Pacific Biosciences of California Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 12 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Path Bio Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note Today's event is being recorded. At this time, I'd like to turn the floor over to Todd Friedman, Senior Director of Investor Relations.

Speaker 1

Sir, please go ahead. Thank you, Jamie. Good afternoon, and welcome to PacBio's Q3 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 on the Investors section of our website at www.pacv.com or as furnished on Form 8 ks available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer and Susan Kim, Chief Financial Officer.

Speaker 1

On today's call, we will be making forward looking statements, including statements regarding Predictions, progress, estimates, plans, intentions, guidance and others, including expectations with respect to our growth potential, instrument and consumable sales and GAAP and non GAAP growth guidance. You should not place undue reliance on forward looking statements because they are subject to 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 SEC, including our most recent Forms 10Q and 10 ks and our recent press releases 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. During the call, we will also present certain financial information on a non GAAP basis.

Speaker 1

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. Management believes that non GAAP financial measures combined with U. S.

Speaker 1

GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans and benchmark our performance externally against competitors. Reconciliations between historical U. S. GAAP and non GAAP results are presented in the tables within our earnings release. In addition, 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.

Speaker 1

Investors electing to use the audio replay are cautioned that forward looking statements made on today's call may differ or change materially after the completion of the live call. Finally, we will be hosting a question and answer After our prepared remarks, we ask that analysts please limit themselves to one question only, so we could accommodate everybody in the queue. I will now turn the call over to Christian.

Speaker 2

Thank you everyone for joining the call today. PacBio achieved another milestone in the Q3 as we grew revenue by 72% year over year to $55,700,000 exceeding $50,000,000 in quarterly revenue for the first time in PacBio's history. All three regions again posted record quarterly revenue. In the Q3, we shipped 52 Revio instruments for revenue, which is a record number of instrument shipments in 1 quarter. This brings our installed base as of September 30 to 129 Revio systems.

Speaker 2

We also shipped our first Anso units in the 3rd quarter. I'm pleased with our order momentum and broad customer interest in this new platform. We've received orders from 10 countries across various customer and application types and expect to continue ramping up shipments in the Q4. I look forward to sharing the installed base for their Onslow system at a later date as the platform matures and we further scale manufacturing. We also recorded consumable revenue of 16 point 9,000,000 in Q3.

Speaker 2

In just its 2nd full quarter on the market, Revio consumables of approximately 9,300,000 surpass SQL 2 and 2E consumables. This ramp was faster than we had originally expected. We shipped well over 9,000 Revio smart cells in the quarter. For context, it took SQL 2, 2E 11 quarters to surpass 9,000 cells, which further underscores customers' rapid adoption and the elasticity of the new platform. In Q3, RevVO utilization increased compared to the Q2.

Speaker 2

Our customers use more cells per installed system as they began their ramp into production. In fact, the total data output for the Revio fleet in the Q3 already surpassed the output from the total 500 plus Sequel IIe fleet at its peak. The increased instrument utilization resulted in an annualized Consumable pull through of 483,000. Although it is exciting to see our customers generating more data than ever before, I would also say that we are still early in our launch cycle and we do not know if this level of consumable pull through will represent the long term pull through of the Revio platform. The continued uptake and adoption of Revio is allowing us to increase our 2023 revenue guidance again this year.

Speaker 2

We now expect full year revenue to be between $195,000,000 $200,000,000 representing 52% to 56 percent growth over 2022 and above the long term targets we set out at our Investor Day last November. One of the most important metrics we're tracking for Revio adoption is new customer uptake as it shows how the platform enables more and more users to migrate from other sequencing technologies on to PacBio. Again, we're pleased to report that over 40% of our REVIO system orders In the Q3 were from new PacBio instrument customers. Additionally, we continue to expect a multiyear opportunity for existing SQL2 customers to migrate over to Revio as less than 30% of the approximate 300 SQL2 and IIe customers have ordered a Revio to date. Our new customers include Helix, who ordered a Revio system to strengthen its offering by incorporating native and accurate long reads into its population genomics business, which currently provides an end to end sequencing platform for several large scale programs across the United States.

Speaker 2

In addition to new customers purchasing the platform, Some of our existing customers are already expanding their Revio capacity, like Children's Mercy Hospital in Kansas City, which has recently shared how Revio has enabled them to consolidate tests, increase efficiency and improve solve rates while accelerating turnaround time. Further, the hospital shared that they can achieve results in just 2 weeks with 5 base HiFi sequencing compared to months using multiple legacy tests. Similarly, we are also collaborating with GeneDx and the University of Washington to study the capabilities of HiPhi long read whole genome sequencing to improve our ability to understand genetic conditions in pediatric patients. We believe that with Hi Fi and Revio, our customers may be able to consolidate a menu of different tests onto 1 integrated complete long read genome. We continue to see strong momentum in the genetic disease segment for HiFi sequencing as other children's hospitals implemented Revio during the quarter.

Speaker 2

This includes another leading institution in the Midwest that upgraded from SQL2E to scale whole genome sequencing for its rare disease cohorts and to implement ISoseq to further its research in pediatric and adolescent cancer patients. In large scale genomics projects, we were pleased to see initial data from researchers at Mohammed Bin Rashid University of Medicine and Health Sciences or MBRU in developing an Arab pan genome reference, which uncovered over 100,000,000 base pairs of novel sequence compared to other recent pan genome references. PacBio HiFi was a key contributor to unlocking this new data, which is why the team decided to ramp on Revio to begin a larger multi 1,000 genome sequencing project this year. One of the hallmarks of PacBio has been our ability to create additional value for our customers by adding new features to our sequencing platforms. With Revio, we are continuing this tradition by improving the performance of our systems in the field and adding valuable new features the platform later this year.

Speaker 2

I'd like to spend a few minutes discussing some of these enhancements. In Q3, we rolled out a software update that optimizes the preload feature on Revio. The preload feature enables customers to load their onto the instrument while a sequencing run is underway. This gives Revio the potential to always be running and truly enables production scale long read sequencing. Over the past few months, we learned that some of our highest throughput, most industrialized customers We're having some challenges using this feature.

Speaker 2

And as a result, we made some changes to improve the preload function, which was included in this recent software release. Now customers can preload as expected, allowing high volume customers to potentially further increase Revio utilization. In the Q4, we plan to add several to the Revio platform. First, we will incorporate the highly anticipated adaptive loading feature popular on our SQL 2E platform. Adaptive loading tailors the DNA loading to better fit the customer's sample, providing a backstop to prevent smart cell overload.

Speaker 2

This can enable customers to load more DNA more confidently and ultimately achieve higher and more consistent yields. We will also enable support for libraries that are less than 3 kilobases long, which will position Revio more favorably in applications like AAV, ISO Seq and 16S microbial sequencing. Further, it will enable 12 hour and 30 hour run time, so users can optimize their runs for shorter and longer DNA inserts. Finally, the update will also include a run preview feature, allowing users to see their run statistics after the first four hours during the sequencing process and enabling customers to better plan for future sequencing runs. We're not just focused on enhancing the sequencing platform, but we are also improving the end to end workflow.

Speaker 2

We believe that by improving the workflow From sample preparation through data analysis, we will enable our customers to truly leverage the power of HiFi sequencing. In the sample preparation process, next year, we plan to release improvements that leverage the technology acquired from Circulomics to improve size selection on the SmartCell. This will improve our customers' ability to achieve higher sequencing output with each SmartCell and consistently achieve longer read lengths. Additionally, in order to enable our customers to take full advantage of the throughput of Revio, We have collaborated with leading automation providers including Hamilton, Integra, Reviti and Tecan to fully automate sample preparation protocols for both Revio and the SQL2 2E systems. On the analysis front, earlier this month, we launched the PacBio Whole Genome Sequencing Variant Pipeline or WGS Variant Pipeline.

Speaker 2

This standardized computational method consolidates over 10 separate secondary and tertiary analysis tools into a single user friendly workflow, enabling users with all levels of bioinformatics experience to access HiFi whole genome sequencing. Over the past few years, I've often discussed our goal to make PacBio more multi omic company. This is important as multi omic approaches allow us to better understand the underlying connections from the genome and the epigenome to the transcriptome in the proteome and ultimately glean greater insights into biology and disease. With the flexibility and increased throughput of Revio combined with HiFi single molecule detection capabilities, We're starting to see how Revio can be a multiomic Swiss Army knife of sorts. For example, in a preprint last month, Researchers from the University of Washington and other institutions showed how Revio can produce data on 4 separate high quality ohms on just one Revio smart cell, the genome, the methylome, chromatin epigenome and the transcriptome.

Speaker 2

In analyzing a participant in the undiagnosed disease network, the researchers reported Data from each of the 4 ohms explained 1 or more of the participants' genotypes. This study is yet another example of how Long read multi omic test can more effectively uncover unexplained rare conditions than multiple one off tests. In another study, scientists at the University of Dresden and Max Planck Institute used PacBio ISOSeq to look deeper into the transcriptome to understand the impact of alternative splicing on isoform diversity and protein structure and showed that isoforms have a critical role in determining protein structures and biological functions in brain development and concluded that alternative splicing has greater potential to impact protein diversity and function than previously thought independently from changes in gene expression. To address this growing transcriptomics market, we're excited to launch our new kinX kits, enabling scalable, cost effective, full length RNA sequencing on PacBio Revio and SQL2E. With the MOS sequencing method introduced late last year, customers can concatenate smaller inserts into one long insert to dramatically increase output in single cell RNA experiments.

Speaker 2

Now with the expanded and rebranded kinX kits, We can better address bulk RNA applications, allowing scientists to reveal the role of isoforms for the biology of health and disease, in addition to obtaining the gene expression information. This truly enables this application on Revio allowing customers perform large studies, thousands of samples per year on a single Revio system, thereby providing access to projects in neurology, rare disease and cancer research, as well as other markets. The KinX line of kits also includes the 16S kits. The 16S gene is found in bacterial genomes and has long been used to identify, classify and quantify Species and strains in a microbial community sample. At about 1500 base pairs long, short They'll be reading the whole gene, while long read sequencing would leave unused capacity on the sequencer.

Speaker 2

With KinX, Customers can concatenate the 16S gene into long libraries for Hi Fi sequencing. This puts Revio and SQL-two on par with short read sequencing regarding cost, positioning Revio to better address the multi $100,000,000 microbial genomics market. These kits further expand our competitive offerings in human genetics, oncology and microbiology, and we look forward to discussing them more with researchers at ASHG later this week. Before I pass the call over to Susan, I'd like to Welcome David Maligne to our Board of Directors. David brings extensive experience to our Board as a finance leader in various life science and healthcare companies, most recently Moderna Incorporated.

Speaker 2

And with that, I'll pass the call to Susan to discuss the financials. Susan?

Speaker 3

Thank you, Christian. As discussed, we are pleased to have reported $55,700,000 in product service and other revenue in the Q3 of 2023, which represented an increase of 72% from $32,300,000 in the Q3 of 2022. Interest revenue in the Q3 was $34,700,000 an increase of 203% from $11,400,000 in the Q3 of 2022. The continued momentum of REVEEO primarily drove the increase in revenue as we shipped 52 instruments for revenue in the quarter. We ended the quarter with an install base of 129 ReVio systems.

Speaker 3

Turning to consumables, Revenue of $16,900,000 in the 3rd quarter increased 5% from $16,100,000 in the Q3 of last year. It was a record for PacBio with approximately 55% of consumable revenue coming from Revio Systems and the remainder from other systems and other consumables. We expect SQL2 and 2E as a percent of total consumables to continue declining as we ship Revio and customers transition to the new system. Finally, service and other revenue was $4,100,000 in the Q3 compared to $4,800,000 in the Q3 of 2022. From a regional perspective, as Christian mentioned earlier, all three regions posted record revenue in the 3rd quarter.

Speaker 3

America's revenue of $29,000,000 grew 73% compared to the Q3 of 2022 with sequential and year over year growth across instruments and consumables. For Asia Pacific, revenue of 15 point $7,000,000 grew 64% over the prior year. China reported year over year growth, but was lower from the Q2 as customers in the region slowed their CapEx purchases, so we were encouraged to see sequential consumables as customers ramp up their Revio usage in the country with healthy levels of utilization. Finally, EMEA revenue of $11,000,000 grew 83% over the prior year period, driven by both instrument and consumable growth as customers like MBRU ramped up its large scale genome project and the Wellcome Sanger Institute reach this milestone of 1,000 species sequenced as part of the Darwin Tree of Life project. Moving down the P and L.

Speaker 3

GAAP gross profit of $17,900,000 in the Q3 of 2023 represented a gross margin of 32% compared to a GAAP gross profit of $13,500,000 in the Q3 of 2022, which represented a gross margin of 42%. Q3 2023 non GAAP gross profit of $18,100,000 represented a non GAAP gross margin of 32% compared to a non GAAP gross profit of $13,700,000 or 42% in the Q3 of last year. The year over year decrease in gross margin was due to product mix as interim revenue accounted for a higher proportion of overall revenue in the Q3 of 2023 compared to the Q3 of 2022 and due to interim mix as Revio instruments sold in the Q3 of 2023 had a lower gross margin than Sequel 2e Systems sold in the Q3 of last year. Additionally, we realized inventory scrap and Reserve charges as well as additional warranty related material expenses on the Revio platform in the Q3 of 2023. GAAP operating expenses were $100,400,000 in the Q3 of 2023 compared to $88,200,000 in the Q3 2022.

Speaker 3

Non GAAP operating expenses were $90,900,000 in the Q3 of 2023, representing an 8% increase from non GAAP operating expenses of $83,800,000 in the Q3 of 2022 and excluded merger related expenses of approximately $9,000,000 related to our acquisition of Aptom in the Q3 of 2023. The increase in operating expenses primarily reflects expenses related to the Aptone acquisition in the Q3 of 2023 and increased sales and marketing expenses primarily related to increased investment in the commercial organization, partially offset by lower engineering and lab related compared to 818 at the end of Q2 2023 and 771 at the end of the Q3 of 2022. Operating expenses in the Q3 included non cash share based compensation of $18,600,000 compared to $18,000,000 in the Q3 of last year. GAAP net loss in the Q3 of 2023 was $66,900,000 or $0.26 per share compared to GAAP net loss of $77,000,000 in the Q3 of 2022 or $0.34 per share. In Q3, we booked a discrete income tax benefit related to the acquisition of Aptown.

Speaker 3

The acquisition was was considered a business combination for tax purposes and therefore the acquired intangibles are disallowed for book tax purposes, which resulted in a one time discrete non cash income tax benefit on the GAAP P and L of $10,700,000 in the quarter. Non GAAP net loss was $67,900,000 representing $0.27 per share in the Q3 of 2023 compared to a non GAAP net loss of $72,500,000 representing $0.32 per share in the Q3 of 2022. Onto our balance sheet. We ended the 3rd quarter with $767,800,000 in unrestricted cash and investments compared with $829,900,000 at the end of the Q2 of 2023. The ending cash balance on September 30 does not reflect The milestone payment to the Omnium shareholders, including approximately $96,200,000 in cash and 9,000,000 shares of common stock, which was paid and distributed on or about October 4, 2023.

Speaker 3

Inventory balances increased in the 3rd quarter to $68,300,000 representing 2.2 inventory turns compared with $67,600,000 at the end of the Q2 of 2023, representing 2.0 inventory turns. Accounts receivable increased in the 3rd quarter to 30 point $5,000,000 compared with $24,000,000 at the end of the Q2 of 2023. To Expand a bit on our guidance, as Krishna indicated, our strong performance in the Q3 leads us to believe that revenue for the year will be 195,000,000 to $200,000,000 representing a growth rate of approximately 52% to 56% compared to 2022. This represents an increase of $10,000,000 over our guidance last quarter and we have now raised our guidance every quarter this year. Around the midpoint, our guidance assumes 4th quarter revenue is approximately flat sequentially compared to the 3rd quarter with the $5,000,000 range reflecting macro factors that are lengthening sales cycles for our customers globally and affecting the timing of customer CapEx purchases.

Speaker 3

Moving down the P and L, we expect the 2023 non GAAP gross margin to be around the low end of the previously guided 32% to 34% range due to higher than expected inventory scrap and reserves in the Q3 and higher warranty costs associated with the Revio instrument. We continue to expect margin expansion beyond 2023 as revenue placements will help drive a mix shift toward higher margin consumables and higher volume and optimization drive lower manufacturing unit costs. Specifically, we've made good progress this year and reducing costs by lowering the manufacturing labor time for the Revio system production, which we expect to continue into 2024. And we have now commenced consolidating our San Diego manufacturing operations into Menlo Park, which will give us the benefit of running our manufacturing operations more efficiently. We now also expect non GAAP operating expenses to grow by 2% to 3% compared to 2022.

Speaker 3

This is lower than our previously guided growth rate as PacBio continues to focus on spending discipline. We expect interest income to more than offset Interest expense for the remainder of the year and the weighted average share count for EPS for the full year to be approximately 254,000,000 due to the timing of the issuance of the Omnio milestone shares. I'll hand it back to Christian for some final remarks. Christian?

Speaker 2

Thank you, Susan. With a couple of months left, 2023 is on track to be the most successful year in PacBio's history. And when looking back, I believe it can mark an inflection point on our strategic journey. For the year, PacBio is on track to ship more systems than any other point in history. What is perhaps more encouraging is that we now expect to achieve record consumable revenue in spite of the fact that 2023 has been a product transition year.

Speaker 2

I believe that this is an indication of the fundamental demand for long read sequencing in the market and that highly accurate high throughput systems such as Revio are enabling that demand. Our projected revenue growth for this When I look back and compare where we are now versus our internal expectations 12 months ago, what really stands out is the pace of Revio adoption as it is well above where we had envisioned it last November. However, as we look toward 2024, we see an economic backdrop that is substantially more challenging than a year ago. On that topic, I wanted to zoom out a bit and provide some high level commentary on 2024. While we're not providing specific 2024 guidance today, I wanted to give you a rough framework of how we're thinking about the year as we build out our 2024 budget.

Speaker 2

First, we continue to focus our R and D efforts on the creation of a multi product, multi platform portfolio that includes both leading long and short read sequencing systems. We are deep into the development of several new sequencing platforms, which we believe will enable us to reach more of the sequencing market and drive long term revenue growth. But even with this focus in R and D, we still believe that total expenses in 2024 will be within the range of the long term guidance that we provided at Investor Day. Additionally, our sales funnel for Revio continues to be robust as potential new PacBio customers remain enthusiastic about implementing the power of native long reads into their research and existing customers are eager to upgrade their SQL2 fleets. However, due to broader global macroeconomic issues, customers have lengthened their capital purchasing timelines, which will likely have some impact on our growth trajectory in 2024.

Speaker 2

So while we still expect to achieve significant revenue growth in 20 24, the current challenges in the global macroeconomic environment are likely to have an impact on our growth rate. As we complete our 2024 forecast and continue to monitor market conditions, we plan to provide more detailed guidance on our Q4 earnings call in early 2024. As we close the call, I want to reiterate how pleased I am with the team's execution. Since we announced the Revio and Anso platforms just over 1 year ago, especially in this environment where we've seen prolonged with inflation and worsening macroeconomic conditions. Thank you for your time today.

Speaker 2

Operator, let's start the Q and A session.

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Tayo Sivan From Morgan Stanley, please go ahead with your question.

Speaker 4

Hey, guys. Good evening and thanks for the time here. Christian, a couple of questions for you here. First, I mean in terms of the backlog growth, Has order backlog essentially trended in line with your expectations? And as you think about juxtaposing your placements for Next year, I know you mentioned some moderation for the macro impact, but how should we think about sort of backlog, how that's trended over the last 4 weeks or so in the context of 24 placements?

Speaker 4

And then my second part of the question was on consumables. Any way for you to parse out how much of the strength that you're seeing here is related to new customers talking versus that 1st cohort of Revio adopters ramping usage. I mean, if you can just break out or circumscribe the trends you see in that early adopter cohort, That would be super helpful. Thank you. Sure.

Speaker 2

I'm just writing down the question. So First of all, I'm not going to comment specifically on backlog, but we are Continuing to ship more and more every quarter and we see it's certainly meeting my expectations. When I think about next year, I do think that we have the technology and capabilities and the enthusiasm in the market to continue growing and growing with respect to Revio. But of course, right now in this near term window, we are seeing some macroeconomic challenges like others. But as I said in my prepared remarks, we expect to significantly grow our revenue in 2024.

Speaker 2

I'm not going to be any more specific than that because quite frankly, this isn't a 2024 guidance call. With respect to consumables, We looked carefully at the Q3 numbers and there really wasn't a lot of stocking going on relative to what we had in Q2. And what we're seeing is our customers are fundamentally starting to really use their Revio systems and that's why we had such a strong performance in consumables. And I do think that that was certainly one of the highlights of the quarter. And certainly my expectation going forward is that you're going to see you're going to continue to see very strong consumable performance.

Speaker 2

We went through more than 9,000 smart cells in the 3rd quarter. People are using the systems and they're generating great data. So That is very, very encouraging for me. We're still really early in this product cycle and to see that kind of to see us number 1 in 2023, have the product transition year and yet still grow total consumables is really a pretty significant milestone for company. And number 2, now you're starting to see Revios completely overtake the SQL platform.

Speaker 2

Those are both very encouraging signs that I think are going to persist into 2024.

Speaker 1

Next question, Jamie.

Operator

Our next question comes from Kyle Mixon from Canaccord. Please go ahead with your question.

Speaker 5

Hey guys, thanks for taking the questions. Congrats on the great quarter. First on the Q4 kind of, I guess, guidance or like outlook. So flat sequential revenue due to the macro environment, lengthening sales cycles, timing of Purchases like not a surprise, but where is that happening? Is that only China or is that occurring in Western Europe, Russia, North America, etcetera?

Speaker 5

And since revenue is going to be flat In the Q4, could that happen again in 1Q as well in 'twenty four? I just want to understand maybe like early 'twenty four commentary. And then just quickly on Anso, like Can you just talk about the sales funnel and backlog, how that's progressing and maybe the composition of customer types and how that rollout could progress next year? You didn't mention that is like a 24 growth driver, It's all kind of inorganic revenue growth as well, so that could be good to hear. Thanks.

Speaker 2

Yes. Okay. We'll start with we'll start generally with Q4. And We did guide and increase the range of guidance, which means we've actually increased our guidance in every quarter this year, which is great news. We are having we do have A reasonably conservative outlook going into the Q4 and that's really driven by the fact that there are several macroeconomic factors at play and we've heard a lot of our peers reporting that too recently.

Speaker 2

And so we're definitely sitting more on the conservative side of the fence. The other thing is that the Q4 is typically it can be a very strong order quarter, but it's also a short Shipping quarter with holidays and other things to think about. And so those are some of the factors that we just put into our modeling as we kind of think about heading towards year end and into next year. Now, When you think about next year, I'm not going to comment today on Q1 or any thoughts. So I'm going to skip that one, Kyle, for today.

Speaker 2

But When you think about the economic challenges, it's interesting. We're at a point where each region has its own unique challenges. You have in China several factors that are impacting revenue. And as I said last quarter and I continue to say, We've been a little more insulated than our peers in China because our customer base is small and concentrated. In fact, what's interesting is We are doing some analysis and believe it or not, our service providers in China have bigger sales forces than our entire sales course.

Speaker 2

So even though we're small and concentrated, our reach has actually been pretty good. And so That's pretty darn encouraging. But there are some macro and economic issues in China that I'm sure have some impact on our business. The rest of Asia, if you make a comment there, I think the strong dollar and inflation have had some impacts and we think have some impacts. Europe, higher energy costs as well as the continuing conflicts Generally create uncertainty, but we are seeing signs of larger projects being talked about across the continent, not just one project or 2, but several.

Speaker 2

And then the United States, one thing that was interesting is that the 4th quarter the 3rd quarter, We really didn't see a significant end of year money end of year push, so to speak, end of government year push. And I think some of that's probably attributed to the fact that there was a lot of angst about potential government shutdowns and there continues to be that. And so I think that we're trying to think about in trying to be thoughtful about how we guide and we're thinking about those things. If I move to Anso, the sales funnels has been quite strong actually and We continue to see bundled orders. We continue to see individual orders.

Speaker 2

We're not giving specifics Because principally for competitive reasons, to be honest, it is a very competitive market. We are scaling up Our manufacturing and that will be manufacturing scaling is probably more of a rate limiter than demand right now. And I suspect that will work its way through the system in the early part by the early part of next year. And so we should end with a decent Going into 2024 of the Onso system, we'll continue to scale Manufacturing and what's exciting is that our customers are using the product and doing some amazing science already, some of which will likely be discussed at ASHG.

Speaker 1

Next question, Jamie?

Operator

Our next question comes from Jack Meehan from Nephron Research. Please go ahead with your question. Thank you. Good afternoon. Wanted to ask about the Revio consumables.

Operator

Could you comment on the range of utilization you're seeing on instruments in the field? And I understand there's caution on capital equipment, but just any color on the rate at which you think the REVEO consumables can kind of grow from here?

Speaker 2

Well, I think, Jack, sure. The absolute Consumable revenue, we expect to keep growing and growing at a pretty good clip. So I think that's a good that is a good sign. The consumable will the consumable pull through increase or stay the same or decrease? It was 483 Kate, this past quarter, which kind of represents roughly 37% utilization give or take of the systems, which is a great number.

Speaker 2

My belief is you've got a few factors impacting us over the next few quarters. First of all, some of the highest throughput customers are really starting to go or get into production, which helps the utilization, which perhaps could help the pull through number. Some of the newer customers are getting up to speed and It was part of the reasons why we wanted to accelerate shipments so much and we shipped 52 systems in the quarter. What we want to do is make sure that all of those customers can scale up and ramp. And so the 4th quarter Pull through might be lower because you than the Q3 because you shipped so many systems that go into the denominator.

Speaker 2

But the opportunity to grow that into the first half of next year, I think it's quite significant. And That's really what we're playing here for is to build a consistently grow consistently fast growing Consumables business, which will help buoy gross margins, drive absolute revenue growth and also create the flywheel and this is really important. More and more Revio data getting into the world will drive deeper insights into the biology, which will drive a flywheel to drive more demand. So Very exciting what we saw happening in the Q3 and continuing to happen quite frankly as far out as we can see right now.

Operator

Our next question comes from Eve Bernstein from Bernstein Research. Please go ahead with your question.

Speaker 6

Hi there. Thanks a lot for the question. So going back to Revio instruments, you said that less than 30% of SQL 2 and 2E customers have ordered a Revio to date. Why do you think that is and what's holding them back? And maybe just on a broader note looking at The Revio placements as a whole, you said a month ago that you expect orders to go up every quarter through 2024 and then Excuse me, to go up every quarter through 'twenty three and then into 'twenty four.

Speaker 6

Is that guidance or that color still in place given the changes in the macro or should we assume that that's maybe no longer the case?

Speaker 2

Yes, Yves. Thank you for the questions. We'll start with the SQL2 customers. There's a lot of reasons why a customer won't upgrade straight away. I think the first Right now is the time to get budgets in place in order to buy the system.

Speaker 2

So some the biggest customers have a lot easier access to getting budgets than other customers. And so those were the first places you go. The second is that a lot of customers that bought in 2022 You don't want to use their system for a while before they adopt before they drive into the Revio platform. And then I think the third is really thinking about what kinds of Projects and applications am I working on. If I'm working on AAV or microbial genomics, Perhaps I don't need that much throughput in.

Speaker 2

And one of the things that I think will be helpful there is we just launched we're launching the Kinix kits that allow you to put more samples onto a Revio more economically and that might drive Some of that some of those conversions more quickly than otherwise would. We'll see. I think that I do believe that over time, The vast majority of those systems will convert to Revio. And over time, I believe very strongly that The installed base for Revio will be significantly larger than the installed base for SQL 2 the SQL 2 family at its peak. When you think about moving on to your question about orders and Revio orders and what is the pace, what I really want to focus is on driving shipments from quarter to quarter.

Speaker 2

We're going to have we are going to have variability in our orders. We're going to be trying to whittle backlog down at times and then at other times perhaps expanding backlog. But my belief is that On balance, shipments are going to grow. In any given quarter, though, they may in fact be slightly lower or slightly above kind of trend line. But if you look out over many quarters, I think net net, you're going to see us growing.

Speaker 2

So that's something that we are Managing, the macro environment is making it tougher right now. And so Perhaps that changes the curve a little bit in the very near term. But I was just with a group of customers, A significant group of customers last week and the number of applications, the excitement, the new ideas Really was quite remarkable. We're super excited to be going to ASHG later this week to interact with our customers and share the energy associated with the platform and ultimately that drives demand. So I think it's a good news story.

Speaker 2

There could be some variability though here in the near term with the macroeconomic environment. Next question, Jamie.

Operator

Our next question comes from Matt Sykes from Goldman Sachs. Please go ahead with your question.

Speaker 7

Hey, good afternoon. Thanks for taking my questions. Just 2 parter. 1, just on the product pipeline, just given the macro issues You've highlighted next year. How are you thinking about benchtop, high throughput, the overall product pipeline as you move into a more difficult Macro environment, have you reprioritized any of those projects?

Speaker 7

I know you talked about R and D spend maintaining consistency, but I just wanted to find out if you've Reprioritize any of those projects? And then secondly, Susan, just on the gross margins, understand the mix shift in the products, but In terms of the inventory charges and scraps, like how should we be thinking about that in terms of one off or anything that could linger into next quarter or beyond? Thanks.

Speaker 2

Great. Okay, I'll go first. So fundamentally, we set out on a course to build a multi product, multi platform company that I think is going to serve the genomics company or serve the genomics industry in unique ways and create incredible value for all of our stakeholders. And I'm still absolutely convinced of that vision. And I think our customers are responding to it as we build out our business.

Speaker 2

Revio is just the beginning Clearly. And it's my belief that we need to continue accelerating getting platforms into the market to drive to continue driving long term revenue growth, but also to drive the ability for us to have different relationships with customers and others. In other words, be able to meet the customers with asking questions rather than selling them technologies. And so we still have we are still working hard on developing lower throughput and higher throughput, long read systems. And with the acquisition of Apton, we've jump started The project to work on a high through very, very high throughput short read sequencing system.

Speaker 2

The good news is that, if I just spend a second on the Apton acquisition, that we've already integrated that team. We shut down their Pleasanton offices and moved the entire team to Menlo Park. Their alpha sequencers are in our labs already sequencing with SVB chemistry. We've got the industrial design going. And so that acquisition accelerated our ability to launch that product perhaps by years.

Speaker 2

We'll see how we do. But My philosophy right now is to continue building out that portfolio while we continue to grow our revenues, but also be disciplined about how we manage our spend envelope consistent with what we talked about at our Analyst Day last year. In fact, we look back to our Analyst Day and here we are a year later and we have met or exceeded the majority of our goals for 2023. So Susan, you can talk about gross margins.

Speaker 3

Great. Thank you, Matt, for the question. So in terms of gross margins, In my prepared remarks, we talked about the fact that in Q3, you're right that we had some excess inventory scrap and reserve charges. This is related to previous generation products, but most notably the decline in the SQL 2 consumables demand drove some of those scrap charges that we took in the quarter. There were some also warranty related expenses on the Revio platform.

Speaker 3

Your question about Q4, As we go through the budget for 2024, there may be some additional cleanup, but for the most part, the transition between Sequel to to Revio, we are through that. And for 2024, I do expect our gross margins to continue to And we talked about this previously, as revenue continues to grow, you get the benefit of higher volumes, but you also get the benefit of higher consumable revenue, which of course with higher gross margins. And Christian alluded to it too that we do have gross margin improvement initiatives that we have already started and some of which we've shared on the prepared remarks, but also some of which are still that are underway that we haven't yet shared, but we'll continue to disclose that as we get closer to realizing those benefits. Thanks, Matt. Next one to realizing those benefits.

Speaker 1

Thanks, Matt. Next one, Jamie.

Operator

Next question comes from Dan Brennan from TD Cowen. Please go ahead with your question.

Speaker 8

Great. Thanks. Thanks for taking the questions. Maybe 2 parter, just on pull through the first one. I know, Christian, in the past you've talked about maybe by the Q1 of next year, you'd be at a point at which you could talk about what seems like a durable pull through to kind of model off of.

Speaker 8

Sounds like you've had now last 3 quarters in the low 400s, last 2, 450, and it sounded like you were pretty constructive. Just wondering, You think it's fair to be thinking 400 plus at this point on pull through from here? And then secondly, stocks traded off a little bit here despite a really good I think on the comments on 24. Just wondering, could you just speak to a little bit about like the types of customers maybe where you're seeing A little bit of elongated cycles, is it in academia, is it across a small mix in biopharma? I know you talked a little bit about China, just a little bit more color there.

Speaker 8

Thank you.

Speaker 2

Sure. So, first of all, for next year, we're not going to comment on the pull through numbers yet. I'm still going to stand by the fact that it's still early in our launch. The pull through figures for Q3 3 were derived from the installed base of what was it 77 units in the denominator. We'll see how we get another quarter under our belt here in Q4 with 129 systems.

Speaker 2

But by the Q1, Perhaps on the call in April or May, I don't know if it's late April, early May, We should, I think, have a view at that point. It'll vary, but I do think the numbers are above They're certainly above where my long term model and thinking have been, and so that's encouraging. But I don't want to declare Until we get a little more under our belt. When you think about the commentary, I mean, we The first thing I want to reemphasize is we continue to we believe we're going to significantly grow next year, period, End of story. We are having a so far this year, we raised guidance every single quarter and we've had a very strong result in Q3.

Speaker 2

Q4, we're looking to have another strong quarter in Q4. And so from my perspective, the business is operating on all cylinders and really from a revenue and customer But it would be remiss if I didn't acknowledge and recognize that the environment out there It's certainly more challenging than it's been in the past, certainly more challenging than it was when we put together when we had our Investor Day last year. But and the impact to customers are customers that are Smaller 1 to 2 z type Revio purchasers that would be in small biotech, for example. Some of the academic funding in the United States, I think the funding hasn't gone away and it's still there. But The anxiety with the government shutdown that we saw at the end of the quarter, the continued rhetoric that's going Does give us pause to be appropriately conservative.

Speaker 2

Outside the United States, I did spend a 2nd or 2 talking about China in particular. China is actually as we continue to grow, China is going to become less of a percentage of our revenues, and I think that's already starting to transpire. So that on balance, that's good for us. Europe, we had several new customers and we have great opportunities in the funnel in Europe, but It is a tough math with high inflation, it is a tougher environment. And so what we're doing is we're just trying to take

Operator

a responsible view here.

Speaker 2

And if we full view here. And if we outperform, we outperform. Okay.

Speaker 1

Next question, Jamie.

Operator

Our next question comes from John Sauerbeer from UBS. Please go ahead with your question.

Speaker 9

Hi, thanks for taking the questions and congrats on the quarter. Maybe just a clarification here just on that extension of order cycles. I guess, have you seen any increase in cancellations? And Then I guess also you're not providing color on next year, but when you look at I guess the announcement with the PacBio Capital last month, I guess any just way to frame how you See maybe is there potentially more leasing next year versus capital purchases? How do you see kind of that shipment place out over 24?

Speaker 2

Yes. Thank you for the congratulations. We're proud of the quarter to be sure. We haven't seen any cancellations. We haven't the competitive environment, we've been doing very, very well against our competitors as evidenced by the shipments in the quarter.

Speaker 2

We continue to make progress there. So We haven't seen cancellations. When we see this, we see orders push out across a quarter or maybe perhaps 3 to 6 months, a quarter or 2. And so when we we don't feel like the business is going away. We don't feel like the business It is being taken by competitors and we don't feel like there is any waning desire to do sequencing.

Speaker 2

So All of those things are very strong for us, but we do see the conversations are taking Particularly where you see it is the early conversations are taking longer. So it may not have an extremely the most near term impact, but you don't know when you're in actually in the sale, you don't know are you going to get it done in the next 6 weeks or is it going to take 12 weeks and it's really that's one way to think about it. PacBio, I think there's still confusion with Investors perhaps about the PacBio Capital program, we've always had leasing programs in place. We just rebranded this program, packed by and we have a new leasing partner, which we believe will give us more flexibility and more access. But when I look at revenue for next year, It doesn't immediately strike me that we're going to do more leasing next year versus this year.

Speaker 2

And when we do the leasing, we still get all of the revenue upfront. And that's a really important aspect of this is The way these leasing programs work is that we work with a financial partner that takes the that actually buys the system and then takes payment from the end customer. And we can work with that leasing partner to do to create incentive programs or other things if we so chose. But right now, we don't see leasing as being any bigger than it was this year per se. It might naturally grow because our whole business is growing, but I don't think a greater proportion, but I also haven't done the math to know explicitly to be clear.

Speaker 1

Next question.

Operator

Our next question comes from Sung Ji Nam from Scotiabank. Please go ahead with your question.

Speaker 10

Hi, thanks for taking the question and congrats on the quarter. Christian, we'd love to get your thoughts on the long read sequencing market over the longer term, let's say, the next 5 years. You laid out the key drivers at the Analyst Day and the growth potential there. But given the stronger than Do you think the long resequencing might could the market could have a bigger impact over the longer term?

Speaker 2

Yes, thank you. That's a great question. And when you look out over the next 5 years, I think what Revio is showing Is that the thesis that germline driven genomics needs the comprehensiveness of long reads. And If we can create platforms that give you the economics and the throughput and All of the capabilities of the multi ohms like we talked about in the prepared remarks, it really does plan to it really will serve a large part of that market. I think our 2026 market estimates were somewhere in the range of the sequencing market being $12,000,000,000 to $14,000,000,000 And realistically, probably half of that at least It could be served by long read sequencing, if not more.

Speaker 2

And I think this year has proven that that's exactly on track. Another area where maybe people don't realize, but it's really important is that plant and animal genetics really benefit from long read sequencing. Oftentimes those genomes have are multiployed, they're not just deployed genomes, They have more chromosomes. They also have bigger genomes, some have smaller genomes and having the ability to have highly accurate sequencing in that space is actually we're significantly outperforming in 2023. And I think if you look out over 5 years, that's another area where you're going to see strong performance.

Speaker 2

It's not we focus a lot to be honest on germline human genetics because those are very, very significant markets, but we can't leave the plant and animal world behind. That's a multi $100,000,000 plus business as well.

Speaker 1

Hey, Jamie, how about our last question?

Operator

Our final question today comes from Luke Sergott from Barclays. Please go ahead with your question.

Speaker 11

Great. Thanks for squeezing me in. So on the 4Q implied guide, can you break out like the assumptions that you guys are I mean from consumables versus the instrument ramp that we should be getting to hit your guidance. And then As you guys continue to launch all these new applications, I mean, clearly all these questions are on consumables and how that's going to pace next year. But in the pushback we get for not pushback, commentary we get from your customers is that you need to there will be even more adoption here if you bring down price Per sample and if you increase the application.

Speaker 11

So how do you guys weigh that investment as you think about going forward the next couple of years?

Speaker 2

Yes. Thanks, Luke, and appreciate you for hanging in there too. So

Speaker 1

when I

Speaker 2

think about Q4, We didn't break out the specifics, but we do think consumable revenue will continue to grow from here A little bit. And I think that instruments, we'll see how we do on When you start to think about consumables bringing down the price, I don't think I've ever heard a customer I don't think I've ever heard a customer say that they wouldn't do more if the price was lower. So that's not a revelatory comment. But I do think that there is this elasticity in the market. We are just At the beginning of that elasticity, Revio gives us the ability to start testing that.

Speaker 2

And I think we started in a great spot this year. What you'll see from us is actually Revio will over time be able to deliver more throughput per SmartCell. And as we do that, we'll have opportunities to either We'll be able to effectively lower the price per base or per gig per gs, so to speak. And so you'll get to see that from that perspective. And then the applications are critical.

Speaker 2

Some of these things that we're launching right now, we've had in the works for a while and next year you're going to continue to see in the first half of the year more applications being launched on the system and all of this is geared towards driving more utilization of the systems. I spent a lot of time in my prepared remarks today talking about the end to end workflow and improving the sample preparation, talking about next year using Circulomics to improve our workflow as well. And so we're doing all of these things to drive that consumable pull through. The sample prep revenue will grow as well, but it's really all about driving that consumable pull through and then selling new systems. And We're looking forward to talking about 2024 when we get there.

Speaker 2

We still have to wrap up 2023 strong. But right now, we're very proud of what we've done in the 1st three quarters. We're looking towards growth that's above Our long term guidance, north of 50% were perhaps one of the fastest growing companies in our peer group, which is exciting. Competitively, the products are very competitive. We've been able to execute on delivering those products.

Speaker 2

And as we kind of move forward to close out this year strong, we're really looking forward to another great year for the company. So we appreciate everyone's support.

Speaker 1

All right. That wraps it up. Thank you everybody for all the questions today and thanks for joining us. We look forward to connecting with many of you this quarter at the various conferences and updating you as we move into 2024. Thank

Operator

you. Ladies and gentlemen, the conference has now concluded. We thank you for joining today's presentation. You may now disconnect your line.

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Earnings Conference Call
Pacific Biosciences of California Q3 2023
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