we've gradually ramped up manufacturing capacity and grew shipments sequentially in the fourth quarter. We have now received orders from a wide range of customers, who plan to use it in applications ranging from oncology, including research into fragment telmex and targeted cell free DNA panels to exome sequencing and Madden.
Susan: Genomics.
Susan: One on so customer is T J, which is taking advantage of the platform's accuracy to detect rare populations associated with disease in a high background of non disease material for applications like early cancer detection and infectious disease research last month researchers from the <unk>.
Christian Henry: Last month, researchers from the Institute presented data that shows ANSO is achieving well beyond its Q40 specification on customer liquid biopsy samples, with the majority of bases over Q50, or one error in 100,000 bases of sequence. Since ANTO's launch, peers in the industry have been increasingly discussing the value of accuracy, which we believe underscores accuracy as an unmet need that PacBio is differentially positioned to address with our sequencing by binding chemistry.
Susan: Institute presented data that shows answer was achieving well beyond its Q40 specification on customer liquid biopsy samples with the majority of bases over Q 50, or one error in 100000 basis of sequencing.
Susan: Since antos launch peers in the industry have been increasingly discussing the value of accuracy, which we believe underscores accuracy as an unmet need that Pac bio is differentially positioned to address with our sequencing by binding chemistry.
Christian Henry: Moving on, as we do every year, I wanted to share an update on our internal market segmentation from the previous year. Our customers use our products across a diverse set of sequencing applications. In 2023, human genomics was the largest portion of our business, accounting for approximately 40% of our revenue. This includes a wide range of customers like UC Irvine and the Greger Consortium looking to run a multi-thousand sample project in rare diseases or Biosentia, who is now using HiFi for routine testing for certain sensory disorders.
Susan: Moving on as we do every year I wanted to share an update on our internal market segmentation from the previous year, our customers use our products across a diverse set of sequencing applications in 2023, human genomics was the largest portion of our business accounting for approximately 40% of our Rab.
Susan: Venue.
Susan: This includes a wide range of customers like UC, Irvine, and the Gregor consortium looking to run a multi thousand sample project in rare disease, where biosensor, who is now using high five for routine testing for certain sensory disorders.
Christian Henry: Plant, animal, and agrogenomics again was the second largest part of our customer base, making up approximately 25% of our revenue, as Longreeds is well positioned to interrogate these often large and complex genomes. This includes agricultural companies that are adopting Revio to incorporate low-pass genome sequencing to improve their workflows and get better insights into crop development and production. Microbiology and infectious disease makes up about 20% of our business and includes a wide array of customers across public health labs, research institutes, and academic labs across a dynamic range of applications from pathogen surveillance to biology of host pathogen dynamics, drug resistance, and more. Cancer genomics was roughly 10%, and this is really an application that we believe can be further addressed with ONTHO's accuracy. For example, McGill University researchers used ONSO, and preliminary results presented at the Early Detection of Cancer Conference in October indicate that ONSO's ability to accurately sequence through homopolymer regions has the potential to increase the detection of microsatellite instability.
Susan: Plant animal in Agra genomics again was the second largest part of our customer base, making up approximately 25% of our revenue as long reads have been well positioned to interrogate these often large and complex genomes.
Susan: This includes agricultural companies that are adopting radio to incorporate low past genome sequencing to improve their workflows and get better insights into crop development and production.
Susan: Microbiology and infectious disease makes up about 20% of our business and include a wide array of customers across public health Labs research institutes and academic labs across the dynamic range of applications from pathogen surveillance to biology of host pathogen dynamics drug resistance.
Susan: And more.
Susan: Cancer genomics was roughly 10% and this is really an application that we believe can be further addressed with answers accuracy. For example, Mcgill University researchers used ASO and preliminary results presented at the early detection of cancer conference in October indicate that answer is ability to accurately.
Susan: Sequence through homopolymer regions has the potential to increase the detection of microsatellite instability.
Christian Henry: The remaining approximately 5% of our revenue is from other and emerging markets, including biopharma, and in the fourth quarter, it included a new gene editing customer planning to implement Ravio as part of its cardiovascular disease therapeutic development. Turning to product launches, last week at AGBT, we announced new library prep kits that eliminate bottlenecks in the high-fly workflow and make PacBio long-read library prep on par with that of the short-read sequence, making it easier for our customers to make the most of their Ravio system. Our Hi-Fi Prep Kit and Hi-Fi Plex Prep Kit 96 offer customers the potential for up to a 60% decrease in workflow time and up to a 40% reduction in cost, and further lowers the DNA input requirement.
Susan: The remaining approximately 5% of our revenue is from other in emerging markets, including Biopharma and in the fourth quarter. It included a new gene editing customer planning to implement ravioli as part of its cardiovascular disease therapeutic development.
Susan: Turning to product launches last week at a G. P. T. We announced new library prep kits that eliminate bottlenecks in the high fly workflow and make Pacbio long read library prep on par with that of short read sequencing, making it easier for our customers to make the most of their radio systems.
Susan: Hi, Fi prep kit, and Hi, Fi Plex prep kit ninety-six offers customers the potential for up to a 60% decrease in workflow time and up to a 40% reduction in costs and further lowers the DNA input requirements. It also allows customers to automate the sometimes T D.
Christian Henry: It also allows customers to automate the sometimes tedious library prep process by integrating with the Hamilton NGS star system, with other automation platform partners to be announced in the future. In the fourth quarter, we launched our Kinects kit for scalable, cost-effective RNA. We've been extremely pleased with our customer enthusiasm and uptake for these kits, and we now have orders from over 115 different customers. An early adopter at UCSD Sanford Consortium commented on how demand for full-length RNA sequencing is outpacing genomic DNA sequencing. The customer shared that the ConnexKit enables competitive pricing, high throughput, ease of use, and automation, and has provided for consistent sequencing yields across various samples. Connects can also help researchers glean more insights into RNA across various applications. For example, another early user from a leading pediatric hospital in Columbus, Ohio, used Kinects to study somatic mosaic diseases like cancer and epilepsy and, with Kinects, was able to pinpoint specific cell types harboring disease-causing genomic variants from single-cell data.
This library prep process by integrating with the Hamilton NGF Star system with other automation platform partners to be announced in the future.
Susan: In the fourth quarter, we launched our connected kits for scalable cost effective RNA sequencing, we've been extremely pleased with our customer enthusiasm and uptake for these kits and we now have orders from over 115 different customers.
Susan: And early adopter at UCSD Sanford consortium commented on how demand for the full length RNA sequencing is outpacing genomic DNA sequencing and the customer shared that the connector kit enables competitive pricing high throughput ease of use and automation and is provided for consistent sequel.
Seeing yields across various samples.
Susan: Connects can also help researchers glean more insights into RNA across various applications. For example, another early user from a leading pediatric hospital in Columbus, Ohio used connects to study somatic mosaic diseases like cancer and epilepsy and with connects was able to pinpoint specific cell.
Susan: Types harboring disease, causing genomic variance from single cell data.
Christian Henry: The customer explained that Connex can help identify cell types harboring the mutation and then understand the mutation's influence on the transcriptome, which could lead to a better basic biological understanding of how the disease occurs, but can also give clues into the timing of disease occurrence and its onset in children. These are just a couple of examples, and we believe Connex will continue to accelerate long-read sequencing as the preferred method in several RNA-Seq applications. Lastly, we rolled out our V13 software for Revio last quarter, and 93% of our Revio runs are using the new V13 software. As a result, customers are getting a better user experience. We've seen a fourfold decline in overloading, and customers are starting to realize increased yields on their smart, Finally, to wrap it up, last week was the annual Advances in Genome Biology and Technology Conference, or AGBT, and it was encouraging to see the impact that HiFi long-read sequencing had on the research community and the desire for researchers to look deeper and assemble more information from the genome than ever before. Our team walked away from the conference feeling like an inflection point for HiFi sequencing had truly just begun. And with that, I'll pass the call to Susan to discuss our finances. Susan?
The customer explain that connects can help identify cell types harboring the mutation and then understand the mutations influence on the transcriptome, which could lead to a better basic biological understanding of how the disease occurs but can also give clues into the timing of disease occurrence and the onset.
Susan: In children.
Susan: These are just a couple of examples and we believe connects will continue to accelerate long read sequencing as the preferred method in several RNA seek applications.
Susan: Lastly, we rolled out our <unk> software for Ravi our last quarter and 93% of our revenue runs are using the new the 13th software.
Susan: As a result customers are getting a better user experience, we've seen over a fourfold declining overloading and customers are starting to realise increase yields on their smart cells.
Susan: Finally to wrap it up last week was the annual advances in genome biology, and technology conference or H B T and it was encouraging to see the impact that a hi Fi long read sequencing hat on the research community and the desire for researchers to look deeper and assemble more information from the genome than ever before.
Susan: Our team walked away from the conference dealing like an inflection point for Hifi sequencing has truly just begun.
Susan: And with that I'll pass the call to Susan to discuss our financials Susan.
Susan: Thank you, Christian. As discussed, we reported $58.4 million in product, service, and other revenue in the fourth quarter of 2023, which represented an increase of 113 percent from $27.4 million in the fourth quarter of 2022. Interim revenue in the fourth quarter was $35.1 million, an increase of 475 percent from $6.1 million in the fourth quarter of 2022, driven by continued adoption of the Revio platform. We ended the quarter with an installed base of 173 radio systems.
Susan: Thank you Christian.
As discussed we reported $58 4 million in product service and other revenue in the fourth quarter of 2023, which represented an increase of 113% from $27 4 million in the fourth quarter of 2022.
Susan: <unk> revenue in the fourth quarter was $35 1 million, an increase of 475% from $6 1 million in the fourth quarter of 2022, driven by continued adoption of the radio platform.
Susan: We ended the quarter with an installed base of 173 radio system.
Susan: Turning to consumables, revenue of $18.9 million in the fourth quarter increased 13% from $16.7 million in the fourth quarter of last year and was a record for PacBio, with approximately $12.4 million of consumable revenue coming from Revio systems, reflecting an annualized pull-through for the Revio system of $385K, and the remainder from other systems and other consumables. Finally, service and other revenue was $4.4 million in the fourth quarter compared to $4.6 million in the fourth quarter of 2022. From a regional perspective, America's revenue of $33.9 million grew 182% compared to the fourth quarter of 2022.
Susan: Turning to consumables revenue of $18 9 million in the fourth quarter increased 13% from $16 7 million in the fourth quarter of last year and was a record for Pac bio with approximately $12 4 million of consumable revenue coming from radio system, reflecting an annualized pull through for the.
Susan: <unk> system of 385, K and the remainder from other systems and other consumable.
Susan: Finally service and other revenue was $4 4 million in the fourth quarter compared to $4 6 million in the fourth quarter of 2022.
Susan: From a regional perspective Americas revenue of $33 9 million grew 182% compared to the fourth quarter of 2022.
Susan: The region's record quarter was driven by continued growth in instruments and consumables from both new and existing customers. For Asia-Pacific, revenue of $13.4 million grew 31% over the prior year, with consumables in the region growing nearly $2 million quarter-over-quarter, which was in part due to stocking orders and year-end budget spend. Finally, EMEA revenue of $11.1 million grew 114% over the prior year period.
Susan: The region's record quarter was driven by continued growth in instruments and consumables from both new and existing customers.
Susan: For Asia Pacific revenue of $13 4 million grew 31% over the prior year with consumables in the region growing nearly 2 million quarter over quarter, which was in part due to stocking orders and yearend budget spending.
Susan: Finally, EMEA revenue of $11 1 million grew 114% over the prior year period.
Susan: Moving down the P&L GAAP gross profit of $9 6 million in the fourth quarter of 2023 represented a gross margin of 16% compared to a GAAP gross profit of $5 1 million in the fourth quarter of 2022, which represented a gross margin of 19% the.
Susan: Moving down the P&L, a gap gross profit of $9.6 million in the fourth quarter of 2023 represented a gross margin of 16% compared to a gap gross profit of $5.1 million in the fourth quarter of 2022, which represented a gross margin of 19%. The GAAP gross profit in the fourth quarter of 2023 includes the amortization of acquired intangibles from the acquisition of Omnium as we allocate some of the amortization expense to the cost of goods sold now that we are generating revenue from the ONSO product. Fourth quarter 2023 non gap gross profit of 11.1 million represented a non gap gross margin of 19% compared to a non gap gross profit of 5.3 million, or 19%, in the fourth quarter of last year.
The GAAP gross profit in the fourth quarter of 2023 include the amortization of acquired intangible from the acquisition of omnium as we allocate some of the amortization expense to the cost of goods sold now that we are generating revenue from the onset product.
Susan: Fourth quarter 2023, non-GAAP gross profit of $11 1 million represented a non-GAAP gross margin of 19% compared to a non-GAAP gross profit of $5 3 million or 19% in the fourth quarter of last year.
Susan: Gross profit in the fourth quarter of 2023 and the fourth quarter of 2022 included inventory reserves and loss on purchase commitments, totaling approximately $9.3 million and $7.1 million, respectively, primarily due to the continued decline in SQL 2 2E consumable demand in the transition to the Revio platform, as well as the decline in SQL 2 instrument demand from predominantly one customer in China. GAAP operating expenses were $97.1 million in the fourth quarter of 2023 compared to $92.2 million in the fourth quarter of 2022.
Susan: Gross profit in the fourth quarter of 2023 and fourth quarter of 2022 included inventory reserves and loss on purchase commitments totaling approximately $9 3 million and $7 1 million respectively, primarily due to the continued decline in sequel to two weeks.
Susan: Similar both demand and the transition to the radio platform as well as the decline in sequel to instrument demand.
Susan: From predominantly one customer in China.
Susan: GAAP operating expenses were $97 1 million in the fourth quarter of 2023 compared to $92 2 million in the fourth quarter of 2022.
Susan: Excluding change in fair value of contingent consideration, amortization of acquired and tangible assets, merger-related expenses, and restructuring costs, non-GAAP operating expenses were $88.4 million in the fourth quarter of 2023, compared to $87.6 million in the fourth quarter of 2022. Regarding headcount, we ended the quarter with 796 employees compared to 844 at the end of Q3 2023 and 769 at the end of the fourth Headcount declined following Q3 2023 due to a reorganization primarily within our R&D organization, which resulted in a reduction of approximately 55 positions in the fourth quarter. Operating expenses in the fourth quarter included non-cash, share-based compensation of $15.4 million compared to $16.8 million in the fourth quarter of last year.
Susan: Excluding change in fair value of contingent consideration amortization of acquired intangible asset and merger related expenses and restructuring costs non-GAAP operating expenses were $88 4 million in the fourth quarter of 2023 compared to $87 6 million in the fourth quarter of 2022.
Susan: Regarding head count we ended the quarter with 796 employees compared to 844 at the end of Q3 2023 and 769 at the end of the fourth quarter of 2022.
Head Count declined following Q3 2023 due to our reorganization primarily within our R&D organization, which resulted in a reduction of approximately 55 position in the fourth quarter.
Susan: Operating expenses in the fourth quarter included noncash share based compensation of $15 4 million compared to $16 8 million in the fourth quarter of last year.
Susan: Gap net loss in the fourth quarter of 2023 was $82.0 million, or $0.31 per share, compared to a gap net loss of $84.4 million in the fourth quarter of 2022, or $0.37 per share. Non-GAAP net loss was $72.5 million, representing $0.27 per share in the fourth quarter of 2023, compared to a non-GAAP net loss of $79.6 million, representing $0.35 per share in the fourth quarter of 20 Turning to our balance sheet items, we ended the fourth quarter with $631.4 million in unrestricted cash and investments, compared with $767.8 million at the end of the third quarter of 2023. The decline reflects approximately $95.8 million in cash paid to the former Omnium shareholders in connection with the milestone achievement. Inventory balances decreased in the fourth quarter to $56.7 million, representing 2.9 inventory turns, compared with $68.3 million at the end of the third quarter of 2023, representing 2.2 inventory turns. Accounts receivable increased in the fourth quarter to $36.6 million, compared with $30.5 million at the end of the third quarter of 2023.
Susan: GAAP net loss in the fourth quarter of 2023 was $82 1 million or 31 cents per share compared to a GAAP net loss of $84 4 million in the fourth quarter of 2022 or 37 cents per share.
Susan: non-GAAP net loss was $72 5 million, representing 27 cents per share in the fourth quarter of 23 compared to a non-GAAP net loss of $79 6 million, representing 37 35 cents per share in the fourth quarter of 2022.
Susan: Turning to our balance sheet items, we ended the fourth quarter with $631 4 million in unrestricted cash and investments compared with 767 8 million at the end of the third quarter of 2023.
Susan: The decline reflects approximately $95 8 million in cash paid to the former omnium shareholders in connection with the milestone achievement.
Susan: Inventory balances decreased in the fourth quarter to $56 7 million, representing 2.9 inventory turns compared with $68 3 million at the end of the third quarter of 2023, representing two point to inventory turns.
Susan: Accounts receivable increased in the fourth quarter to $36 6 million compared with $35 million at the end of the third quarter of 2023.
Susan: As of December 31, 2023, our total product backlog was approximately $18.7 million, compared to $51.5 million as of December 31, 2022. The decline was primarily related to our record starting backlog in 2023 and the ramp-up of manufacturing to deliver Revio to customers throughout 2023. As we've communicated before, we expect to share this backlog figure on an annual basis in our Form 10-K. Now to expand a bit on financial guidance. As Christian indicated, we continue to expect Revio to drive growth in 2024 and expect full-year revenue to be between $230 million and $250 million. Compared to 2023, this represents a growth rate of approximately 15% to 25%, which we believe will be well above the sequencing market growth rate.
Susan: As of December 31, 2023, our total product backlog was approximately $18 7 million compared to 51 5 million as of December 31, 2022.
Susan: The decline was primarily related to a record starting backlog in 2023, and the ramp up of manufacturing to deliver radio to customers throughout 2023.
Susan: As we've communicated before we expect to share this backlog figure on an annual basis and our Form 10-K.
Susan: Now to expand a bit on financial guidance.
Susan: As Christian indicated we continue expect radio to drive growth in 2024, and expect full year revenue to be between $230 million to $250 million.
Susan: <unk> to 'twenty two 'twenty three this represents a growth rate of approximately 15% to 25%, which we believe will be well above the sequencing market growth rate.
Susan: At the midpoint of our guidance range, we expect Revio system shipments to be flat to slightly higher compared to the 173 units shipped in 2023. Our growth expectations consider several macro factors that are impacting purchases of capital equipment. For example, the funding environment in China is impacting our ability to further expand our Revio installation base in the country, specifically with smaller volume academic labs. Additionally, persistent inflation and high interest rates are lengthening sales cycles globally.
Susan: At the midpoint of our guidance range, we expect radio system shipments to be flat to slightly higher compared to the 173 units shipped in 2023.
Susan: Our growth expectations consider several macro factors that are impacting purchases of capital equipment.
Susan: For example, the funding environment in China is impacting our ability to further expand our radio installed based in the country, specifically with smaller volume academic labs.
Susan: Additionally, persistent inflation and high interest rates are at a lengthening sales cycle globally.
Susan: In terms of linearity, we expect approximately 45% of revenue in the first half and 55% in the second half. Based on what we've seen quarter to date, we expect the first quarter revenue to be lower compared to the fourth quarter of 2023 with Revio system shipments flat to slightly down sequentially with lower ASPs and total consumable revenue approximately flat. As we continue to expect Revio, Instruments, and Consumables to make up the majority of revenue, we do not expect to share SQL 2e or ONSO placements or pull through on a quarterly basis for these platforms this year. Moving down the P&L, we expect the 2024 non-gap gross margin to be in the range of 36% to 39%.
Susan: In terms of linearity, we expect approximately 45% of revenue in the first half and 55% in the second half.
Susan: Based off what we've seen quarter to date, we expect first quarter revenue to be lower compared to the fourth quarter of 2023 with radio system shipments flat to slightly down sequentially with lower asps.
Susan: And total consumable revenue approximately flat.
Susan: As we continue to expect revenue instruments and consumables to make up the majority of revenue, we do not expect to shares equal to we or ASO placements or pull through on a quarterly basis for these platforms. This year.
Susan: Moving down the P&L, we expect that 2024, non-GAAP gross margin to be in the range at 36% to 39%. We do believe that gross margins will improve over the course of the year as a reminder, inventory reserve charges associated with the decline in sequel to TUI demand in place of higher.
Susan: We do believe that gross margins will improve over the course of the year. As a reminder, inventory reserve charges associated with the decline in SQL 2 2e demand in place of higher revio demand represented a headwind of approximately 700 basis points in 2023. Additionally, compared to the 2023 non-GAAP gross margin, we expect improvement driven by a mixed shift toward higher-margin consumables and higher consumable manufacturing volumes, as well as instant manufacturing optimization, helping to drive lower manufacturing unit costs. Additionally, we expect non-GAAP operating expenses to grow less than 5% compared to 2023, which is consistent with our long-term guidance. We expect interest and other income to be between $5 million and $10 million in 2024, and the weighted average share count for EPS for the full year to be approximately $273 million. I'll hand it back to Christian for some final remarks. Christian?
Susan: RVO demand represented a headwind of approximately 700 basis points in 2023.
Susan: Additionally, compared to the 2023 and non-GAAP gross margin, we expect improvement driven by a mix shift towards higher margin consumables and higher consumable manufacturing volumes as well as insurance manufacturing optimization, helping to drive lower manufacturing unit costs.
Susan: We expect non-GAAP operating expenses to grow less than 5% compared to 2023, which is consistent with our long term guidance.
Susan: We expect interest and other income to be between 5 million and $10 million in 2024, and the weighted average share count for EPS for the full year to be approximately 200.
Susan: Okay.
Christian Henry: Thanks, Susan. As we move forward in 2024, I want to reiterate our strategic priorities that I laid out last month. Our top priority is increasing the adoption of our technology by driving more Revio placements at new customers, converting existing SQL 2 and 2e accounts, and expanding Revio fleets at current customers. Additionally, as we expect to complete our scaling of ONSO manufacturing this quarter, we will aggressively drive placements of the ONSO platform so that our leading SPB chemistry can get into the hands of more customers globally.
Speaker Change: Thanks, Susan as we move forward in 2024, I want to reiterate our strategic priorities that I laid out last month.
Susan: Our top priority is increasing the adoption of our technology by driving more radio placements at new customers converting existing sequel to in TUI accounts and.
Speaker Change: And expanding revenue.
Speaker Change: Ravi of fleets at current customers. Additionally, as we expect to complete our scaling of ASO manufacturing. This quarter, we will aggressively drive placements of the onto a platform. So that our leading SPV chemistry can get into the hands of more customers globally.
Speaker Change: Another important priority is continuing to build the momentum for sales into the clinical and translational market earlier in the call. We discussed a few of our customers who are starting to use their <unk> in this setting including biosensor.
Christian Henry: Another important priority is continuing to build the momentum for sales into the clinical and translational markets. Earlier in the call, we discussed a few of our customers who are starting to use their Revios in this setting, including Bioscentia and Children's Mercy Kansas City, and we aim to expand our support in this market in 2024. Additionally, we are progressing the development of our groundbreaking technologies. We launched two transformative platforms in 2023, but our work is far from complete. I presented three other instruments we're working on that we plan to launch over the coming years, and we expect to make meaningful progress on all of these this year. I look forward to sharing more about these instruments when they near completion.
Speaker Change: Children's Mercy, Kansas City, and we aim to expand our support in this market in 2024.
Speaker Change: Additionally, we are progressing the development of our groundbreaking technologies, we launched two transformative platforms in 2020 three but our work is far from complete.
Speaker Change: I previewed three other instruments were working on that we plan to launch over the coming years, and we expect to make meaningful progress on all of these this year.
Speaker Change: I look forward to sharing more about these instruments when they near their completion.
Speaker Change: Finally, we intend to continue building our business with the goal of becoming cash flow positive during 2026 on top of our long term revenue target of reaching at least $500 million. In 2026, we have several gross margin initiatives that are expected to lower production costs better utilized manufacturing overhead.
Christian Henry: Finally, we intend to continue building our business with the goal of becoming cash flow positive during 2020. On top of our long-term revenue target of reaching at least $500 million in 2026, we have several gross margin initiatives that are expected to lower production costs, better utilize manufacturing overhead, and improve our supply chain efficiency. These programs, along with the product mix shift towards consumables, are expected to improve our gross margin.
Speaker Change: And improve our supply chain efficiency. These.
These programs along with a product mix shift towards consumables are expected to improve our gross margins.
Speaker Change: Further we expect to continue to be disciplined on how we deploy our operating expenses and make investments in the future of our business.
Speaker Change: I continue to be encouraged by our investors our customers enthusiasm for our products and look forward to updating everyone on our progress as we continue to drive adoption of our technologies this year.
Operator: In addition, we expect to continue to be disciplined on how we deploy our operating expenses and make investments in the future of our business. I continue to be encouraged by our customers' enthusiasm for our products and look forward to updating everyone on our progress as we continue to drive adoption of our technologies this year. So with that, let's start the Q&A. Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your keyboard.
Speaker Change: So with that let's start the Q&A.
Speaker Change: Thank you very much we will now begin the question and answer session I got to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: Your question. Please press Star then two.
Speaker Change: First question comes from Dan <unk> with T. D. Cohen. Please go ahead.
Dan: Great. Thanks, Thanks for taking the questions guys.
Dan: And then maybe just on the headwinds that you talked about imports and the guidance we talked about China.
Operator: If you're using a. Please pick up your handset before, to ask your questions; the magnus is not a better star than two. This concludes today's first question. Dan Brennan with T.D.
Dan: Kind of close rates again could you give us some more color on China.
You know what are you kind of do in the quarter.
Where do you kind of baking in for kind of a 24.
Dan: On the side, we've got worsening stable in terms of these crude rates have you seen anything Greg.
Susan: Cohen. Please go ahead. Great, thanks. Thanks for taking the questions, guys. And Susan, maybe just on the headwind that you talked about, implicit in the guidance, you talked about time. Can you give some more color on China, what China did in the quarter, and what are you kind of baking in for China for 2024? www.pacificbiosciences.com. Yeah, Dan, thank you for that.
Greg: Yeah, Dan. Thank you for that we won't talk about the Q4, China's break that out separately, we actually had a decent Q4 in China.
Greg: You had some of our large service providers.
Greg: Go with more new multi system orders some of which were delivered in Q4, some will be delivered over the course of the first half here, but.
Greg: But what we see in China is as you know we do see funding challenges in China that are making it difficult for the smaller the smaller labs to drive into rather you know and as a result there.
Susan: We won't talk about the Q4 Chinese numbers, break that out separately. We actually had a decent Q4 in China. We had some of our large service providers go with new multi-system orders, some of which were delivered in Q4, and some will be delivered over the course of the first half here. But what we see in China is, you know, we do see funding challenges in China that are making it difficult for the smaller labs to drive into Revio. And as a result, they're sending out their samples to the large service providers and driving, you know, the business that way. And so, although the consumables will be strong, the instruments are not as strong in China as we would be hoping for. And as a result, in our guidance, we, you know, significantly took down our forecast for China for the year.
Greg: Sending out their samples to the large service providers and in driving the business that way and so although the consumables will be strong the instruments are not as strong in China as perhaps we would be hoping for and as a result in our guidance. We you know significant.
Greg: We took down our forecast for China for the year, it's actually one of the biggest areas of.
Greg: Challenge for us as we look into 2024.
Greg: The next question is from Kyle Mixon with Canaccord. Please go ahead.
Kyle Mixon: Yeah, Hey, guys. Thanks for the questions.
Congrats on the year, maybe just Susan could you talk about the gross margin cadence in 'twenty four as you reduce production costs for the RVO and increase revenue consumables revenue as well given the expanding install base and then how does this kind of funnel into cash burn this year as well just given you have that 26 target. Thanks.
Susan: It's actually one of the biggest areas of challenge for us as we look into 2024. Yeah, hey, guys, thanks for the questions. Congratulations on the year. Maybe Susan, could you talk about the gross margin cadence in 2024 to reduce production costs for Revio and increase Revio consumers revenue as well, given the expanding install base? And how does this kind of funnel into cash burn this year as well, just given you have that 26 target? Yeah, thank you for the question, Kyle. You're right.
Susan: Yeah. Thank you for the question Kyle so.
Susan: You're right and what's implied in our guidance is that our gross margins will improve this year.
Susan: And our gross margins this year will come from a combination of activities some of which we've actually already initiated which is going to help to reduce the not only the interest instrument cost, but also the consumable costs. These initiatives include and include consolidating manufacturing facility such that we had.
Susan: And what's implied in our guidance is that our gross margins will improve this year. And our gross margins this year will come from a combination of activities, some of which we've actually already initiated, which is going to help to reduce not only the instrument costs but also the consumable costs. These initiatives include consolidating manufacturing facilities such that we have better overhead allocation across more products, which helps to lower unit costs. Additionally, initiatives such as a better balancing of insourcing and outsourcing, which will help to lower the cost on the instrument.
Susan: Better overhead allocation across more products, which helps to lower the unit cost.
Susan: Initiatives, such as better balancing of in sourcing and outsourcing, which will help to lower the cost on the instrument and of course, improving manufacturing yields and value engineering to drive down the bill of materials further for especially on the instrument side, but also on the consumable side, we're going to start to see some of these cost reductions as early as Q2.
Two and then we'll continue to improve even in the subsequent quarters such that the second half our gross margins continue to improve relative to the first half.
Susan: And this is a key part of our path to getting to cash flow positive as you had alluded to Kyle.
Christian Henry: And, of course, improving manufacturing yields and value engineering to drive down the bill of materials further, especially on the instrument side, but also on the consumable side. We're going to start to see some of these cost reductions as early as Q2, and then we'll continue to improve in the subsequent quarters, such that in the second half, our gross margins continue to improve relative to the first half. And this is a key part of our path to getting to cash flow positive, as you had alluded to, Kyle, improving gross margins and also being very disciplined with respect to our OPEX. So as part of our OPEX, we do not expect our OPEX to grow more than 5% this year, which is part of our journey to get to cash flow positive out in 2026, which is what our long-term guidance we had indicated. The next question is from John Sourbeer with UBS. Please go ahead. Hi, good evening.
Susan: Improving gross margins and also being very disciplined with respect to our opex. So as part of our Opex, we do not expect our opex to grow more than 5%. This year, which is part of our journey to get to cash flow positive out in 2026th which is what our long term guidance we had indicated.
Susan: The next question is from Jon <unk> with UBS. Please go ahead.
Jon: Hi, good evening and thanks for taking the questions maybe.
Maybe just digging in a little bit further on maybe some of the assumptions that changed on revenue of placements being up versus the big pain point.
Jon: Being roughly flat here beyond China any other color you can provide on that and insight that gives you confidence into getting that flat placement for the year.
Jon: Thanks.
Speaker Change: But I I mean, I think John Thanks for the question you know one of the things. We're seeing is we're seeing a lot of a lot of opportunities, particularly for larger sized projects and those will drive those will drive not only consumable demand, but also increased unit placements and so as those projects.
Christian Henry: And thanks for taking the questions. Maybe just digging in a little bit further on maybe some of the assumptions that changed on Revio placements being up versus the midpoint, you know, being roughly flat here, you know, beyond China, any other color you can provide on that and, you know, insight that gives you confidence into getting that flat placement for the year. Thanks.
Speaker Change: <unk> get started and get going.
Speaker Change: You would expect to see.
Speaker Change: Those being truly incremental to what we've seen in the past and therefore, you know additive to the radio placements of course, China is challenged and we've talked about that you know we've been talking about this for several quarters now it has gotten a little bit worse I would I would say.
Christian Henry: But I mean, John, thanks for the question. You know, one of the things we're seeing is that we're seeing a lot of opportunities, particularly for larger-sized projects. And those will drive those will drive not only consumable demand but also increased unit placements. And so as those projects get started and get going, you know, we would expect to see those being truly incremental to what we've seen in the past and therefore, you know, additive to revio placements. Of course, China is challenged.
Speaker Change:
Speaker Change: And so when you know when I think about 'twenty 'twenty four.
Speaker Change: Can we can we get back to two the placement rate.
Speaker Change: What we were seeing in 2023 I, absolutely think we can I think at this point, where we're very focused on driving adoption.
Speaker Change: And you know kind of taking a a balanced perspective, because the macro conditions have been pretty tough.
Speaker Change: Okay.
Speaker Change: The next question comes from Jack Meehan with Safran Research. Please go ahead.
Christian Henry: We've talked about that. You know, we've been talking about this for several quarters now. It has gotten a little bit worse, I would say.
Jack Meehan: Thank you good afternoon.
Jack Meehan: Christian or Susan was wondering if you could lay out for us what the assumptions are for consumables in 2024, and just as you kind of the visibility into that as you sort of add up the different projects you see going on thanks.
Christian Henry: And so when, you know, when I think about 2024, you know, can we can we get back to to the placement rate of what we were seeing in 2023? I absolutely think we can. I think at this point, we're, you know, we're very focused on driving adoption. And, you know, kind of taking a, a balanced perspective, because the macro conditions have been pretty, The next question comes from Jack. Go ahead. Thank you. Good afternoon.
Speaker Change: Yeah, when I think about the consumables Jack Thanks for the question.
Speaker Change: Think about consumables, we're gonna be growing consumables this year pretty significantly and the reason for that of course is we first of all we shipped a lot of systems in 2023, and we're going to get the layering impact of those systems as they get up to full utilization.
Christian Henry: Christian or Susan was wondering if you could lay out for us what the assumptions are for consumables in 2024 and just as you kind of have visibility into that as you sort of add up the different projects you see going on. Thanks. Yeah, when I think about consumable tech, thanks for the question. You know, when I think about consumables, we're going to be growing consumables this year pretty significantly. And the reason for that, of course, is that we first of all shipped a lot of systems in 2023. And we're going to get the layering impact of those systems as they get up to full utilization, or their planned utilization, I should say. And then as we ship new systems in 2024, those as they scale up.
Speaker Change: Or are there plans utilization I should say and then as we ship new systems in 2024.
Speaker Change: As they scale up so that that's how you start to see you know truly the mix shift the growth in consumables, because you're layering on new system placements from one year in our you know now we're moving towards the second year at by the end of this quarter, we'll have been shipping the radio system for one year.
Speaker Change: And so that's how you're going to see that the other thing is we also are adding consumable kits and so you saw we just recently.
Speaker Change: We just recently launched some new kits and those kits are additive to the consumable.
Speaker Change: Revenue line and we've seen strong uptake on particularly the connector kit, which you are which we've talked about over 115 customers have ordered from us at this point and so that's another positive factor that drives consumer drives consumables up and then finally, you know the large projects when you start to see some.
Christian Henry: So that's how you start to see, you know, truly the mix shift, the growth in consumables, because you're layering on new system placements from one year. And now we're, you know, now we're moving towards the second year. By the end of this quarter, we'll have been shipping the radio system for one year. And so that's how you start to see that.
Christian Henry: The other thing is, we are also adding consumable kits. And so you saw, we just recently launched some new kits. And those kits are additive to the consumable revenue line.
Speaker Change: Some of these larger projects for.
For example in.
Speaker Change: Q2, I would expect us to start seeing the Singapore population project that were part of a start to do their sequencing. So you'll see a ramp in consumables, there which would be additive. So there's several factors that are driving the positive side of of.
Christian Henry: And we've seen, you know, strong uptake on, particularly the connects kit, which we've talked about; over 115 customers have ordered from us at this point. And so that's another positive factor that drives consumables. And then finally, you know, the large projects; when you start to see some of these larger projects, for example, in Q2, I would expect us to start seeing the Singapore population project that we're part of start to do their sequencing. So you'll see a ramp in consumables there, which will be additive. So there are several factors that are driving the positive side of consumable growth explicitly in 2024. Thank you. We will go to the next question now. Thank you. Doug Schenkel, Wythe Wolfe, Go ahead.
Speaker Change: The consumable growth explicitly in 2024.
Speaker Change: Yeah.
Speaker Change: The next question is from Doug Schenkel with Wolfe Research. Please go ahead.
Doug Schenkel: Good afternoon, and thanks for taking the question.
Doug Schenkel: So I guess just a couple of loose ends I want a click through first.
Doug Schenkel: First a follow up on the gross margin question from earlier it seems like you're assuming an extra grade at the mid Forty's for gross margins just doing some math, there, which is obviously important in the context of building confidence in the trajectory of your long term targets.
Doug Schenkel: And then also doing some math.
Doug Schenkel: Recognizing the placement numbers you gave out for revenue.
Christian Henry: Good afternoon, and thanks for taking the question. I guess there are just a couple loose ends I want to click through. First, a follow-up on the gross margin question from earlier. It seems like you're assuming an exit rate in the mid-40s for gross margins. Just doing some math there, which is, you know, obviously important in the context of building confidence in the trajectory of your long-term target, and then, you know, also doing some math, recognizing, you know, the placement numbers you gave out for Revio. It's not clear to me that your guidance embeds an assumption for a big jump in... Consumable growth per box, or, I'm sorry, consumable revenue per box. I just want to make sure that's the case because, you know, typically there's a toggle, right?
Doug Schenkel: It's not clear to me that your guidance Embeds, an assumption for a big jump in.
Doug Schenkel: Consumable growth per box consumable I'm, sorry, consumable revenue per box.
Doug Schenkel: I just want to make sure. That's the case because typically there's a toggle right if you're a place and a lot more instruments are going deeper into the customer pyramid.
Doug Schenkel: The pacing of that and the types of customers are probably going to spend less.
Doug Schenkel: At least initially.
Doug Schenkel: But if youre, placing fewer boxes year over year I'd assume a consumables per box to go up so I'd just love to understand the logic behind that just to make sure. We're looking at that shows a potential source of upside for the year. Thank you.
Speaker Change: Yeah sure. Thank you Doug Okay. So first with gross margin you know I do I do expect over the course of the year.
Speaker Change: You know we are going to see gross margins, improving and therefore, you get into it exit rates, we gave our guidance at 36% to 39%, which means we're certainly moving towards the forties, whether we get there not this year, we'll see but but but we certainly see the opportunity to keep moving.
Christian Henry: If you're placing a lot more instruments and going deeper into the customer pyramid, the pacing of that, and the types of customers are probably going to spend less, at least initially. But if you're placing fewer boxes year over year, I'd assume the consumables per box would go up. So I'd just love to understand the logic behind that just to make sure we're looking at this as a potential source of upside for the year. Thank you. Yeah, sure. Thank you, Doug.
Speaker Change: On gross margins.
Speaker Change: For lots of all the reasons that that Susan outlined you know one thing she didn't she kind of mentioned, but I also wanted to really point out.
Speaker Change: We're actually innovating a lot.
Christian Henry: Okay, so first with gross margins, you know, I do, I expect over the course of the year, we're going to see gross margins improving, and therefore, you get into exit rates. We gave our guidance at 36 to 39%, which means, you know, we're certainly moving towards the 40s, whether we get there or not this year, we'll see. But, but we're, but we certainly see the opportunity to keep moving up on gross margins for lots of reasons, all the reasons that Susan outlined. You know, one thing she didn't, she kind of mentioned, but I also wanted to really point out that we're actually innovating a lot, and that innovation is getting translated into reducing costs by, in particular, decreasing the compute costs associated with Revio, and that's a big source of opportunity that's, you know, tens of thousands of dollars per system kind of opportunity for gross margin improvement.
Speaker Change: And that innovation is getting translated into reducing cost by in particular decreasing the compute costs associated with <unk> and that's a big source of opportunity that's.
Speaker Change: Tens of thousands of dollars per system kind of opportunity for for gross margin improvement. So you couple those things along with.
Consolidated factory consolidation and.
Speaker Change: Product consumable mix changes, that's how you start to move towards those forties.
Speaker Change: <unk> and beyond and of course, our objective is to get.
Speaker Change: Up to 55% to 60% as we said for 2026 and.
Speaker Change: I do believe we still see a pathway to get there.
Speaker Change: And with respect to the placement numbers in the relationship between that and consumable pull through as you know it's a compound.
Speaker Change: It's a compound problem, there's lots of variables on one hand, you are right as you place more systems do you think youre, placing of them to the.
Christian Henry: So you couple those things along with consolidation, factory consolidation, and product consumable mix changes, that's how you start to move towards those 40s, you know, 40s and beyond. And, of course, our objective is to get, you know, get up to 55 to 60%, as we said, for 2026. And, you know, I do believe we still see a pathway to get there. In respect to the placement numbers and the relationship between that and consumable pull through, as you know, it's a compound problem; there are lots of variables.
Speaker Change: Two deeper into the market and therefore to lower utilization customers.
Speaker Change: However, we're still early in the in the adoption of Rab Yo, particularly with respect of the larger projects right projects from a you know anywhere from.
Speaker Change: From 1000 to 10000 sample projects and quite frankly, what we've seen from the conferences from as HG and from recently from a GBT has been there is more interest in large scale projects than ever in the history of the company and so as those projects you know it takes long time for these projects to get.
Christian Henry: On the one hand, you are right, as you place more systems, you think you're placing them deeper into the market and, therefore, to lower utilization customers. However, we're still early in the adoption of Revio, particularly with respect to larger projects, right, projects from, you know, anywhere from 1000 to 10,000 sample projects. And quite frankly, what we've seen from the conferences from ASHG and recently from AGBT has been there is more interest in large-scale projects than ever in the history of the company. And so as those projects, you know, it takes a long time for these projects to get funded and then won and then started.
Speaker Change: Get funded and then one and then started but as those projects get going we fully expect to see.
Speaker Change: You know people utilizing their systems at a very high clip in those projects because they're usually scaled laboratories and they're they're used to operating at a high sample volumes. So that so they're kind of competing those two factors are competing at some level.
As I said last week at <unk>, you know, we still believe we don't really we don't really know where consumable pull through is going to shake itself out here. We we've said that we think it's kind of in the three to 400 K range, where it fits.
Christian Henry: But as those projects get going, we fully expect to see, you know, people utilizing their systems at a very high clip in those projects because they're usually scaled laboratories and they're used to operating at high volumes. So they're kind of competing. Those two factors are competing at some level. As I said last week at AGBT, we don't really know where consumable pull-through is going to shake itself out here. We've said that we think it's kind of in the 300 to 400K range, where it fits. But you know, I think we still don't know that answer.
Speaker Change: I think we we still don't know that answer I think it'll be several several quarters, yet before you really know no that answered definitively.
Speaker Change: There's lots of different competing forces here. So it is a compound problem that compound puzzle. We're trying to unravel just like you guys are.
Speaker Change: But what I do know is the number of samples coming onto this system is accelerating and its more than ever in the history of the company and I think that's at a fundamental level that bodes well for driving revenue growth driving adoption driving gross margin expansion.
Christian Henry: I think it'll be several quarters yet before you really know that answer definitively, but there are lots of different competing forces here. So it is a compound problem, a compound puzzle we're trying to unravel, just like you guys are. But what I do know is the number of samples coming onto this system is accelerating, and it's more than ever in the history of the company. And I think that, at a fundamental level, that bodes well for driving revenue growth, driving adoption, driving gross margin expansion, and then driving, you know, really ubiquity in the market, which is really our core objective in this phase of our strategic plan, right? Driving adoption, building confidence in the data type, and demonstrating why HiFi is really the way to go with respect to germline genomes.
Speaker Change: And then driving really ubiquity in the market, which is really our core objective in this phase of our strategic plan right driving adoption building the confidence in the data type and demonstrating why hi Fi is really the way to go with respect to Germline genomics.
Sung Ji Nam: The next question is from sung genome with Scotiabank. Please go ahead.
Sung Ji Nam: Hi, Thanks for taking my question. So Christian you mentioned you know your outlook for this year, obviously, it's much higher than kind of the overall sequencing market growth.
Sung Ji Nam: Just kind of curious I don't know if it's too early to tell but just you know how much of that growth do you think for you guys. This series coming from you know it potentially taking share from the short read sequencing market birthday, I'm kind of expanding into new territories with with long read sequencing you know keeping the new library prep launch.
Christian Henry: Your question is from Sung Jee Nam with Scotiabank. Please go ahead. Hi, thanks for taking my question. So, Christian, you mentioned your outlook for this year, and obviously, it's much higher than the overall sequencing market growth. Just kind of curious, I don't know if it's too early to tell, but how much of that growth do you think for you guys this year is coming from potentially taking share from the short read sequencing market versus kind of expanding into new territories with long read sequencing, you know, given the new library prep launch recently, the Hi-Fi Solves, you know, consortium you talked about, and all these large-scale studies that you are saying that there is more So I'm just kind of curious, do you have a kind of sense at a high level of how much carry might be taken from the short read versus creating new markets? Yeah, you know, I think it's a it's a great question.
Sung Ji Nam: Recently.
Sung Ji Nam: The Hi Fi solved you know consortium you talked about in all of these large scale that you thought you were saying that there is more interest than I've heard I mean, just kind of curious do you guys. Do you have a kind of a sense at a high level kind of how much carry might be taken from the short read birthday, creating new markets.
Speaker Change: Yeah, you know I think it's it's a it's a great question.
Speaker Change: Think that you know most of our new customers are already doing short read sequencing.
And so you can imagine that there they're generally allocating dollars from short read sequencing to long read sequencing most of the time, but sometimes you know for example in rare disease.
Speaker Change: Short read approaches have been used and to some success, but long read sequencing gives you so much more information dramatically increases the solve rates decreases cost.
Speaker Change: And as a result.
Speaker Change: The question is are you building a new market there or are you. Just are you, replacing an end being additive to short reads and I think it's a bit of you know.
Christian Henry: I think that, you know, most of our new customers are already doing short read sequencing. And so you can imagine that they're generally allocating dollars from short read sequencing to long read sequencing, most of the time, but sometimes, you know, for example, in rare diseases, short read approaches have been used, and with some success. But long read sequencing gives you so much more information, dramatically increases the solve rates, and decreases costs. And as a result, you know, the question is, are you building a new market there? Or are you just replacing and being additive to short reads? And I think it's a bit of, you know, a bit of in the eyes of the beholder.
Speaker Change: A bit of in the eyes of the Beholder, but I also think that you know what we see is that at a high level.
Speaker Change: We are winning projects that were slated for short reads and and what's happening is exactly kind of how we outlined it would happen at first it would be we win a portion of a project and long reads would do that.
Speaker Change: Long reasons do a portion in short we had to do the.
Speaker Change: The remaining but now we're actually seeing accounts.
Speaker Change: <unk> believe that with revenue now there's enough experience in the market of the scale. We've launched the automation with these new kits, we're seeing customers that say hey, you know, it's totally plausible I can do it 10000 sample project entirely on revenue or even more.
Christian Henry: But I also think that, you know, what we see is that at a high level, we are winning projects that were slated for short reads. And, and this is exactly kind of how we outlined what would happen at first; it would be we win a portion of a project, and long reads would do the long reads would do a portion, and short reads would do the remaining. But now we're actually seeing accounts believe that with Revio, now there's enough experience in the market for the scale, we've launched the automation, you know, with these new kits, we're seeing customers that say, Hey, you know, it's totally plausible. I can do a 10,000 sample project entirely on revenue or even more.
Speaker Change: And so as a result, we're actually starting to see customers, saying, Hey, if you can fit within this economic envelope. We are transferring our entire project to two long reads and I think that's really really exciting and I'm looking forward to as we get deeper into the year and some of these projects.
Speaker Change: Can't go into sharing that with you guys.
The next question is from East Burstein with Bernstein Research. Please go ahead.
Hi, there thanks for the question.
East Burstein: We talked about gross margins in 'twenty four about one clarifying question on the gross margin for this quarter, if I'm doing the math right. Even if we account for the charges on inventory reserve than the loss on purchase commitments and the amortization you still get to about 35% and we.
Christian Henry: And, and so as a result, we're actually starting to see customers saying, Hey, if you can fit within this economic envelope, we are transferring our entire project to two long reads. And I think that's really, really exciting. And I'm looking forward to as we get deeper into the year, and some of these projects get going. And just sharing that with you guys, for burn. Go ahead. Hi there.
East Burstein: The ASP was unusually high for radio so if you normalize for that.
Looks like a normalized gross margin this quarter of about 32%. So why is this flat first last quarter I can see that both went up as a percent of revenue and then is there any color you can give on gross margin for consumables versus instruments or for a sequel.
Christian Henry: Thanks a lot for the question. We've talked about gross margins in 24, but one clarifying question on the gross margin for this quarter. If I'm doing the math right, even if we account for the charges on the inventory reserve and the loss on purchase commitments and the amortization, we still get to about 35%.
Speaker Change: Yeah, So just to kind of try to clarify the question China If you.
Speaker Change: I'll just trust your math I didn't I didn't redo your math, but but what was in the fourth quarter. We have had some yield challenges on.
Christian Henry: And we know that ASP was unusually high for Rebio. So, if you normalize for that, it looks like a normalized gross margin this quarter of about 32%. So, why is this flat first last quarter if the consumables went up as a percent of revenue?
Speaker Change: On the consumables, which have impacted us a little bit that wouldn't be factored into your account or your calculation, so even with consumables being higher.
Christian Henry: And then, is there any color you can give on gross margin for consumables versus instruments or for Rebio versus SQL? Yeah, so, just to kind of try to clarify the question, you know, trying to if you, I'll just trust your math. I didn't I didn't redo your math.
Speaker Change: We did have some yield some yield challenges in the fourth quarter.
Speaker Change: Nothing that's significant but probably had some sort of impact there looking those things had been largely resolved and so as you look into Q1 and beyond here.
Christian Henry: But but real what what in the fourth quarter, we have had some yield challenges on the consumables, which has impacted us a little bit. That wouldn't be factored into your account or your calculation. So even with consumables being higher, you know, we did have some yield, some yield challenges in the fourth quarter. Nothing that significant, but it probably had some sort of impact there. Those things have been largely resolved. And so, as you look into Q1 and beyond here, you know, I fully expect us to start moving the gross margins up on a quarterly basis. Ross Osborne with Cantor Fitzgerald.
I fully expect us to start moving the gross margins up on a quarterly basis.
Speaker Change: Yeah.
Speaker Change: The next question comes from Ross Osborne with Cantor Fitzgerald. Please go ahead.
Ross Osborne: Hi, Thanks for taking our question. So I'll call you mentioned consumable stocking in APAC did stocking occur in other geographies and is this a normal phenomenon and if not could you provide some more color here.
Ross Osborne: So I think that with respect to consumable stocking fourth quarter, we didn't have that much stocking.
Ross Osborne: There's always a little bit in the fourth quarter and in APAC for example, because they have.
Susan: Please go ahead. Hi Nicole, you mentioned consumables and stocking, and APAC. Did stocking occur in other geographies, and is this a normal phenomenon?
Ross Osborne: Because they have.
Ross Osborne: Holidays in it.
Ross Osborne: Q1, they may be ordering some of their component some of their consumables earlier, so they get a good head start before they go on the holidays, but.
Susan: And if not, could you provide some more color here? So I think that with respect to consumable stocking, you know, fourth quarter, we didn't have that much stock. There's always a little bit in the fourth quarter and APAC, for example, because they have, you know, because they have holidays in Q1. They may be ordering some of their consumables earlier so they get a good head start before they go on the holidays. But there was nothing really major.
Ross Osborne: There was nothing really major we had some of our large customers put in blanket.
Ross Osborne: But large blanket pose that will ship over the course of 'twenty 'twenty four and they did take some of their they did take some of that those P. As in Q4 as well and so I.
Ross Osborne: I think on balance.
Susan: We had some of our large customers put in large blanket POs that will ship over the course of 2024. They did take some of those POs in Q4 as well. I think, on balance, it wasn't a super heavy stocking quarter for the company. The next question comes from Matt Sykes with Goldman Sachs. Please go ahead. Hi, this is Evian speaking for Matt.
Ross Osborne: It wasn't super heavy stocking quarter for.
Ross Osborne: <unk> for the company.
Ross Osborne:
Speaker Change: I think we're ready for the next question.
Speaker Change: Thank you. The next question comes from Mac Sykes with Goldman Sachs. Please go ahead.
Mac Sykes: Hi, This is <unk> on for Matt. Thanks for taking my question.
Christian Henry: Thanks for taking my question. So I know you said your sales cycles are extended with general weakness in the funding environment, but is there a recovery baked into your guide for 2024?
Mac Sykes: You said yourself cycles are extended with general weakness in the funding environment, but is there a recovery baked into your guide for 2024, and you are you expecting a continuation of the current trends throughout the year.
Christian Henry: And are you expecting a continuation of the current trends throughout the year? You know, I think we've taken a pretty moderate view on sales cycles. You know, I suspect we're hopeful by year end that we're seeing sales cycles kind of shrink back down to kind of more normal levels. But the reality is that, you know, we are prepared to manage through longer sales cycles throughout throughout 2024. And, you know, we tried to give guidance that would contemplate things outside of our control are just that they're outside of our control and that we should be able to try to execute accordingly. Now, things have gotten a lot worse.
Mac Sykes: You know I think we've taken a pretty.
Mac Sykes: Moderate view towards sales cycles, you know I suspect.
Mac Sykes: Hopefully by year end that.
Mac Sykes: We're seeing sales cycles kind of shrink back down to kind of more normal levels, but but the reality is is that you know we are we are prepared to manage through.
Mac Sykes: Longer sales cycles.
Mac Sykes: Throughout 2024, and we tried to give guidance that would contemplate things outside of our control are just that they are outside of our control and that we should be able to try to execute.
Mac Sykes: Accordingly, now things get a lot worse of course things could change.
Christian Henry: Of course, things could change if things get better. Could we, you know, could we do better inside of our guidance range? Of course. But where we sit today, you know, we tried to kind of create a balanced set of guidance based on the fact that it's a tough funding environment across the board. We still if even if you take, for example, the United States, we're still operating under continuing resolutions, and we still don't really have a budget.
Mac Sykes: If things get better could could we could we do better inside of our guidance range of of course, but where we sit today.
Mac Sykes: Tried to kind of create a balanced set of guidance based on.
Mac Sykes: It's a tough funding environment across the board, we still if you even if you take for example, the United States, We're still operating under.
Mac Sykes: Continuing resolutions and we still don't really have a budget you know, there's there's all kinds of noise about where the NIH budget will end up which obviously NIH funding is an important part of our our business and so I'm sure that create some friction in the sales side selling process are we.
Christian Henry: You know, there's all kinds of noise about where the NIH budget will end up, which obviously NIH funding is an important part of our business. And so I'm sure that creates some friction in the sales process. We talked about outside the United States. We talked about China a lot already today, and we've emphasized that. But also, even in Europe, you know.
Mac Sykes: Talked about outside the United States, you know, we talked about China, a lot already today, and we've emphasized that but but also even in Europe you know.
Christian Henry: Interest rates and the funding environment still continue to be challenged. Europe had a great year last year for us, and we expect to have a good year in Europe and continue growing, but there is that friction in the system. The good news, as I said in my prepared speech, is that there is no shortage of interest for Revio and for HiFi sequencing in general. In fact, at AGPT last week, our social teams tracked social impressions. I was told we had 2.3 million social impressions, and the next highest person was almost 10 times lower than where we were. What is that?
Mac Sykes: Interest rates are and the funding environment still continued to be challenged Europe had a great year last year for us and we expect to have a good year in Europe and continue growing but but there is a.
Mac Sykes: There is that friction in the system. The good news as I said in my prepared remark is there is no shortage of interest in.
Mac Sykes: For radio and for.
Mac Sykes: And for Hifi sequencing in general in fact, you know at <unk> last week.
Mac Sykes: Our social teams track social impressions.
Mac Sykes: I was told we had $2 3 million social impressions and the next highest.
Mac Sykes: <unk>.
Mac Sykes: Person was like almost 10 times lower than where we were in so.
Christian Henry: What does that mean? And how does that translate into sales? Well, I think what it does mean is there's a lot of interest in what we do, which is helping build our funnels, which, you know, gives us opportunities to execute, which we're going to be focused on this year. Hi, I'm A. Jess Savant with Morgan Stanley. Please go ahead. Hey, guys. Good evening.
Mac Sykes: What does that what does that mean and how does that translate into sales will I think I think what it does mean is theres a lot of interest in which is helping build our funnels, which gives us opportunities to execute which we're going to be focused on this year.
Mac Sykes: The next question is from Tejas Savant with Morgan Stanley. Please go ahead.
Tejas Savant: Hey, guys good evening.
Christian Henry: Christian, I want to follow up a little bit on that question, take a slightly different tack. So as you think about, you know, the low end of the guide, right? I think it probably bakes in around 160 odd sort of revisions at the low end.
Tejas Savant: Christian I wanted to follow up a little bit on that question take a slightly different tack. So.
Tejas Savant: As you think about the low end of the guide right I think it probably baked centered around 160 odd sort of <unk> at the low end can you just walk us through what do you see you've talked in the past of backlog not being the best leading indicator, but perhaps you can talk about the qualified lead pipeline or some other metrics that drive your confidence at the low.
Christian Henry: Can you just walk us through what you see? You've talked in the past about backlog not being the best leading indicator, but perhaps you can talk about the qualified lead pipeline or some other metrics that drive your confidence at the low end of the range. And then on the Onzo, my question there is really related to the value proposition and the product market fit, given some of your, you know, the emerging sequencing vendors bumping up their FRED scores as well on the benchtops. And you've got the XLEAP coming out next week. So is the benchtop market essentially in a little bit of a frozen state at the moment? Yeah, that's a good question. Thank you, Tejas.
Tejas Savant: The end of the range and then on the <unk>. My question, there is really related to the value proposition and the product market fit.
Given some of your emerging sequencing vendors bumping up their better Fred scores as well on the bench tops and you've got the ex leap coming out on the next week. So is the bench top market essentially in a little bit of a frozen state at the moment.
Speaker Change: Yeah. That's a good question. Thank you Jay just so you know thinking about.
Christian Henry: So, you know, obviously, when we put the guide together, at 230 to 250, where we are today, we considered, you know, we certainly considered the quality and strength of our sales funnel for Revio, and for Anso, and for consumers, you know, for all of our products. And, and, you know, at the low end and even at the high end, we have coverage in our sales funnels. It just we are the explanation for the kind of possible outcomes really comes down to timing of orders, timing of when funding comes for projects, of course, our own sales execution, and the ability of our own execution in terms of the ability to manufacture the products and get them out to customers on a timely basis.
Speaker Change: Obviously, when we put the guide together at 230 to $2 50, where we were.
Speaker Change: Talking today, we considered.
Speaker Change: Certainly considered the quality and strength of our sales funnel.
Speaker Change: For for radio and for ASO and for consumables for all of our products and at the low end and even at the high end, we have coverage in our our sales funnels. It just we are there.
Speaker Change: The explanation for kind of the range of possible outcomes really comes down to timing of orders timing of when funding comes for projects.
Speaker Change: Of course, our own sales execution and the ability our own execution in terms of the.
Speaker Change: The ability to manufacture the products and get them out to customers on a timely basis. So when you put the guidance together you really try to think through all of those different things and give a responsible range where.
Christian Henry: So when you put the guidance together, you really try to think through all of those different things and give a responsible range where you think you might end up for the year. Now, if the funnels and the excitement are enough such that you could actually exceed the top end of the range. But of course, there could be risks that are out there, perhaps outside of your control that make it so you end up towards the lower end of the range.
Speaker Change: Where do you think you might end up for the year now if the funnels and the excitement is enough such that you could actually exceed the top end of the range.
Speaker Change: But of course, there could be risks that are out there.
Speaker Change: Perhaps outside of your control that that make it. So you end up towards the lower end of the range and so it is a we consider all of those different factors. We certainly have a pipeline that is encouraging for us which is how we came up with the range quite frankly, you start there.
Christian Henry: And so it is; we consider all of those different factors. We certainly have a pipeline that is encouraging for us, which is how we came up with the range. Quite frankly, you start there, and you work backwards to all the other areas of execution. The value proposition with respect to ANSO, I would argue that the first thing I'd want to say is that, you know, the reality is that most of the bases that come off of the sequencer, off of the ANSO, are actually over Q50.
Speaker Change: And you work backwards to all the other areas.
Speaker Change: Areas of execution the value proposition with respect to answer though I would argue that the first thing I'd want to say is that you know the reality is most of the bases that come off the sequencer off of the ASO or are actually over $2 50.
Christian Henry: Now, we expect it at 90% of the bases over Q40. And I would submit to you that our competitors have not put a formal specification in to say they get 90% of their bases over Q40 or Q50. I think what they've done is, you know, perhaps they've demonstrated a run or some runs. You know, I will let each of those competitors kind of describe themselves, how they define their quality.
Speaker Change: Now we expect it at 90% of the bases over Q40, and I would I would submit to you that our competitors have not put a formal specification and to say they get 90% of their bases over Q40, or <unk> 50, I think what they've done is perhaps they've demonstrated a.
Speaker Change: Ron or some runs.
Speaker Change: You know I I will let each of those competitors kind of describe themselves how they define their quality, but what we are seeing in actual fact is that in customers hands. For example, like T J and I talked about today.
Christian Henry: But what we are seeing in actual fact is that in customers' hands, for example, like TJ and I talked about today, they see a lot of data that's well over Q50, and that data is allowing them to see parts of the genome and see variants that no one else could see. And I think that's where the value proposition starts. And so I don't think the opportunity is frozen.
Speaker Change: See a lot of data, that's well over Q <unk> and that data is allowing them to see parts of the genome and see variance that have that no one else could see and I think that's where the value proposition starts and so I don't think the opportunity is frozen.
Christian Henry: On the other hand, I do see the market for, you know, those mid-throughput sequencers is a huge market, and every year, you know, there are many, many, many sequencers sold. And so I think for us to capture our appropriate share according to our strategy, if you remember our strategy, we're trying to make OnSo a sequencer that fits into very specific needle-in-a-haystack applications and We think that the opportunity is very strong. What's been interesting to us as we see the funnel for OnSo grow and as we see customers using OnSo is that they're using it in ways that we didn't quite anticipate. So, for example, one of our customers is using it for wastewater testing, which makes total sense because, you know, that's where the earlier you detect a variant that identifies a pathogen, the sooner, you know, that obviously has benefits for the community.
Speaker Change: On the other hand, I do see the market as the market for for those mid throughput sequencing is a huge market.
Speaker Change: And there and every year you know there's a.
Speaker Change: There's many many many sequencer sold and so I think for us to capture our appropriate share. According to our strategy. If you remember our strategy, we're trying to make on so a sequencer that fits into very specific needle in a haystack applications and not necessarily every.
Speaker Change: Occasion, we think that the opportunity is very strong.
Speaker Change: What's been interesting to us in as we see the the funnel for also grow and as we see.
Speaker Change: Customers using ASO as that they're using it in ways that we didnt quite anticipate so for example, one of our customers is using it for wastewater testing, which makes total sense, because that's where the earlier you detect the variant that identifies a pathogen. The soon that that obviously has.
Speaker Change: Benefits for the community so that makes perfect sense, we're seeing other customers focus on.
Christian Henry: We're seeing other customers focus on, you know, oncology research, and whether it's, you know, MRD, or it's actually, you know, oncology screening, there's a lot of research going on and an opportunity there. So the combination for Anso is, you know, we have a lot of market opportunity. I feel like our quality is still the best in the market, and so much so that we specify it in our specifications.
Speaker Change: Oncology research and whether it's you know mr's.
Speaker Change: Marty or it's actually.
Speaker Change: Oncology screening.
Speaker Change: There's a lot of research going on and an opportunity there so the combination.
Speaker Change: For answer is.
Speaker Change: We have a lot of market opportunity I feel like our quality is still the best in the market and so much so that we specify it in our specifications I am not sure of the other customers other competitors are doing that yet.
Christian Henry: I'm not sure if the other customers and other competitors are doing that yet. But, you know, I do think, at the end of the day, the market is significant, and we enjoy competing. The next question is from Subbu Nambi with Guggenheim. Please go ahead.
Speaker Change: But you know I do think at the end of the day the market is significant and we enjoy competing in it.
Guggenheim: The next question is from southern <unk> with Guggenheim. Please go ahead.
Christian Henry: Hi, thank you for taking my question. Following up on Doug's question on consumable revenue per revenue, your guidance seems to imply that you're assuming 300k per box in a full year guidance. Is that right?
Southern: Hi, Thank you for taking my question.
Southern: Following up on Doug's question on consumables revenue part of that deal.
Guggenheim: Your guidance seems to imply that you're assuming 300 cable box.
Guggenheim: Our full year guidance is that right and if so keeping in mind. What you described on this call and <unk> last week are you expecting that will build momentum in the second half of the year and heading into 2025.
Christian Henry: And if so, keeping in mind what you described on this call and in AGBT last week, are you expecting this to build momentum in the second half of the year and heading into 2025? And then I have a little follow-up. Okay, so with respect to the pull through, we, we have, there's lots of ways to get to the guidance. And so, you know, we won't comment on whether our model says 300, 350, 400.
And then I have one follow up.
Speaker Change: Okay. So with respect to the pull through we had we there's lots of ways to get to the guidance and so you know.
Speaker Change: No.
Speaker Change: We won't.
We won't comment on whether our model says $303 5400.
Christian Henry: You know, what we've said is that we don't know where our pull through is going to end up. But, for example, last week at AGBT, I did say I believe it's going to be in the 300 to 400k range. And there are lots of factors, of course, that would influence it one way or another that I've already kind of gone through on this call. But I didn't explicitly, you know, I won't explicitly comment on whether our model to get to the guidance was 300k a box or not.
Speaker Change: What we've said is that we don't know.
Speaker Change: Where are.
Speaker Change: Where our pull through is going to end up.
Speaker Change: But at like for example, last week at a JBT I did say I believe it's gonna be in the three to 400 K range and Theres lots of factors of course that would influence one way or another that I've already kind of been through on this call, but but it didn't explicitly I won't explicitly comment on whether it's our model to get to the <unk>.
Speaker Change: <unk> was 300 K box or not.
Christian Henry: A more general comment I'll make about the business in general is that, you know, we do see more revenue coming in the second half of the year as opposed to the first half. Now, this is not an uncommon phenomenon, and we don't expect, as Susan pointed out, 45-55 is the split, which isn't really uncommon, you know, in the life science business, but we do see the business strengthening throughout the year because of these large projects, because of the growth in consumables, because of the, you know, the actual opportunities that we see for Revio and Anso over the course of the year. And so, you know, we're excited about our ability to grow faster than the market. We do think our competitive positioning is extremely strong right now. And, you know, we just have to go execute it. It makes perfect sense.
Speaker Change: And more general comment I'll make about the business in general is that we do see more of the revenue coming in the second half of the year as opposed to the first half now that is not an uncommon phenomenon and we don't expect as Susan pointed out $45 $55 is the split which isn't really uncommon.
Speaker Change: In life Science business, but we do see the business strengthening throughout the year.
Speaker Change: Because of these large projects because of the growth in consumables because of the the actual opportunity set we see for radio and also over the course of the year and so we're excited about our ability to grow faster than the market.
Speaker Change: We do think our competitive positioning is extremely strong right now and we just have to go execute.
Speaker Change: It makes perfect sense.
Christian Henry: And Christian, like you said, there was lots of enthusiasm, even in our checks at AGBT last week. That said, the need for a lower cost and more streamlined solution adjacent to sequencing costs came up, and even the sequencing process. And you, of course, launched the Hi-Fi kits, the new kits that you launched last week, to address that same exact friction. What else should we think about is in the pipeline to address the same issue? And how big an opportunity is this reduction of friction, both in terms of reducing activation energy but also capturing more revenue?
Speaker Change: Christian like you said there was lots of enthusiasm even in our checks that HBV last week.
Speaker Change: Hum.
Speaker Change: The need for lower cost and more screen line solution addressing to sequencing costs came up and even the sequencing process and you of course launched the Hi Fi kit the new kits that you launched last week to address that the same exact friction what else should we think about is in the pipeline to address the same issue.
And how big an opportunity is this do you think introduction of friction both in terms of.
Speaker Change: <unk> activation energy, but also capturing more of that.
Speaker Change: Yeah. That's a great question. Thank you for it.
Christian Henry: Yeah, it's a that's a great question. Thank you for it. I, you know, you're right; the new kits, we've been really focusing on automation and reducing the friction and costs of the upfront workflow; we continue to lower the DNA input requirements, which gives you more access to more kinds of samples, more samples; all those things are critical. Other things that we're doing to decrease friction and enable revenue growth are on the bioinformatics side. And so we continue to build out more applications that, you know, really highlight the benefits of HiFi sequencing and using long reads.
Speaker Change: Youre right the new the new kits, we've been really focusing on automation and.
Speaker Change: Reducing the friction and costs of the upfront workflow, we continue to lower the DNA input requirements, which gives you more access to more kinds of samples more samples all of those things are critical other things that we're doing.
Speaker Change: Two decrease friction and enable enable revenue growth is on the bioinformatics side and so we continue to build out more applications that.
Speaker Change: Really highlight the benefits of hifi sequencing and using using long reads and the more of those applications.
Christian Henry: And the more of those applications that are out there, the more we can reach more and more customers. We're also doing things on the market development side. So, we created the Hi5Solves consortium so that customers can work together to solve rare diseases and show how they can benefit from, you know, seeing some particular variant in a particular sample. Because by definition, rare diseases are each single one of them is rare.
Speaker Change: <unk>.
Speaker Change: That are out there the more we can reach more and more customers. We're also doing things on the market development side. So we created the hi Fi solves consortium, so that customers can can work together to solve rare diseases to show how they can.
Speaker Change: Benefit from you know seeing seeing some particular variant in a particular sample because by definition rare disease. Each single one of them is rare and so enabling enabling the community is an important thing and then finally of course, we have.
Christian Henry: And so, enabling the community is an important thing. And then, of course, we have, you know, we have a benchtop sequencer, a long-read sequencer, in development now. And once that product comes to market, that will, you know, that will change the capital barriers, of course, of the system and enable us to even broaden our customer base further. And, you know, we haven't given specific timing on that, but we will certainly share updates as they are warranted. So, thank you for the question. This is a presentation by Rachel Wattensdahl with J.P. Morgan. Please go ahead. It's perfect. Good afternoon,
Speaker Change: We have a bench top.
Speaker Change: Sequencer long read sequencing in development now and once that product comes to market that will.
Speaker Change: That will change the capital barriers of course.
Speaker Change: Out of the system and enable us to even broaden our customer base further.
Speaker Change: Haven't given specific timing on that but we will certainly share update says as they are warranted. So thank you for the question.
Speaker Change: Okay.
Speaker Change: The next question comes from Rachel <unk> with J P. Morgan. Please go ahead.
Rachel: Perfect. Good afternoon, and thanks for squeezing me in so I wanted to ask <unk> talks about some of the cautious capital spending that you're seeing a customer and say you noted that you were starting to or getting discounts to customers I'm Raphael, but then requiring higher minimum spend on consumables to kind of alleviate some of that capital purchasing dollars.
Christian Henry: And thanks for squeezing me in. So I wanted to ask, at AGBT, you talked about some of this cautious capital spending that you're seeing at customers. And so you noted that you're starting to explore giving discounts to customers on Revio, but then requiring higher minimum spend on consumables to kind of alleviate some of that capital purchasing dollars. It's almost more of a regent rental model.
Rachel: Its almost more of a reagent rental model. So can you spend a minute talking about that right have you started to use that go to market strategy. This year and then if so how should we think about that impacting F. P. As we model a ramp up for this year, it's Bob Thank you.
Christian Henry: So can you spend a minute talking about that for us? Have you started to use that go-to-market strategy this year? And then, if so, how should we think about that impacting ASP as we model Revio for this year as well? Thank you. Rachel, it's a great question. Thank you. Yeah, we are exploring alternative business models or economic economic arrangements that still get us to the same place with respect to revio. But perhaps, perhaps the customer pays more for consumables and less for their instrument.
Bob: Rachel It's a great question. Thank you, yes, we are we are exploring alternatives.
Bob: Business models or economic economic arrangements that still get us to the same place with respect to radio, but perhaps perhaps a customer pays more for consumables and less for their instrument.
Christian Henry: Last year, we implemented a new leasing partner. That new leasing partner gives us the ability to do more creative financing arrangements where the leasing partner takes some of the financial exposure, but we, you know, obviously get the benefit to our customers, and we still get healthy, you know, healthy revenue from that. And so we're managing through this period by starting to think about how we experiment with different models to see, you know, how we catalyze, you know, how we continue to catalyze and grow the market. Now, the vast majority of our, our, our sales are still going to be traditional sales as we've kind of historically done. And so I don't think anyone should be thinking that we're fundamentally altering how we think about generating revenue and the geography of revenue on the P&L. But I do think, at the margin, some customers might benefit from more reagent rental programs. And the implication of that would be, you know, that you would probably likely have higher consumable revenues, and, effectively, what the street would see is a lower, lower instrument ASP, maybe a little bit.
We last year, we implemented a new leasing partner.
Bob: That new leasing partner gives us the ability to do more creative financing arrangements, where we are at the leasing partner. It takes some of the financial exposure, but we.
Bob: We obviously get the benefit to our customers and we still get healthy.
Bob: Healthy revenue from that and so we're managing through this period by starting to think about how we experiment with different models to see.
Bob: You know, how we catalyzed how we continued to capitalize and grow the market now the vast majority of our our sales are still going to be traditional sales as we've as we've kind of historically done and.
Bob: And so I don't think anyone should be thinking that we're fundamentally altering how we think about generating revenue and the geography of revenue on the P&L, but I do think at the margin some customers might benefit from more reagent rental type programs and the implication of that would be.
Bob:
Bob: That you will likely have higher consumable revenues and effectively what the street would see is lower a lower instrument asps, maybe a little bit, but but I think that you know.
Christian Henry: But, but I think that, when you think about 2024, the real impact on ASPs and consumable revenue probably isn't that significant, really. I think, at the end of the day, it ends up being much more of a marketing tool and a way to get into customers, and then they will decide, you know, how to deploy whatever, you know, opportunity that we provide them. So we'll see how it goes, and we'll keep you guys posted. The next question is from Mason Carrico with... Please go ahead.
Bob: When you think about 2020 for the real impact to Asps and consumable revenues, probably isn't that significant really I think it's I think at the end of the day it ends up being much more of a.
Bob: A marketing tool and a way to get into customers and then they will decide how to how to deploy.
Bob: Opportunity that we provide them. So we'll see how it goes and we'll keep you guys posted.
Bob: The next question is from Nathan <unk> with Stephens. Please go ahead.
Christian Henry: Hey guys, sorry if this has been asked already. I jumped on a little bit late here, but you guys have talked about these larger sequencing projects coming online in the back half of the year. Is there any way to frame up the magnitude of these projects in terms of the growth implied in the guide? I mean, ultimately, I think the question is, how de-risked is the revenue baked into the guide related to these projects? How much visibility do you have into the timing and ramp of these customers scaling them up in the back half? I think, thank you, Mason, for the question. It's a good question.
Nathan: Hey, guys sorry, if this has been asked already.
Nathan: <unk> done a little bit late here, but do you guys have talked about these larger sequencing projects coming online in the back half of the year is there any way to frame up.
Nathan: The magnitude of these projects in terms of the growth implied in the guide I mean, ultimately I think the question is how de risked is the revenue baked into the guide related to these projects how much visibility do you have into the timing and ramp of these customers scaling them up in the back half.
Speaker Change: Thank you Jason for the question, it's a good question and.
Christian Henry: And the reality is, anytime you have a large project, large projects are highly variable with respect to when they start, but once they start, they run. And so, you know, watching when they actually start, of course, we're doing everything we can to accelerate them. Most, you know, some of these projects that we're seeing certainly already have samples banked and ready to go, and those are most likely to get going sooner than others, because those might be prospective kinds of studies. When you think about, okay, what's the magnitude of any particular project, you know, probably the best way to think about it is to apply a cost per genome, for example, and then multiply it by the number of samples that the particular project is. So, if you have a 5,000-sample project at a $750 price per genome, or whatever price you want to use, you can do the math and figure out what that looks like. And then you have to assume they have to buy capital along to run.
Speaker Change: The reality is anytime you have a large project large projects are highly variable with respect to when they start but once they start they crank.
Speaker Change: And so.
Speaker Change: Watching when they actually start of course, we are doing everything we can do accelerate them.
Speaker Change: Some of these projects that we're seeing certainly already have samples.
Speaker Change: <unk> and ready to go in those most likely to get going sooner than others that might be prospective kinds of studies.
Speaker Change: When you think about okay, what's the magnitude.
Speaker Change: Of any particular project you know probably the best way to think about it is to apply our cost per genome. For example, and then multiply it by the number of samples that that particular project is so if you have a 5000 sample project.
Speaker Change: A.
Speaker Change: $750 price per genome or whatever price you want to use you can do the math and figure out what that looks like and then you have to assume they have to buy capital along to run so that can kind of give you a sense.
Christian Henry: So that can kind of give you a sense of the magnitude of any particular project. With respect to our guide, we were actually pretty. You know, because of the volatility or the variability of when any particular project starts, you know, we took a pretty conservative view as we baked in those projects into our guide because, you know, we really want to make sure that we put out responsible guidance and that we're not so dependent on one project or one, you know, as a make or break for the year. But I do think in 2024 you're really going to see the turning point here where, you know, several of these projects start to get kicked off. We are already seeing some, right? All of us are moving along. We talked about the Greger Consortium project. And so, you know, we talked about Singapore starting later this year. And so there's, you know, we're really seeing it.
Speaker Change: Of what the magnitude of any particular project with respect to our guide we were actually pretty.
Speaker Change: Because the volatility of the variability of when any particular project starts we took a pretty conservative view as we do.
Speaker Change: Taking in those projects into our guide.
Speaker Change: We really want to make sure that that.
Speaker Change: We put out responsible guidance and we're not so dependent on one project or one.
Speaker Change: As a make or break for the year, so to speak but I do think in 2024, you're really going to start to see the turning point here where.
Speaker Change: Several of these projects start to get kicked off we already are seeing some write all of US is moving along.
Speaker Change: We talked about the Gregory consortium project.
Speaker Change: And so you know when we talked about Singapore, starting later this year and so we're really seeing it.
Christian Henry: And it's super exciting because, you know, every time we go to one of these conferences, more samples get added to the funnel, and significantly more samples. And so now it's a question of timing and execution, and we're ready to, you can be assured, we're ready to go. This concludes our questions. I'd like to turn back to management for any closing remarks. All right, well, we want to thank everyone for hanging in with us. I know we're a few minutes over our time today.
Speaker Change: And it's super exciting because.
Speaker Change: Every time, we go to one of these conferences more samples get added to the funnel and significantly more samples and so now it's a question of timing and execution and we're ready to you can be assured we're ready to go.
Speaker Change: Yeah.
Speaker Change: Thank you. This concludes our question and answer session I would like to turn it back to management for any closing remarks.
Speaker Change: Alright, well, we want to we want to thank everyone for hanging in with US I know, we're a few minutes over over time today.
We expect 2024 to be an exciting year for the company and we appreciate everyone's support we look forward to seeing you at various conferences over the course of the quarter and on our next earnings call with that we will end this call. Thank you.
Christian Henry: You know, we expect 2024 to be an exciting year for the company, and we appreciate everyone's support. We look forward to seeing you at the various conferences over the course of the quarter and on our next earnings call. With that, we will end this call. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.
Speaker Change: [music].
Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Operator: ... BF-WATCH TV 2021