Pacific Biosciences of California Q1 2023 Earnings Call Transcript

There are 11 speakers on the call.

Operator

Good day, and welcome to the PacBio First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of IR, please go ahead.

Speaker 1

Thanks, Chaps. Good afternoon, and welcome to PacBio's 1st 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 in the Investors section of our website at www.pacb.com or as furnished on Form 8 ks on the Securities and Before we begin, I'd like to remind you that on today's call, we will be making forward looking statements, including Statements regarding predictions, progress, estimates, plans, intentions, guidance and others, including expectations regarding our financial guidance, Our Revio and Anso systems and their commercialization plans, the future availability, uses, accuracy, coverage, advantages, quality or performance of or benefits or expected benefits of using PacBio products or technologies, including our Revio and Onzo systems and expectations with respect to customer demand for our products and technologies and growth in our business. You should not Please undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially and those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we file SEC, including our most recent Forms 10Q and 10 ks and our recent press release to better understand the risks and uncertainties that could cause actual results to differ.

Speaker 1

We disclaim any obligation to update or revise these forward looking statements, except as required by law. We will also present certain financial information on a non GAAP basis during the call. The non GAAP information is not prepared under a comprehensive set of accounting rules should only be used to supplement an understanding of the company's operating results as reported under U. S. GAAP.

Speaker 1

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 are presented in tables within our earnings release. For future periods, we are unable to reconcile the non GAAP gross margin and non GAAP operating Recorded and will be available for audio replay on the Investors section of our website shortly after the call. Investors Electing to use the audio replay are cautioned that forward looking statements made on today's call may differ or change materially after the completion of the live call.

Speaker 1

Finally, we will be hosting a question and answer session after our prepared remarks today. We ask that analysts please limit themselves to one question only so that we accommodate everybody in the queue. With that, I will now turn the call over to Christian.

Speaker 2

Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today. Last October, we unveiled Revio, a long read sequencer that is 15 times more powerful than our previous generation sequencer. The system enables researchers to analyze what we believe are the most complete genomes in the industry with paradigm changing Scale and Economics. And as we saw in Q4, these features captured the imagination of scientists and researchers across And we started 2023 with a backlog of 76 systems.

Speaker 2

In March, we began shipping the Revio system at Scale to customers around the world. I'm pleased to say our launch of BREVIO is progressing extremely well and is ahead of our targets. The demand for our new system continues to be robust, so much so that orders for Revio in the Q1 outpaced our shipments of Revio, resulting in a net increase of instrument backlog. This sets us up favorably to deliver on our growth targets for the rest of 2023. During the Q1, we delivered 32 Revio systems, surpassing our expectations and demonstrating That our robust manufacturing capabilities can scale and deliver on new instrument launches.

Speaker 2

With Revio Manufacturing capacity scaling up in the Q1 and customers beginning to ramp down SQL2E and 2E Consumable spending, PacBio still delivered record revenue of $38,900,000 in the 1st quarter. The initial customer reception of Revio, its robust fuel performance and our ability to scale manufacturing has given to $185,000,000 for the full year or 33% to 44% growth year over year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total Hi Fi capacity in the market for our cumulative SQL2 and 2e installed base. This is extremely important for our growth As the increased demand for long read sequencing is clear and I believe our customers will ramp and fill their sequencers with both New projects and existing samples that may have been sequenced using other short read technologies. Before I move on, I'd like to congratulate our global service and support teams.

Speaker 2

They were essential to the successful launch of the platform. I'm happy to report that all 32 instruments have been installed in all regions and have completed their first sequencing runs. Additionally, the platform's early field performance has exceeded our expectations. For runs with sample libraries That are 15 kilobases and higher, our customers average above 90 gigabases of output per SmartCell with many customers exceeding 100 gigabases per SmartCell. That's 400 gigabases per 24 hour run on Revio.

Speaker 2

To put that in perspective, SQL2e generates just 30 gigabases of sequence in 30 hours. The strong early fuel performance Given us the confidence to accelerate some shipments in April and we are now actively shipping instruments according to our manufacturing plan. I'd like to take another minute to discuss the composition of customers who have already received REVIO. They are a diverse group that spans 10 countries and includes commercial service providers, academic core labs, Children's hospitals, pharma and agriculture. These customers are expected to use their Revio from large scale human genome projects and human disease research to plant, animal and microbial research.

Speaker 2

The scalability and The ability of Revio can power multiple ohmic applications and is expected to ultimately drive a diversified customer and installed base as the product launch progresses. To highlight the specifics behind a few of our customers in the past quarter, We start with Grandomics, a long time PacBio service provider based in China who successfully implemented Revio and is now preparing to run Large scale cohort studies, pan genome projects and biodiversity sequencing efforts. In its first sequencing run, The company reported an average SmartCell yield of over 102 gigabases per SmartCell with median Q Scores of Q30 or better. Additionally, the Australian Genome Research Facility or AGRF, They plan to implement Revio to offer long reads at extraordinary scale and affordable cost to its customers. We've also shipped Revio to multiple sequencing centers that plan to use Revio to scale up long reads for the NIH's All of Us program.

Speaker 2

These examples were just a few as many other early Reggio customers were willing to share their excitement for the platform and their initial experience on social media. I look forward to many more of these posts this quarter and into the future. Revio opens the door to large scale genomics and we are currently tracking several multi 1,000 sample Genome Project Opportunities. Revio has already enabled us to win some of these projects and we are in discussions with several other potential partners. Revio not only gets PacBio a seat at the table for these large scale programs, but it makes us a top competitor as we can deliver what we believe is the most complete highest value human genome.

Speaker 2

This means potentially more insights into genetic disease, a better understanding of cancer and ultimately improving human health. We take pride in delivering our customers the high quality complete sequencing products and services. Delighting our customers after all is one of our core values and is a critical part of our mission. So I'm incredibly pleased with our initial results from our in progress Annual customer survey showing a net promoter score of over 60, a significant improvement over last year and higher than other sequencing providers have reported. Our survey closes in a few days and I look forward to relaying more feedback.

Speaker 2

We've also continued to see interest from NewPac Bioinstrument customers as 1 third of the Revio systems ordered in the Q1 were from brand new Customers and over 1 third of the systems in our sales pipeline for the remainder of 2023 consist of new customers. In fact, our largest instrument order in Q1 was from a new customer, a European genomic testing lab Looking to incorporate HiPhi genomes to investigate rare disease cases, the customer ordered multiple systems. They indicated that one of the key factors to implementing Revio was the ability to sequence 1,000 of HiFi genomes under $1,000 so that they can shift from short read exomes directly to long read genomes. Another new customer, A hospital in Canada decided to reallocate a portion of its budget for a high throughput short read sequencer towards acquiring a Revio and expanding its capabilities in highly accurate long read sequencing. Revio is also reigniting legacy PacBio customers' interest in leveraging long reads as Weill Cornell Medical Center ordered Revio for their genomics core, which will be their first PacBio instrument since their RS-two.

Speaker 2

Their team is looking forward to partnering with PacBio and has shared with us that they plan to move several active Short read projects in applications like human whole genome, RNA and epigenetics to Revio once their system is installed. In the near term, we expect most Revio shipments will be to existing SQL 2 and 2E customers, which is why we've been investing so heavily in expanding our installed base over the past couple of years. Since the end of 2020, We have grown our SQL2e install base by 150% and more than doubled our SQL2 and 2e customers. This has helped set the foundation for a multiyear product transition. After our strong launch, we believe the customer conversion cycle to Revio Still has a long runway as only about 1 fifth of our nearly 300 SQL2E customers have placed orders for Revio.

Speaker 2

As we turn our focus to our groundbreaking short read sequencer Onso, I'm pleased to report that our beta program has been quite successful And our partners continue to sequence on their systems. We have recently enabled each site with our latest 2x150 paired end chemistry, delivering increased sequencing robustness and reliability over our previous versions. Regarding its Performance, we are excited to share that the beta sites are seeing output that achieves our commercial specification of 800,000,000 paired end reads and regularly gets over 90% of the reads between Q40 and Q50. Our beta partners are running samples where low variant allele detection is critical, such as circulating tumor DNA and gene editing analysis, and they're looking forward to sharing additional data from these challenging data sample types. On the operational side, our manufacturing team is finalizing scale up plans for Onso.

Speaker 2

We've completed our first Onso pilot Manufacturing builds in house with the first runs going well. And on the commercial front, I'm pleased to announce that we've already received multiple Onso orders as we continue to build our sales pipeline. We believe Onso is likely to be available for commercial shipment around the end of the second quarter. As one would expect, there's been a lot of attention on Revio and Onso platforms, but we continue to make great progress on improving the During the quarter, we launched our latest high throughput nanobind extraction kits to enable fast, reliable and scalable Large fragment DNA extraction across blood, cells and tissue samples. This new offering lowers Extraction time to less than 2 hours minimizes sample input and eliminates the need of harmful The new high throughput protocol is automated for a complete walk away solution, enabling labs to scale their PacBio sequencing.

Speaker 2

Also on the front end workflow, we partnered with Corteva Agriscience. We released end to end workflows that streamline DNA extraction through library preparation, enabling thousands of samples to be sequenced annually. Orteva received its first Revios during the Q1 and is beginning to transition sequencing over to the platform. On the informatics front, we continue to develop the tools for researchers to make impactful discoveries. For example, some of the recent tools that we've been developed include smart analysis to phase de novo assemblies, TARGET or TRGT for tandem repeat genotyping and visualization, paraphrase to help call highly homologous genes and hHiFi CNV for identifying large copy number variants across the genome.

Speaker 2

Rolling out new and improved ways to interpret long read data and collaborating with 3rd party providers is a key pillar to our informatics Strategy and will help further drive adoption of our platforms. In addition to making the workflow more We developed kits to power customers' research across various omic applications. In transcriptomics, Our recently launched MaSeq kit has already been ordered by 100 of our customers since its launch late last year. MASSEQ addresses transcriptomics and single cell research, which are incredibly important and rapidly growing areas in sequencing. For example, in a preprint in March, researchers at UCLA and other institutions used PacBio ISOSeq to build a full length transcriptome atlas of the developing human brain.

Speaker 2

Mapping over 200,000 unique isoforms, Over 70% of which had never been detected before. This can allow us to understand Better risk variances associated with neurodevelopmental disorders and help us reshape our understanding of brain development and disease. And then just a few weeks ago in cancer research, another preprint describe the first isoform resolution colorectal cancer transcriptomic atlas using PacBio iCSeq to identify several 100 dysregulated transcript structures in tumor cells. Both studies used our legacy iSoSeq solution on SQL-two, but with new solutions like MOSseq and the expansion into bulk ISO Seq, Along with the throughput of GRAVIO, we can further enable these groundbreaking studies, which ultimately may translate into improved With that, I'll turn the call over to Susan to discuss our financial results in more detail. Susan?

Speaker 3

Thank you, Christian. As discussed, we reported $38,900,000 in product, service and other revenue in the first quarter of 2023, which represented an increase of 17% from $33,200,000 in the Q1 of 2022. Instrument revenue in the Q1 was $20,700,000 an increase of 33% from $15,600,000 in the Q1 of 2022. The increase in revenue was primarily driven by the launch of Revio in the Q1, which is sold at a higher ASP than our previous SQL 2 and 2E platform. We ended the quarter with an installed base of 32 Revio systems and shipped 6 SQL2E systems.

Speaker 3

Turning to consumables. Revenue of $14,000,000 in the Q1 grew 10% from $12,700,000 in the Q1 of last With approximately 10% of consumable revenue coming from Revio systems and the remainder from other platforms and other consumables. We expect Revio as a percent of total consumables to increase throughout 2023 as we continue shipping Revio and customers transition to the new system. Finally, service and other revenue was $4,200,000 in the quarter compared to $4,900,000 in the Q1 of 2022. From a regional perspective, America's revenue of $19,100,000 was roughly flat compared to the Q1 of 2022 as the higher ASP and revenue offset A record Sequel IIe placement quarter for the region in the Q1 of 2022.

Speaker 3

As a reminder, Last year included 18 sequel 2Es delivered to the Broad Institute. For Asia Pacific, revenue of $12,000,000 grew 43% over the prior year. China grew approximately 40% year over year and posted its highest revenue since Q2 of 2021 as customers in the region are taking to Resideo and as the country recovered from last year's COVID-nineteen related lockdown. Japan also showed strength as consumables continue to grow on top of its record consumable quarter in Q1 of 2022. Finally, EMEA revenue of $7,900,000 grew 38% over the prior year period, with changes in FX rates representing Approximately a 5% headwind in the region year over year.

Speaker 3

The region had its highest instrument revenue Quarter in over a year as customers like the Welcome Sanger Institute, Radboud University and MBRU received their first revios to scale their long read genome projects. Moving down the P and L, a GAAP gross profit of $9,800,000 in the Q1 of 2023 Represented a gross margin of 25% compared to a GAAP gross profit of $14,200,000 in the Q1 of 2022, which represented a gross margin of 43%. Q1 2023 non GAAP gross profit of $9,900,000 represented a non GAAP gross margin 26% compared to a non GAAP gross profit of $14,300,000 or 43% in the Q1 of last year. Gross margin declined year over year due in part to interim mix as revenue instruments sold during the quarter had a lower margin, primarily due to customer loyalty discounts provided and higher initial manufacturing costs. Additionally, GAAP and non GAAP gross Profit in the Q1 reflect adjustments of approximately $3,500,000 primarily related to excess consumables inventory resulting from a faster than expected decline in demand for SQL IIe consumables due to the product transition to Revio.

Speaker 3

This accounted for an approximate 900 basis point headwind on gross margin in the quarter. While we expect gross margin to And during the remainder of the year, gross margin could fluctuate depending on the pace at which SQL2, 2E usage declines and Revio manufacturing is scaled. GAAP operating expenses were $101,000,000 in the Q1 of 2023 compared to $91,700,000 in the Q1 of 2022. Non GAAP operating expenses were $88,700,000 in the Q1 of 2023, representing a 4% decrease from non GAAP operating expenses of $92,700,000 in the Q1 of 2022. The increase in GAAP Operating expenses primarily reflects an increase in the fair value of contingent consideration liability during the Q1 of 2023 of $12,300,000 related to the milestone payment to Omnium shareholders.

Speaker 3

Non GAAP operating expenses declined year over year, primarily driven by the transition of Revio from development to commercialization. Regarding headcount, we ended the quarter with 793 employees compared to 769 at the end of Q4 Expenses in the Q1 included non cash share based compensation of $16,000,000 compared to $20,900,000 in the Q1 of last year. GAAP net loss in the Q1 of 2023 was $88,000,000 or $0.36 per share, compared to a GAAP net loss of $81,500,000 in the Q1 2022 or $0.37 per share. Non GAAP net loss was $75,500,000 representing $0.31 per share in the Q1 of 2023 compared to a non GAAP net loss of 80 $2,300,000 representing $0.37 per share in the Q1 of 2022. Turning to our balance sheet items.

Speaker 3

We ended the Q1 with $875,000,000 in unrestricted cash and investments compared with $772,000,000 at the end of the Q4 of 2022. The change in cash reflects net proceeds from our public offering in January of approximately $189,000,000 less cash burn of approximately $86,000,000 which included our annual employee bonus payout and a prepayment for future inventory in the Q1 of 2023. As a reminder, we expect to pay the Omnium shareholders approximately $200,000,000 in cash and equity dependent upon the achievement of a milestone in connection with the commercial shipment of the Onso platform. Inventory balances increased in the Q1 to $62,000,000 representing 2.1 inventory turns compared with 50.4 1,000,000 at the end of the Q4 of 2022, representing 1.6 inventory turns. The increase in inventory primarily reflects Purchases of Revio and Onso Instruments and Consumables Inventory.

Speaker 3

Accounts receivable increased in the Q1 of 29.6 compared with $18,800,000 at the end of the Q4 of 2022, while our DSO of 56 days declined in the Q1 compared to a DSO of 70 days in the Q4 of 2022. Turning to guidance, as discussed earlier, Given the successful launch and positive customer reception toward revenue, we are increasing our guidance for 2023. We now expect revenue in the range of $170,000,000 to $185,000,000 representing a growth rate of approximately 33% to 44% compared to 2022. The lower end of the range continues to assume a year over year client and consumables as customers transition to revenue. The high end assumes consumable revenue is slightly higher compared to 2022.

Speaker 3

Service and other revenue is still expected to be lower compared to 2022. We continue to ramp up manufacturing capacity and expect to reach our planned production rate for 2023 during Q2. As such, we expect to continue to increase revenue shipments every quarter this year and as a result, we expect revenue to be more weighted toward the second half. Moving down the P and L, we expect that 2023 non GAAP gross margin, which will exclude the amortization of intangible assets to be lower than our previously guided range of 36% to 40% due to inventory reserves in Q1 resulting primarily from the decline in demand of Sequel 2 and 2E consumables due to customers' product transition to Revio. We expect margin expansion beyond 2023 as revenue placements will help drive a mix shift towards higher margin consumables and higher volume and optimization drive lower Manufacturing unit costs.

Speaker 3

We continue to expect non GAAP operating expenses to grow less than 5% in 2023 compared to 2022. Additionally, we expect interest and other expenses to have a minimal impact on our full year EPS as interest income on our cash and investments is expected to offset our interest expense from the convertible debt. We expect the weighted average share count for EPS for the full year to be approximately $255,000,000 reflecting the recent sale of common shares and share is expected to be issued as part of the Omnia milestone later this year. I'll hand it back to Christian for some final remarks. Christian?

Speaker 2

Thank you, Susan. As you can see from our prepared remarks, we're off to a strong start for the year. We're driving the rapid adoption of Revio with over 1 third of our sales funnel being new to PacBio instrument customers and existing customers sharing how they plan to increase the amount of long read sequencing with the platform's 15 fold throughput increase. For Onso, our beta program is progressing well and we are scaling our operations with an eye towards commercial launch at the end of this quarter. We look forward to more customers getting their hands on Q40 plus accuracy and becoming the only company with both leading long and short read Technologies in the market.

Speaker 2

Financially, we remain well positioned with $875,000,000 in cash and investments on our balance We believe our strong financial position allows us to drive toward both our growth targets and our goal to become cash flow positive during 2026. 2023 is the first step in this journey of becoming a multi platform, multi product company and we look forward And with that, I'll turn it over to the operator so that we can begin the Q and A.

Operator

Thank you. We will now begin the question and answer session. And at this time, we will pause momentarily to assemble our roster. And the first question will come from Dan Brennan from T. B.

Operator

Cowen. Please go ahead.

Speaker 4

Great. Thank you. Thanks for taking the questions. Congrats on the quarter. Maybe just a couple.

Speaker 4

Christian, you kind of Given the profile of the box, maybe just give us some flavor for like where that is, how that is, is it the pipeline, is it the number Customers, is it the initial kind of performance? Just give us some color on kind of where it's more optimistic? And then I'm just wondering you guys, I know you're not giving order numbers out obviously, but you did talk about a record backlog. So obviously orders were greater than what was placed. I'm just kind of trying to get a flavor for any other color around that in terms of the extent of that and or the funnel, things of that nature.

Speaker 4

And then I might have

Speaker 2

Great. Hey, Dan. Thank you. So Revio is exceeding my expectations On a number of different fronts, first, our ability to execute and get the product shipped on time, Get the product working in the hands of our customers with very almost straight out of the gate And then seeing the actual run performance, how our customers on real world samples are getting At least 90 gs per SmartCell, but oftentimes over 100. So the overall performance of the system Certainly in the launch is actually quite encouraging for me and the ability for us to deliver on that.

Speaker 2

The second piece is The breadth of applications and the breadth of demand, quite frankly, I think that it demonstrates we've seen orders From people doing microbial research to whole human genomes, plant and animal research, really very broad and I tried to highlight that in Our written remarks that this really is a broad adoption of the platform and people really do need the throughput that Revdeo brings And so although I was hopeful that would happen, to see it actually happening and at the level That is happening across the entire community. It's gratifying and also kind of sets us up well We're looking out into the future demand. When you talk about orders, of course, we've been very clear that we're not going to give Quarter to quarter order numbers, but what we tried to say is that the actual order book was very Strong in Q1, it was well above what we shipped, which is fantastic and sets us up well for the rest of the year. The funnel continues to be healthy with lots of new customers coming into the product, Lots of customers that are thinking about scale and so when you look at the outlook Into the future for Revio and how it's going to continue its growth trajectory, It gives me a lot of excitement and a lot of opportunity.

Speaker 2

Of course, we always have a lot of work to do, but I do think we're in a very, very Good position. So hopefully that answers your question, Dan.

Speaker 4

Yes, that was super helpful. And maybe just a quick follow-up. I know it's obviously super early. It's May 2nd. You just First customers got this at the end of March.

Speaker 4

But in terms of kind of filling the boxes and when we think about what Revio could do, I think you Maybe 4 quarters out is when you actually could see a run rate pull through. Just kind of what are you hearing from customers on that front in terms of the box Can generate, I think sequence 1300 genomes. So as we think about modeling out pull through and the early users and Kind of the demand trends like what would the that early traction suggest about the utilization of revenue?

Speaker 2

Yes. Dan, it is really impossible for me to really kind of predict the future, but a couple of things That I can kind of comment on. First of all, the consumable shipments for Revio We're higher than we had modeled, even straight out of the gate. And so what that says is there's enthusiasm to get 2nd, in my prepared remarks, we talked a lot about there are lots of customer conversations that we have where People are moving short read projects to long read. And so what that means to me is that, first of all, they see utility in long reads and utility on Revio.

Speaker 2

But secondly, that means that samples exist to make that transition happen reasonably quickly. And so those are both two encouraging signs. So far, since As you said, most of these systems were delivered anywhere from mid to late March, and so it's still way too early to really have a read. But the one other thing I would say is people are using their systems. 100 of smart cells have been run, 100 upon 100 have been run and overall the results are the performance is quite high, Which gives us which helps the new instrument funnel of course, but it also helps you say, hey, this is going to be a robust product that customers can run So that's about all I could say on it now, but we'll watch from quarter to quarter and try to give color where we can.

Speaker 2

And as we get a few quarters into this, start to report some of those kind of pull through metrics and our perspective on where they're going, but it's a bit early yet, Dan.

Operator

Thank you. And the next question will come from David Westenberg from Piper Sandler. Please go ahead.

Speaker 5

Hi. Thank you for taking the question and I echo congrats on this really great instrument orders in placements here. I want to start off with the gross margin here. I know that you had some people that bought Sequel to in year, like last year, I think they got a discount. And then, I was just wondering here, how should we think about gross margins?

Speaker 5

Is when do we start Really see the leverage of the manufacturing. And as we get into 2024, maybe you roll off that discount and you're going to see higher ASPs and better gross margins. And then last one on the gross margin side, that $3,500,000 of Inventory coming off, is that all the headwind In the guidance for this year or is there more than that? And I guess I think all those questions are probably for Susan actually.

Speaker 2

Well, I'll take a stab at starting and then maybe we'll pass it to Susan. But first of all, the strategy The pricing strategy and launch strategy for Revio was really developed around the notion of delighting our customers And making sure that the transition from SQL to Revio was as painless as absolutely possible. Through lots of experience that we've had over the years, we know these product transitions are tough. And so we set up a loyalty discount program that says You get X amount of discount if you bought a sequencer in 2022, X minus something for 2021 And I believe even for 2020. So we gave all of our install base a bit of Discount with the heaviest discounts being that in 2022.

Speaker 2

So as a result, The first seventy six orders were virtually all discounted pretty reasonably and that program ended in February. And so when we look at our financials and our projections over the year, we would expect the low watermark of ASP to be this quarter, Q1. And then Q2, Q3 and Q4, we expect ASPs to improve and then probably kind of normalize At their normalized rate in the 1st part of 2024. So we think that's how ASPs are going to unpack themselves as we ship all of the systems out of our backlog. If you move to the gross margin and the charge, The charge that we took in Q1 was really based on the consumable demand expectations for Sequel 2.

Speaker 2

And so what I mean by that is we're seeing customers transition to Revio faster than maybe we had predicted Because these things are extremely difficult to predict and we needed to make sure we had enough inventory and capability If the transition was slow or if it was fast, it seems as though it's happening faster than we would have than we modeled. And as a result, we took about a $3,500,000 charge. Most of that amount is related to consumables. Back in Q4, if you remember, we did take a charge as well and that was for the sequel to instrument. And so at this point, We anticipate that we're through most of those excess inventory Our issues and so we don't see significant material amounts of issue going forward, I guess, is the best way to characterize it.

Speaker 3

I think the one thing that I'll add, David, that you were asking just in terms of when do you start to get the leverage on gross margin? So we talked a lot about the consumable mix being a big part of Helping to get that leverage on gross margins. And so with the growth of the installed base and as you can tell from our guidance, this is a very instrument revenue heavy year. And so next year, you start to see more Tremend revenue heavy year. And so next year, you start to see more of the consumable revenue as our installed base for Revio has grown.

Speaker 3

And so that's going to help in terms of our gross margin expansion that you'll start to see more of in 2024 relative

Speaker 2

But the other thing, Susan, we probably should point out is that we expect this is to be the low watermark at gross margins for this Q1 being the low watermark for this year. We expect it to improve quarter by quarter and then get the leverage like to talk about Really in 24? Exactly. Yes. So hopefully that answers your question.

Operator

Thank you. The next question will come from Kyle Nixon from Canaccord. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking the questions. Congrats on the strong start out of the gate here, living out with the hype so far. I wanted to just ask 2, I guess, a multipart question. First on the guidance update, you literally raised the guide by the beat in the Q1, yet revenue is ahead of expectations.

Speaker 6

And you said, I think Christian, does 32 revios match the Total Hi Fi capacity in the field currently, pretty interesting data point. Maybe just provide a bit more detail on some of the assumptions for the remainder of the year At this point, both like company specific and macro and just to kind of frame that, I'm curious like how much conservatism you're baking in, maybe it's too early. What What kind of like you beat this $185,000,000 high end? And then secondly, just you received over 32 Revio orders in the That compares to the 76 you put up after that huge ASHG coming out event. I guess, how are you thinking about orders Forward, I mean, could a run rate be half this 32 number?

Speaker 6

Just kind of curious about that. And I guess importantly, would you end the year still at

Speaker 2

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

Speaker 2

The good news is that we right now we see a lot of excitement and we see a lot of revenue ramp up. So if you look kind of into the future of the company, It bodes extremely well for us to grow our consumables significantly over the next several years and grow our gross margins like Susan was talking about before. So we left the range pretty wide because of that. We did increase the guide modestly. We had a very nice quarter and a strong beat and you're right, We raised by that amount roughly.

Speaker 2

And the thinking there is that we do see an incredible funnel continuing to build and We do see continued opportunity to do really, really well this year, But we're also cognizant of there are a lot of macroeconomic factors lingering out there and we don't have a crystal ball And we figure we had great performance in the Q1. We see very strong demand for the Q2, which gave us some confidence to raise here. But it is the 1st part of the year and what we want to do is see how the year unfolds and if there's opportunity To clarify the guidance on the high end further over the course of the year as we get deeper in, we will. But It was the Q1 was a great result. I'm really proud of the team.

Speaker 2

The demand curve continues to look strong. The order book Continues to look really robust. And so we definitely see a lot of opportunity this year. But right now, We're just taking we're taking stock of the fact that we had a great Q1 and we'll see how the rest of the next few quarters Unfold. Let's see, did I get all of that?

Speaker 2

So as I said before, We did have more than 32 orders in Q1. The reality is, our objective is to be shipping much more than that on a or getting orders for much more than that on a quarter by quarter basis. But the orders in any particular quarter are going to likely be variable dependent on a lot of different factors. And So I think when you look out towards the remainder of this year, our objective is to of course Do better than what we did for orders in Q1, but it may be lumpy from quarter to quarter. But on balance, I see that Growing over the course of the year and into next year.

Operator

Thank you. The next question will come from Tejas Savant from Morgan Stanley. Please go ahead.

Speaker 7

Hey, guys. Good evening. So question, 1 on the hardware side and then a couple of the consumables. So on the instrument side for the Revio, Can you just walk us through what your key learnings were in terms of the customer feedback you received during that April shipment pause that you had called out earlier in the year? And then on the consumable side of things, you've talked about sort of max pull through on the box being about 400 ks or so, so about 30%, 35% of the MAX pull through rather.

Speaker 7

Any early insights from these placements around the Slope of that ramp, is this sort of a 2 year dynamic in your mind or could it be sort of a more of a longer term thing? And then My final sort of consumables question here is, can you just share some color around the process and duration of the workflow for long read sequencing? I mean, you highlighted the new NanoBIND But are there any other sort of key areas you feel you need to do work in to support the higher throughput that the Revio enables? Thank you.

Speaker 2

Yes, Tejas, thank you for the questions. So the pause was quite modest, Quite frankly, we were excited to continue shipping because the system is performing so well. But the key learnings were, there were some Software issues that any launch will typically have. So we did some patches for bug squashing, which are mostly behind us now. We also just wanted to see how the first runs would be going in the field.

Speaker 2

And As I've said probably too many times already on this call, the runs have gone really well and We're seeing above spec output generally across all of our customers. We are seeing One of the challenges, I guess, if there was one I would point out is that, the loading So, I'm going to take a look at the I'm getting up to speed basically for their sample type or their application optimizing The amount of DNA loading that has to happen, so that's an area where we probably have learned a little bit and perhaps And put some new processes in place to make that better and particularly as we Scale to even higher density smart cells down the road, we'll take that learning and implement it into our development program. So Those are some of the things. On balance, the launch is going extremely well. It's We've been excellent and I think customers so far are pretty darn satisfied.

Speaker 2

With any particular we're still going to have run failures. Run failures are at our target spec right now, which is good. We actually think we can Do better and over the course of this quarter we'll make further enhancements to the platform to decrease run failures. But they're really a very small portion of all the runs that have heart failures at this point. So we launched the system in a very, very robust way.

Speaker 2

With respect to Mac's pull through and early insights, the truth is there's not enough run data out there for to even glean those The only data, so to speak, is the enthusiasm of the customer base And they're that they have been buying their consumables probably faster than I expected, which is good. And they are running their systems, getting into most of the time for the higher throughput labs, what they'll do is they'll Run the systems in kind of development mode until they really lock the workflow down and then they'll really scale up. And so we're seeing that happen with our higher throughput customers, which is encouraging and people starting to set target dates on, hey, I'm going to Start my full scale up on this date or that date. So those are all pretty good, but we're not going to really have any fundamental insights. The one thing I would say is you kind of mentioned a 2 year time horizon to potentially get to kind of the optimal throughput Our pull through for a particular customer, first, I think that number is going to be highly variable amongst the customer base.

Speaker 2

But more importantly, I think that ramp will be much faster than 2 years. I think it's I think we should be thinking kind of in the I don't know, somewhere between 12 18 months to where you start to see that. So hopefully that gives you a little bit of color there. And then lastly on improving the process upfront For automation, we do the system today is fully automated. We do have protocols.

Speaker 2

The NanoBine was the latest And improving workflow for high throughput, but we the biggest bottlenecks are in sharing and in size selection and we continue to innovate and work on new ways in which we can do that. The overall sequencing workflow isn't much longer than short read technologies And so it's not really a major, the time is not really a major consideration. It's really just making sure that it's automated So that you're able to walk away, get high quality libraries, put them on the sequencer and with the way we design Revio is you can load You can load your next run at any time while the sequence is running. And so to really maximize the capability of the sequencer, You could load the sequencer every day and basically run the sequencer 24 hours a day, 7 days a week. So That's what we're focused on, continuing that.

Speaker 2

And then as I said, I guess I'll go one step further, The on the back end, we continue to launch lots of new tools to help drive sample throughput Through the sequencer.

Operator

Thank you. And the next question will come from Sung Ji Nam from Scotiabank. Please go ahead.

Speaker 8

Hi, thanks for taking

Speaker 9

the question and congratulations on the quarter as well. I was curious, Christian, in terms of it's really nice to see the Revu installed base already up and running very well. Just curious if there are differences in terms of how quickly the customers are ramping up between the existing SQL customers, Hi Fi users versus new to CAC Bio customers, and then including The customers achieving performance characteristics above your expectations, if there are any differences between new users versus existing users. And also just on Onso, if you're seeing kind of the orders related to bundling with the revenue at this point? Thank you.

Speaker 2

Yes, great. So with respect to new versus existing customers, The workflow is essentially the same for SQL2 to Revio and that's a real benefit of Revio. And so we are seeing the existing SQL2 customers typically can get ramped up a bit faster than the new But the system has a lot of innovations to make it easier to use relative to any product that we've ever had in the past. And I think That will help our new customers make sure they get very high quality DNA out of the gate Using our NanoBind technology and then get those high quality samples onto the sequencers. And so I don't I do think the ramp for new customers will be longer before they are kind of at full capacity, probably, I don't know, 30%, 40%, 50% longer maybe, but I don't think given the ease of use I don't think it's going to be I don't think it's going to really be that onerous quite frankly.

Speaker 2

It's still a bit early, but that's the early experience. With respect to Anso, it is really interesting, lots of conversations going on about bundling. We've had Orders, but we also had orders of single Onso systems straight out of the gate. And It's really exciting to see the demand curve and the power of our sales channel starting to ramp up. And so now we're finishing the late stages of development, getting ready for manufacturing at global scale And full commercialization and our target date is by the end of the quarter like we've been talking about and I think it's It's going to be right there or right around there and I think we're going to have a lot to talk about with respect to ONT.

Speaker 2

So Which is a when you think about it launching 2 major platforms in the same year with the little company like PacBio is Pretty significant task and when we get it done, hopefully a pretty significant achievement. So Look forward to telling you about it more on our next call after hopefully we have orders shipping the product and then it's getting out in the wild.

Operator

And thank you. The next question will be from Julia Kim from JPMorgan. Please go ahead.

Speaker 8

Hi, good afternoon and congrats on the strong quarter. Christian, you mentioned on the prepared remarks about Pop programs that are being brewed in the pipeline. Obviously, we appreciate the strength and the growth for all of us that you mentioned. But could you give us more color on the other Popsy programs and where we are in terms of discussion and the cycle? And then regarding the Revio mix, a third being from short REIT users, is that a positive surprise to you?

Speaker 8

And How are you thinking about this mix going forward as probably both the cost on both the short and long reset continue to go down?

Speaker 2

Yes, I think that so thanks, Julie. I'm going to try to be quick here. But with respect to the radium mix and The samples coming on to the platform, that's not surprising at all because we've achieved the economics and throughput That's enabling and it's actually kind of the fundamental piece of the thesis here is that we're going to be able to take market share and be able to Expand the market with the unique capabilities of Revio. So I think it just helps the taking samples from existing projects Helps us grow faster and get the Revio further up to speed sooner, but I'm not that Surprised by it because of the capabilities. With respect to PopsSeq, there are lots of projects that are percolating right now.

Speaker 2

I don't want to get into specifics of any one project, because for competitive reasons quite frankly, but There are early stage and there are mid stage and there are some late stage projects. The later stage ones are the ones probably we could focus on And we would expect to be achieving or basically winning Are participating in those programs as early as later this year. So it was important to talk about in the prepared remarks to give people a sense of You know, the Revio has made it such that we can be a strong competitor and the projects Have taken notice of Revio and so not only are we reaching out, people are reaching out to us. And I think it's that combo that's really powerful. And if we can win some of these deals, of course, that will be great for our growth.

Speaker 2

So that's what I'll say about that for today.

Operator

And thank you. The next question is from John Salar Bier from UBS. Please go ahead.

Speaker 10

Hi. Thanks for taking the question and congrats on the quarter. Just Couple of quick clarifying ones here. China was pretty strong in the quarter. Just any thoughts on how that ramps throughout the year in reopening?

Speaker 10

And then just a follow-up to that last On the third of new customers to PacBio, are those all new to LongRe customers? Did you have a sense on How many of those might be maybe existing offshore NanoPort customers that are converting over? Thanks.

Speaker 2

Yes. So first of all, yes, China was really strong result, 40% growth in the quarter and Really, it continues to be strong. China's always can, as we've learned over the last 24 months, can be variable, but I do think Revio and actually Onso are both helping us allay any headwinds That are that maybe other companies have with respect to China, so new product portfolio certainly helps there. So we see that business Continuing to be strong in the year. With respect to new customers, yes, most of those when we talk about new Customers are generally new to Long Reed.

Speaker 2

They're certainly they may have done some Long Reed program projects with service providers, but they're generally new to Long Reed And some of them have tried Oxford and some of them haven't, but I don't know the exact breakdown. What's interesting is that Although we both have long read technologies, we both attack different parts of the market. And so we don't see each other As much as maybe one might think, we still do, but maybe not as much as one might think. But it's exciting to see Industrialization, the scale, the cost advantages of Revio excite even Oxford Nanopore customers.

Operator

And the next question will be from Ross Osborne from Cantor Fitzgerald. Please go ahead.

Speaker 2

Hi. Congrats on the quarter and thanks for taking our questions. So I guess first off, I'll re ask Kyle's question regarding color on your comment that Revio Match Hi Fi demand in the market as I do not believe it was addressed, but did think that was an interesting comment. And then for my question, can you just walk us through how you're Meeting stronger than anticipated revenue demand while trying to launch Onzo without cannibalizing the strong revenue demand. Sure.

Speaker 2

Those are good questions, Ross. So just a little bit of color. What we were trying to point out with that comment was That we with Revio launching, we are now increasing the capability for customers to generate HiFi data And we think that the more Hi Fi data that is created that will drive demand for even more Hi Fi data. And so Revio really is the beginning of the flywheel that drives a fundamental paradigm shift in our mind of how researchers think about their projects And how long read technology can really go toe to toe with short read technology and build up significant market. And I think that was the point was really that, hey, now we're starting to get that kind of capacity into the Into the world and from our perspective that's essential to driving the flywheel for long term growth.

Speaker 2

So that was really the reason for the comment. The last question of balancing demand and Thinking about making sure we have a great Onso launch, that's something that I think about every single day. I think it's really important right now as So is showing a lot of promise and we do think there's a lot of good opportunities. And the way we're managing that is that we have specialist Folks that are focusing principally on Anso, we still have one unified commercial organization, but we're definitely ramping up The intensity of focus on Anso, we don't think that, that is impacting our Revio focus. And in particular, if you look at over the last 6 months, we've really pushed the Revio story hard so that we could drive and create a big funnel and now we can execute And now we're in a position to continue executing on that funnel and we're building the Onso funnel.

Speaker 2

We still need to continue to demonstrate the power of Onso and the data, and so you'll see us We will continue to publish a lot more data and that will help drive the commercialization. But you're right, it is a balancing act and it's going to require Good execution for us to stay focused. The good news is that our team has a lot of experience with multiple platform selling And it really and thinking about how you sell solutions rather than just products and I think that will serve us well, but it's something we have to stay focused on. So I appreciate you highlighting it, Ross.

Operator

And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.

Speaker 1

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

Operator

The conference has now concluded. Thank you for attending today's presentation.

Earnings Conference Call
Pacific Biosciences of California Q1 2023
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