Pacific Biosciences of California Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 8 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to hand the call to Todd Friedman, Senior Director of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and welcome to PacBio's Q1 2024 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or is furnished on Form 8 ks available on the Securities and Exchange Commission website at www.sec.gov. A copy of our earnings presentation is also available on the Investors section of our website at www.pacb.com. With me today are Christian Henry, President and Chief Executive Officer and Susan Kim, Chief Financial Officer. 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, our commitment to create a sustainable cash flow positive company by the end of 2026, expectations with respect to certain customers being early in the ramp up and measures to increase their utilization.

Speaker 1

GAAP and non GAAP guidance and expected benefits of using PacBio products or technologies and new product expectations. You should not place undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties that could cause our 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 Form 10 Q and 10 ks and our recent press release to better understand 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. 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 provides 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 are not presented in tables within our earnings release. For future periods, we are unable to reconcile the non GAAP gross margin and non GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, acquisition related items that may arise during the year, including future changes in fair value adjustments of contingent consideration and allocation of amortization expense attributable to certain acquired intangible assets.

Speaker 1

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

Speaker 1

Thank you, Todd, and thank you for joining our call today. In today's remarks, we will discuss some of the factors that contributed to our previously announced revenue shortfall and revised full year guidance. We'll also discuss the steps we're taking to return to revenue growth and why we are confident in the assumptions underlying our updated financial forecast. Finally, we will share our refocused priorities for 2024, which we believe will position us to build PacBio into a sustainable cash flow positive company with the ability to execute in any macro environment. While we forecast near term growth to be lower than our original guidance for 2024, we have never been more confident in the value of our platforms, our long term growth potential and our ability to capture market share in the multibillion dollar sequencing opportunity.

Speaker 1

But first, let's recap the Q1. Consistent with our pre announcement on April 16, revenue of $38,380,000 for the Q1 was below expectations due to an increasing number of customers delaying instrument purchases and softness in consumable shipments. Based on the Q1 results and our expectation that some of these external factors will likely persist throughout 2024, we expect full year revenue to be in the range of $170,000,000 to $200,000,000 The instrument shortfall primarily resulted from elongated customer purchasing cycles as the median sales cycle for Revio instrument purchases increased more than we expected in the Q1 of 2024. More specifically, we believe that the sales cycle increased primarily because of uncertainty surrounding the timing of funding for new capital equipment, particularly in the United States and China smaller SQL IIe customers who are planning to upgrade to REVO are waiting for the samples to drive that upgrade and an increasing proportion of the sales pipeline is comprised of new customers in the Q1 of 2024, which are proven to have longer sales cycles compared to those existing PacBio customers. While consumable revenue grew 15% year over year, it was also below our expectations.

Speaker 1

We believe this was primarily attributed to the slower than expected ramp up in sequencing by our small and midsized customers, many of whom are new to PacBio. The time for new Revio customers and new projects to reach full capacity has been slower than we anticipated. Sample delays impacting sequencing volume in the quarter for certain large customers and some smaller service providers in China operating at lower utilization as a result of the challenging funding environment. In Q1, more customers than we expected utilized their revenue systems at less than 20% capacity. Many of these newer customers and the average age Many of these newer customers and the average age of the systems in this category was less than 4 months, which we believe indicates that these customers are still early in their ramp up.

Speaker 1

The pace of the ramp is dependent on a number of factors including the timing of sample availability, lab readiness and funding among other reasons. We are putting measures in place that we believe will help these customers ramp to their full utilization as timely as possible and help drive consumable growth going forward. Moving on, we're implementing several strategies aimed at accelerating instrument and consumable revenue. 1st is an intense focus on the customer to drive new sales opportunities, close existing deals and accelerate consumable revenue ramp up time. And among other activities, this involves launching our Prism customer focused roadshows.

Speaker 1

These events include discussions and workshops with PacBio users and key opinion leaders in genomics, where they'll engage and share the groundbreaking science that Rabio is enabling. We're organizing events across 6 global cities with approximately 1,000 registered attendees representing over 500 organizations, many of whom we believe will become future Revio users. We're reducing the spans and layers in the commercial which will allow leadership to get closer to and more involved in the sales process. We're also establishing Tiger teams to actively work with low volume customers to accelerate their Revio ramp and collaborate with them to secure samples to feed their sequencer and we're continuing to collaborate with customers to demonstrate the value of HiFi long read sequencing to drive long term durable revenue. 2nd, we're addressing the upfront CapEx barrier some customers face when assessing HiFi and we're doing this by implementing promotions that ease customers upfront CapEx requirements and we're doing this in ways that preserve PacBio's overall economic value.

Speaker 1

These promotions have already created more funnel opportunities, which we believe will close this year and we're focusing our product development on a bench top sequencing to 100 of new global customers. 3rd, we're expanding the market and applications addressable with Revio and HiFi. As I'll discuss shortly, we're investing in developing library prep and informatics solutions around Revio that enhance the platform's value proposition. These launches include PureTarget for targeted clinical research applications and connects for transcriptomics and 16S metagenomics and we're also developing future enhancements that we will believe will further reduce DNA input requirements below 1 microgram of DNA for a 30x whole human genome, potentially opening up more existing samples and new projects to HiFi sequencing. Looking ahead, our pipeline of sales leads has continued to grow each quarter since we launched Revio.

Speaker 1

We believe our current sales pipeline is sufficient to at least support the midpoint of our guide of 120 Revio systems, which provides further confidence in our revised revenue targets for 20 24. There's no doubt that PacBio and our industry are facing increasing headwinds this year. However, we remain incredibly optimistic about our business and the prospects for long generate with their sequencers. Growth in this metric demonstrates increasing utility and broader acceptance of long read Hi Fi technology. In the Q1, total generated total data generated from PacBio long read sequencers grew 2.5x from the Q1 of last year.

Speaker 1

This growth is a testament to the overall interest in Revio and the continued market share gain for LongREASE. As of March 31, just over just 1 year after commercialization, we surpassed 200 cumulative Revio shipments, marking the fastest install base ramp in PacBio history. From a throughput perspective, this has the same power as over 1,000 SQL2Es, our previous generation platform. This rapid scale up demonstrates our customers' desire to sequence using PacBio Hi-five more than ever, but it will take some time for them to migrate projects and samples to this new found capacity. We've been exceptionally pleased with the number of new customers These customers included University of Tartu, host of These customers included University of Tartu, host of Estonia's National Biobank.

Speaker 1

The team selected Revio exclusively over other short and long read technologies to sequence 10,000 whole human genomes as part of their goal to adopt personalized medicine at scale and understand the underlying genetics of health, disease and treatment outcomes. It also includes the first Revio in Latin America, which will be used by a customer to support in support of 1,000 sample human genome project. These new Revio customers add to the existing multi 1,000 sample projects that we've shared over the past year, such as large scale human genomics program in Singapore, which is expected to start sequencing this quarter and continued sequencing from the All of Us and 1,000,000 Veterans program in the United States. We're also pleased to announce that Ambre Genetics has joined the collaboration with the Gregor Consortium and the University of California, Irvine and aims to sequence up to 7,000 long read HiFi genomes over the next 3 years, focusing on the development on developing new insights into rare disease ideology and treatment. Revio enables more than just large scale research studies.

Speaker 1

Hospitals are increasingly seeking to implement Revio to achieve unprecedented insights into genetic and rare disease. It includes existing PacBio customers like Seoul National University Hospital, which utilized one of our recently announced interim promotions and plans to use HiFi Long Read technology to improve its testing capabilities in rare disease and cancer. Also, a leading pediatric hospital in Canada purchased Erevio, its first pack biosystem to sequence 1500 rapid hold genomes of critically ill infants. HiFi was the clear choice for this clinical oriented customer as the other long read sequencing technology proved too high an error rate. To support these customers, we are continuously enhancing our software, launching new library prep and sample Revere.

Speaker 1

We've seen tremendous interest in our recently launched Konext full length RNA kits. Launched in the Q4 of 2023, we booked orders for 160 customers as of March 31, totaling over $1,500,000 The PacBio Pure Target Panel was launched and began shipping in late March, allowing for comprehensive characterization of repeat expansions. Expansions of repetitive DNA sequences have been linked to over 50 monogenic disorders in cancers. This kit enables customers to interrogate some of the most critical and hard to sequence genes related to these diseases and multiplex up to 192 samples on the Revio system. Combined with our target repeat expansion collar and the NanoBind DNA extraction kit, it allows for an easy and scalable workflow to capture repeat expansions, bringing customers from sample to answer in 3 days.

Speaker 1

We just started shipping these kits in March and we're already seeing great interest from customers ranging from pediatric hospitals to large commercial testing labs, biopharma and academic labs. Launched in the Q1, our Hi5 Prep and to prepare up to 96 libraries at a time at a lower cost per library and some of our largest customers are adopting these kits to help them further scale their projects. We expect the kits to be particularly beneficial for microbial genome and low pass large genome sequencing. The library prep costs are a large percentage of the overall workflow costs. The NanoPine pan DNA kit developed from the Circulomics technology supports a high molecular weight extraction from cells, bacteria, blood, tissue, insect and plant nuclei.

Speaker 1

This new product consolidates the capabilities of our existing sample specific offerings into a single solution for DNA extraction. Since we acquired it in 2021, over 1,000 customers have ordered Circulomics kits. This product line helps us deliver solutions the thousands of lower throughput long read users and could potentially serve as a funnel for our future bench top long read sequencer. We continue to be pleased with the traction of our sample extraction offerings and excluding large OEM purchases from one customer, the Q1 was our most successful quarter for Sample Prep. Finally, our version 13 experience by preventing overloading of the smart cell, allowing customers to load DNA more confidently and achieve higher and more consistent yields.

Speaker 1

With B13 enabled on almost every Revio, the mean yield per smart cell for whole genome sequencing runs in 2024 is approximately 5 gigabases higher than in 2023. We continue to see success with consolidation of Onso instrument and consumable manufacturing into our consolidation of Anso instrument and consumable manufacturing into our Menlo Park facility, which allows us to fully leverage our operational infrastructure. So now let's look ahead and discuss our 4 strategic priorities going forward. First, improving our commercial execution to drive adoption of both Revio and Onso. We're placing a greater focus on the value proposition of HiFi sequencing and increasing collaboration with customers, purchasing departments and decision makers.

Speaker 1

We're also working to improve revenue. With respect to Onso, in the Q1 we've scaled the manufacturing of the platform, enabling us to deliver instruments based on demand much more which will help drive our ability to sell the system. Additionally, we've identified opportunities to drive manufacturing improvements and lower the unit cost of consumables, which gives us the flexibility to lower the list price on on so flow cells and reagents to as low as $8 per gigabase. With these advances along with a more focused and targeted selling effort, we believe that we can be very competitive in this market. 2nd, continuing the development of new platforms that are expected to broaden our product offering and drive our revenue growth.

Speaker 1

We continue to believe that developing a multi platform portfolio is important for our success, enabling us to reach more customers and drive technology adoption. While we expect the Revio platform to be the primary contributor to revenue over the next few years, we are aggressively pursuing the development of a long REIT benchtop system, which will have a much lower capital cost enabling us to reach a new subset of lower throughput customers and provide flexibility to existing Revio customers through fleet expansion. We believe that this instrument will address a market of over 1,000 potential customers. We're also developing a high throughput short read platform that is expected to enable us to serve high throughput labs with our leading sequencing by binding technology. This highly accurate technology is perfect for needle in a haystack applications such as liquid biopsy.

Speaker 1

We believe it to be highly competitive in terms of both throughput and cost relative to other high throughput offerings. The addressable market for this platform is estimated to be over $1,000,000,000 per year. We are also continuing to develop our next generation smart cell. This cell is expected to power a new extremely high throughput long read platform enabling throughput dramatically higher than that of the Revio system. 3rd, we're implementing projects to improve our gross margin and drive manufacturing efficiencies.

Speaker 1

A cornerstone of our path to cash flow breakeven is our ability to improve gross margins through revenue mix and unit cost reduction. We've already reduced the production cost of both the Revio instrument and the 25 ms SmartCell and expect more improvements this year and beyond. Outside of our next generation platforms, this is a critical R and D and operations effort that we will continue to invest in. Finally, we are reducing annualized run rate operating expenses. Last week, we began implementing our restructuring plan to reduce operating expenses.

Speaker 1

As part of that, we made the difficult decision to reduce our total headcount by approximately 25% or 195 employees and close our San Diego office. Virtually all functions within the company were impacted. The reductions

Speaker 2

are being made based on

Speaker 1

our refocused priorities that I discussed above. As a result, I believe that we have the resources required to achieve our near term priorities. With these reductions along with other non headcount related savings, we now expect to lower our non GAAP operating expenses on an annualized run rate basis by more than the $75,000,000 reduction by year end. This is above the range we provided in our pre announcement on April 16. We believe that it positions us to deliver on our commitment to our plan to create a sustainable cash flow positive company by the end of 2026 and enable us to continue to provide scientists with some of the best technologies that push the boundaries of biological discovery.

Speaker 1

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

Speaker 3

Thank you, Christian. As previously mentioned, we reported $38,800,000 in product, service and other revenue in the Q1 of 2024, compared to $38,900,000 in the Q1 of 2023. Interest revenue in the Q1 was 19,000,000 a decrease of 8% from $20,700,000 in the Q1 of 2023. The decrease was due to lower Revenio unit shipments. We ended the quarter with an installed base of 201 Revio systems.

Speaker 3

Turning to consumables, we delivered revenue of $16,000,000 in the Q1, a 15% increase from $14,000,000 in the Q1 of last year. Approximately 69% of consumable revenue came from Revio systems, which reflected an annualized pull through of the Revio system of $254,000 and the remaining consumable revenue from other systems and other consumables. We expect SQL2 and 2E share of total consumables to continue declining as we continue shipping revenue and customers transition to the new Finally, service and other revenue was $3,800,000 in the first quarter compared to $4,200,000 in the Q1 of 20 23. The decline was primarily due to customers transitioning to the Revio system, which includes a 1st year warranty and opting not to renew their sequel to 2E service plan. From a regional perspective, revenue in the Americas was $17,700,000 a 7% decrease compared to the Q1 of 2023.

Speaker 3

This was driven by a decline in Revio shipments as Revio system sales took longer to close. We believe the majority of Revio system opportunities that slipped out of the Q1 pipeline encountered challenges with funding. Consumable growth in the quarter was partially offset by delays in large project spending and sample availability at high utilization sites. For Asia Pacific, revenue was $12,800,000 up 7% versus the prior year with headwinds in China, partially offsetting growth in other countries, including Japan. We believe China Revio sales were impacted by capital funding challenges and lower Revio sequencing pricing offered by large service providers, delaying the need to directly purchase Revio instruments by the smaller lab.

Speaker 3

Looking ahead, we're encouraged by new modernization initiatives in China. We believe these will boost R and D capital spend, including sequencing instruments as several potential customers have already applied for REVO funding under this program, albeit it's too soon to factor this into our 2024 expectations. Finally, EMEA revenue was $8,400,000 up 6% over the prior year period, but was lower than previously anticipated as some interim deals were delayed and for some new system orders shipped, the associated consumable orders were pushed to the following quarter after installation. Moving down the P and L, a GAAP gross profit of $11,300,000 in the Q1 of 2024 represented a gross margin of 29% compared to a GAAP gross profit of $9,800,000 in the Q1 of 2023, which represented a gross margin of 25%. 1st quarter 2024 non GAAP gross profit of $12,600,000 represented a non GAAP gross margin of 33% compared to a non GAAP gross profit of $9,900,000 or 26% in the Q1 of last year.

Speaker 3

Non GAAP gross profit in the Q1 excludes approximately $1,300,000 of expenses for the amortization of acquired intangible assets. Gross margin increased year over year, primarily due to adjustments of approximately $3,500,000 recognized in the Q1 of 2023, primarily related to excess sequel 2E consumable inventory that resulted from a faster than expected decline in demand for sequelae2e due to the product transition to Revio. We are pleased to have completed the consolidation of our short reagents of flow cells from San Diego to Menlo Park during the quarter, helping to lower production costs for every consumable kit we transitioned the build of a key component on the Revio system in house, which since being implemented in March has helped reduce the contract manufacturing overhead expenses on each Revio instrument built by tens of 1,000 of dollars. GAAP operating expenses were $92,600,000 in the Q1 of 2024 compared to $101,000,000 in the Q1 of 2023. Non GAAP operating expenses were $87,200,000 in the Q1 of 2024.

Speaker 3

This represents a 2% decrease from non GAAP operating expenses of $88,700,000 in the Q1 of 2023. Operating expenses in the Q1 included non cash share based compensation of $17,400,000 compared to $16,000,000 in the Q1 of last year. Regarding headcount, we ended the quarter with 787 employees compared to 796 the end of 2023 and 793 at the end of the Q1 of 2024. As a reminder, in April, we began implementing reductions in our headcount by approximately 195 employees and therefore expect to end the second quarter and full year 2024 with a headcount of less than 600. GAAP net loss in the first quarter of 2024 was $78,200,000 or $0.29 per share compared to a GAAP net loss of $88,000,000 in the Q1 2023 or $0.36 per share.

Speaker 3

Non GAAP net loss was 71,400,000 representing $0.26 per share in the Q1 of 2024 compared to a non GAAP net loss of $75,500,000 representing $0.31 per share in the Q1 of 2023. Turning to our balance sheet items. We ended the Q1 with $561,900,000 in unrestricted cash and investments compared to 631,400,000 dollars on December 31, 2023. Inventory balances increased in the Q1 to 67 $300,000 representing 1.7 inventory turns compared to $56,700,000 on December 31, 20 23, representing 2.9 inventory turns. The increases in inventory primarily purchases of REVO and Onso instrument and consumable inventory.

Speaker 3

Accounts receivable decreased in the first quarter of $30,300,000 compared with $36,600,000 at December 31, 2023. Now to expand a bit on our financial guidance. Consistent with our pre announcement on April 16, we believe full year 2024 revenues to be between $170,000,000 $200,000,000 At the midpoint of this guidance, we assume 85,000,000 dollars of instrument revenue, which includes 120 Revio shipments, making Revio still the fastest growing sequencer in PacBio history. We expect $80,000,000 in consumable revenue, which assumes an annual pull through of $290,000 for the Revio platform. Moving down the P and L to gross margin, we now expect full year gross margin to be between 35% 38%, lower by 1 point at the midpoint from our prior guidance due to lower volumes and revenue.

Speaker 3

We have made significant progress on improving the per unit cost of both Revio instruments and Revio consumables and expect to end the year with Revio instrument costs 10% lower than when we launched the platform and consumable unit costs over 25% lower. These costs and operational improvements will continue beyond 2024 and are expected to drive quarterly gross margin expansion this year and going forward. Moving to operating expenses, we now expect non GAAP operating expenses to decline year over year from the $355,000,000 we reported in 2023 to be approximately $300,000,000 to $310,000,000 Specifically at the midpoint, we expect $150,000,000 in non GAAP research and development expenses and $155,000,000 in non GAAP selling, general and administrative expenses. As mentioned, we expect the non GAAP annualized amount of these savings to be above the high end of our $50,000,000 to $75,000,000 range by year end. And as a result, we expect full year non GAAP operating expenses to decline in 2025 compared to 2024.

Speaker 3

We continue to expect $5,000,000 to $10,000,000 in interest and other income, dollars 273,000,000 in weighted average shares outstanding for the full year 2024 and we continue to expect ending cash, cash equivalents and investments to be in the range of 435,000,000 dollars to $450,000,000 representing a cash burn of $189,000,000 at the midpoint. As a reminder, we announced that we were unlikely to achieve our previous long term guidance. While we are not providing updated figures today, we remain committed to our plan of turning the business cash flow positive by the end of 2026 under various revenue scenarios, which include revenue growth in 2025 and beyond with new products and growing consumables off increasing revenue install base. Expanding gross margins with reduced manufacturing per unit costs and continued mix shift to consumables and lower non GAAP operating expenses in 2025 compared to 2024 with minimal growth thereafter. We will provide more details behind our assumptions and our updated long term guidance at a later date.

Speaker 3

I'll now turn it back to Christian for some final remarks. Christian?

Speaker 1

Before we move to Q and A, I just wanted to leave you with 3 things I hope you take away from our call. One, our business and industry are facing headwinds, which we believe are short term. 2, we have a clear plan to address these issues, which includes proactively working with our customers and focusing our talented people and resources on our highest potential technologies. It also involves rightsizing our organization and expenses to align with the lower near term revenue expectation. We are also firmly committed to our plan of positive cash flow exiting 2026.

Speaker 1

And finally, we remain optimistic about our technology and the power of our differentiated platforms. We are confident that we have the right plan in place that will enable us to capitalize on the long term growth and value creation opportunity ahead of us for the benefit of scientists and clinical researchers around the world. We continue to be energized by the countless stories of customers utilizing technologies to look deeper into the genome and uncover biological insights that are otherwise undetectable. With that, I'd like to open the call up to Q and A. Operator?

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Kyle Mixon with Canaccord. Please go ahead.

Speaker 4

Hey guys, thanks for the questions. Good to chat with you. So, Christian, a few years ago, you said these really exciting medium term growth and margin targets, right? And since then, you've had to withdraw those, you just went over that. You're probably not going to come close to hitting those numbers.

Speaker 1

I think you probably seem confident

Speaker 4

on cash breakeven, but we'll see what happens there. So definitely there's been some external factors. A lot of it seems to be due to changes in the RevVO forecast, maybe some of the other products as well that you plan on launching. I guess, Christian, just how do you kind of regain investor confidence and support in both the demand for the Revio as well as these future long

Speaker 1

Yes. Thank you for the question, Kyle. Obviously, regaining investor confidence is front and center for us. And I think the first thing we've done is we've recognized that our revenue trajectory is not what we had forecast and we made aggressive moves quickly to right size our spend envelope so that we can confidently say that we're committed to being cash flow positive in 2026. And being cash flow positive in 2026, as Susan pointed out, we do have some expectations like we do believe that we are going to be able to grow revenue.

Speaker 1

We do but we believe we can achieve positive cash flows with really a modest revenue ramp from here. And so I want to make sure that that's well understood that we are not planning to achieve the moon to get to positive cash flows, but we are very we are looking to be very disciplined about how we match our expenses with our revenue growth. So that's the first thing with investors is demonstrating our commitment to running this business responsibly. The second thing is to continue on the path. Our strategy of building leading a leading long read technologies and building a short read business as well is still intact in our view.

Speaker 1

We still see on the long REIT side tremendous excitement and adoption of the technologies. As I pointed out in my remarks, we saw in the quarter, we saw 2.5x more sequencing than happening and data being generated than at just 12 months ago. That's pretty incredible when you think about where we're going and you think about what our competitors are saying. So we do think that there is a broad excitement about long reads. Now the translation of that excitement into revenue is really focused.

Speaker 1

We're focusing our efforts on working with our customers to try to shrink the purchase cycle as much as we can given the macroeconomic constraints that we've been under. And that's why you saw us implement some promotional programs to reduce capital expenditure requirements. But one thing I'll point out there is that the way we've done these promotions, we still end up in the same economic place. It's really a timing of the cash flows issue for the company. So we're reducing the barriers to get into the technology.

Speaker 1

So those are just a couple of things that we're doing. At the end of the day to regain investor confidence, I think it is pretty straightforward. It is demonstrate financial discipline, exhibit market leadership, and then deliver revenues as we Kyle, but we have a lot of excitement about what we're doing. It's certainly frustrating and it was certainly disappointing to have to make such a big move, but we made the move aggressively early, which gives us a great opportunity to get to positive cash flows.

Operator

Thank you. The next question comes from Dan Brennan with TD Cowen. Please go ahead.

Speaker 5

Great. Thank you. Thanks for taking the question. Maybe a 2 parter. Maybe just the first one, Christian, just on PacBio been developing the Longleaf technology for over 10 years and you guys are really differentiated there.

Speaker 5

And in this iteration, it's really the revenue is there's a lot of excitement in the marketplace. So I'm just wondering, given the balance sheet and given where the stock is and given the opportunity ahead on Long Reed and all the demand and interest and you're just trying to refine the curve to kind of meet the demand in the right way. What how come is it the right strategy to be so committed to the short REIT portfolio at this point where Onso is differentiated with the kind of the accuracy, but we really don't see kind of what the numbers are in Anso even and then you're still committed to the high throughput. And so I'm just wondering, given the pressure on the company and given the opportunity ahead of long lead, not only on revenue, but on the mid throughput, I'm just wondering why not cut back significantly on short read to give investors more confidence the path to this positive free cash flow? And then the second part would just be on Revio as we think ahead this year and next year on placements.

Speaker 5

Just any color you can give us about how you're thinking about trying to kind of optimize your go to market strategy to kind of give us confidence towards growth in placements? Thank you.

Speaker 1

Yes. Dan, thanks for the question. And sure, this is of course, we've been thinking long and hard about how do we manage our business in light of our financial situation and in light of where the market is right now. And the good news, we'll start with this. We have $562,000,000 of cash on the balance sheet.

Speaker 1

So we are very well capitalized right now. We have a strong business and we believe we have both leading technologies on the long read side and the short read side. So we do believe we have a lot of assets and opportunities. The short read side is certainly more competitive than it's been and ever been. And so, we did have to ask ourselves, do we keep going?

Speaker 1

And what I would say to that specifically is, first, we just scaled up our production capability for the Onslow system. So the reality is that we've seen increasing shipments each quarter, Q3, Q4, Q1, but we've been manufacturing constrained and we had some late development that we had to finish to make the chemistry even better. And so the reality is that we're still just getting started in this opportunity and we in conversations with customers, customers are excited about testing out the accuracy. Customers are seeing interest and value in it, but we haven't been able to deliver to that yet. And so I think that what the way we're thinking about this is that we aggressively drive our marketing activities and our commercialization efforts right now on and on so.

Speaker 1

We think we can do that without so we are going to be aggressively marketing the product over the next several quarters and we'll see how we how the product does in the market. I think we're really just getting our feet under us, so to speak, there. On the short read, high throughput side, we are already I'm very encouraged with the development we're making with the Apton technology that we acquired. We're already sequencing billions of reads at high accuracy. We have I was just in the lab late last week looking at new optical systems and advanced abilities for us to actually get super high resolution images which will really enable us to sequence fast at very, very high capability.

Speaker 1

And so that and then we've had customers come Opton technology, large lab type customers and they are you know, the first conversations are after they look at the data is when can we get an early access machine. So all that being said, what this means is that we are early in this journey. I don't I believe strategically it's an important market for us, particularly these needle and haystack applications. And I do think we have both the resources financially and personnel wise even after the reductions to execute on this portfolio. Of course, we will be very focused on how we do in the market in the next several quarters and evaluate it at the end of the year.

Speaker 1

So it's not like we're we are going to have both eyes open as we aggressively pursue this. The second part of your question and I know that was a long answer to the short read question, but I know a lot of people have that same question in their mind. With respect to Revio and driving demand, as I said in my prepared remarks, the funnel has been increasing every single quarter, but the sales cycle has been lengthening and a lot of it is new customers. So we're seeing new customers take 9 to 12 months to get to a purchase decision. And so I think that that we didn't anticipate it would be that long.

Speaker 1

And so we're working on ways in which we can lower the barriers to entry through the capital, improve the proof Hi Fi proof cases, for example, with our Prism events and how we're getting more customers engaged with our high runner customers and so that they can they could see how they could get up to scale and take advantage of this incredible technology. And so we have a lot of aggressive marketing and really on the ground conversations that are going on right now to help these new customers shorten the sales cycle and then also help customers kind of in the middle of the market get more samples to their Revio so they can drive their utilization up so that they get ready to buy their second Revio. And we still have a significant number of instruments of SQL II ease that we can go after and we're hopeful that some of the capital reduction plans that we've put in place will help us unlock some of that demand sooner rather than later. So those are just a few of the things, Dan, and I appreciate the question.

Operator

Thank you. The next question comes from Doug Schenkel with Wolfe Research. Please go ahead.

Speaker 6

Hey, everybody. Thanks for taking my question. Listen, it was a tough start to the year and you had to make some tough decisions quickly. So I hope that is appreciated. It's always tough to start the year this way and I appreciate you moving quickly.

Speaker 6

With that in mind, it's good to hear that you think you can get to cash flow breakeven in 2026. And maybe this is asking Dan's question a different way or just trying to take it up a level. But if I oversimplify things a little bit, you kind of got 2 levers. You cut costs or you try to kind of grow into the infrastructure that you built. And it seems like you've kind of veered now to the former cutting costs, but that ultimately hurts your ability to kind of scale up to be a bigger company.

Speaker 6

And there's a toggle between those things, right? And what I don't hear is kind of a pruning of the portfolio. So I'm trying to figure out how do you cut costs and how do we balance that. We want you to do that, but if you're cutting cost and you're not pruning the portfolio, it simply put, it kind of feels like you're still trying to thread the needle a little bit. And if you're not investing as much and you don't have as much infrastructure, it kind of just hurts the probability of success with essentially everything other than revenue, I think.

Speaker 6

So help us understand, Christian. Maybe I'm wrong and but if I'm not, is this a sign that you're in a way viewing the situation as something like don't let a good crisis go to waste and you feel like you can kind of level set and right size and still kind of have the same vision for the company remain intact, it's just delayed a little bit? Sorry, that was a lot, but just want to kind of make sure we understand the logic here. Thank you.

Speaker 1

Yes, Doug, it's a great question. And, I do think I do think in challenging times it forces you to be even more focused. It forces you to push the teams move faster and also from a pragmatic practical perspective, you need to right size to match revenues and to create sustainability as a business. And so the levers you are right, there's 2 fundamental levers. It's actually really 3, right?

Speaker 1

There's drive revenue growth, improve gross margins and decrease costs. Those are the 3. We have when we started this project, I talked about the ability to develop multiple platforms simultaneously. And so we have a very large R and D budget and we have done a lot of that work already to develop next generation products that are in parallel with Revio. And so what this really says is that our bench top system is much for is pretty far along and we're leveraging other technologies coming from RAVIO, for example, to make that system fly.

Speaker 1

And then we're also focused on we've been developing for a long time the high throughput long read capability. And so those projects have already been in motion and by making some of the reductions, we're just recognizing that we've already put some of that bolus of work together and it isn't going to impact our ability to get those products out on a reasonable time horizon. So it's something that I think a lot about is that how do you manage this. I don't believe if you look at where we did the reductions, we actually did the reductions just as much in G as a percentage, just as much in G and A and commercial as we did in R and D. And that is getting us those reductions are focused on making us leaner, more flexible, the ability to move faster.

Speaker 1

We had to spend the 1st few years in this role as we built a new team to build the infrastructure to be able to manage the business as we grow. A lot of that work is done. Of course, you can always get better and do more, but the core abilities for us to monitor our revenue, manage our customers, drive commercialization relationships and marketing activities, those things are that infrastructure is built and now we're able to leverage that infrastructure and reduce costs as a result of that. So you see costs coming down broadly across the whole company. I don't believe and I said very explicitly in my remarks, I don't believe that we have cut so deeply that we're sacrificing the product portfolio.

Speaker 1

Now of course, there are some areas where we are reducing some investment for a while and that will be kind of the nice to have things. But we are still very, very focused on we need building a multi product portfolio because we think that's fundamental to create a robust business. We're still focused on creating incredible customer experiences and the first principles we actually started with when

Speaker 3

we went to the reductions

Speaker 1

were number 1, we have to take care of our customers and delight them consistent with our values. Number 2, we have to improve our commercial execution. We need to get better as a commercial organization to be able to forecast and then execute on these deals in spite of tough macroeconomic environment. And then number 3, we need to develop this product Perhaps it's not on the same timeframe that we've talked that we Perhaps it's not on the same timeframe that we've talked that we were hoping for, but we still fundamentally believe it. So I appreciate the question and I can understand the concern, but I do think that our strategy right now is laser focused and the cost reductions we've made give us a great opportunity with very modest revenue growth to get to cash flow breakeven, which is very important right now in this market environment, which is just different than it was 2 or 3 years ago.

Speaker 1

Okay. Next question please.

Operator

Thank you. The next question comes from Sung Ji Nam with Scotiabank. Please go ahead.

Speaker 3

Hi, thanks for taking my question. For your bench top long read sequencer under development, Christian, appreciate that could alleviate some of the capital spending constraints in the current environment. But I was curious what the overlap might be there for the addressable market. You mentioned the 1,000 or so labs. So with your existing customer base, are they are the 2 segments meaningfully differentiated?

Speaker 3

And then over the longer term, how do you see the bench top versus high throughput segments evolving for long read sequencing? Could it kind of mirror what we're seeing currently for the short read market? Or do you anticipate something different? Thank you.

Speaker 1

These are great questions. Thank you for them. The first thing is there we do believe that there's over 1,000 customers that could be opportunities for the benchtop laundry system. And they're always in these product portfolios, there's perhaps a little bit of overlap, say between Revio and the bench top. But the reality is what happens is oftentimes is when a customer wants the higher throughput system, but doesn't have the demand yet for that, they may buy the lower throughput system and then within a reasonable period of time, say the next 24 months, within a year or 2, they end up scaling up.

Speaker 1

And so when you think about locking a customer in for the long term with upsell opportunities, it's really a great way to get in and we've seen that in the past in other places where you sell a less expensive piece of gear and then over time they migrate up to more expensive higher throughput pieces of gear. I think that's exactly the same thing. I don't think the specifications on the long rig system which we haven't published yet aren't the overlap isn't there is no overlap. Revio is completely a different system. And so I don't think there's going to be a tremendous amount of cannibalization, so to speak, with the Revio.

Speaker 1

The bench top system will be very powerful, we believe in the clinical markets, particularly in the smaller types of clinical labs, maybe not the highest throughput labs, but it will have number of different applications in those clinical labs. We when we talk about the bench top system with our high throughput customers today, Every single one I've spoken to so far literally has said we want to have the bench top system sitting right next to our Revios, so that when we have an experiment that just makes sense to do on the bench top system, they can do that and have that flexibility. So we actually see many of the higher throughput labs having both systems in place. And if you look across the industry with other players, that's certainly the case. Many customers have different kinds of systems from the same company doing same technology with different throughput levels for different reasons.

Speaker 1

So we see that. Now the question is whether or not the benchtop laundry system narrows our short read opportunity, I don't think so at all. I think our focus in short reads is on needle in haystack applications and what that means is that we will be focused in areas where the bench top long read system really won't have a lot of strategic capability. And so I do think that they will be very separate.

Operator

Thank you.

Speaker 1

Next question please.

Operator

The next question is from Luke Sergut with Barclays. Please go ahead.

Speaker 7

This is Salem on for Luke. Thanks for the questions. I think you've mentioned before that of the benefits from the Revio promotion would start to come through in the second quarter. And that should be fully realized by the end of the year. How do you see this promotion kind of affecting the cadence of placements this year?

Speaker 7

Are you going to kind of see more in 2Q given when the promotion kind of began? And then you mentioned some sample delays impacting sequencing volumes in the quarter for some large customers. Could you kind of give us some granularity there? And do those come from PoppSeq projects? Thanks.

Speaker 1

Yes, it's a good question. So when you think about the promotions, the promotions are spurring new demand into the funnel, which has a lead time and then perhaps getting that middle of the funnel closer to the tipping point, so to speak. And so I would not be surprised if the promotions start helping in Q2 and continue throughout the year. But I would also not be surprised to see if the promotions really have their biggest impact in the second half of the year just because of the sales cycle. And I think that we've seen these elongated sales cycles.

Speaker 1

This will probably help push people across the finish line and shrink the sales cycle some. So perhaps it will have some impact in the Q2. We're not giving specific Q2 guidance today. But I do think the environment is still tough in Q2. And when I look at the year, I look at the year, the second half definitely getting better than the first half.

Speaker 1

And so we definitely see that, partially because, 1, we see where the funnels are, but also because the larger scale epoxy project type projects will be they should mostly be fully operational in the second half of the year. And so that goes to your second question where some of the sample delays, they were from some of the larger type population scale type projects and I do think some of those will start in the Q2. We've already we're already seeing the Singapore project slated to start this quarter, the All of Us project has been continuing, the MVP project, Veterans project is continuing. And the Estonia project is actually ramping really quickly. We've installed the systems.

Speaker 1

They've been trained. They're amazing people to work with. They have a lot of sequencing capability. And so we'll see how that project ramps. But we're pretty darn excited about that.

Speaker 1

And so hopefully this quarter that will get up and ramped as well and grow over the course of 2024. So the back half definitely looks a lot more promising than Q2. But Q2, we are continuing to build the funnels and we're continuing to improve our execution over Q1.

Speaker 3

I think one other thing that I'll add is, Sam, if you see the in the include a histogram of our installed base. And what is across the horizontal axis was the utilization of the instruments in our installed base. But a key driver of that utilization, what you'll notice in the metric below that is that the month or the age in which that instrument was installed and how long it's been in installation is also a driver. So one of the things that we fully expect to happen is that the low utilization, which actually have been installed more recently, are going to start to move to the right and that's going to help to grow our consumable revenue going forward.

Speaker 1

Yes, that's a good point, Susan. All right, next question.

Operator

Thank you. The next question is from Tejas Savant with Morgan Stanley. Please go ahead.

Speaker 2

Hey, guys. Good evening and thanks for taking my question here. Christian, sort of sticking with the needle threading and pipe pruning, pipeline pruning theme here. So I want to start with the COGS side, right? So you talked about some good cost cuts on both the Revio unit as well as consumables.

Speaker 2

Can you just share how much will be passed on to customers via for the price cuts and promotions and so on? And how much goes towards better margins to get you to that cash flow breakeven target for 2026? And then on the pipeline, just taking a different tack on some of those earlier questions. I know you mentioned work on that next gen smart cell for the ultra high throughput long read instrument. But in a sense, I mean, is more long read capacity in the market really the priority that you need to solve for when it sounds like, if anything, the fact that there's too much long read capacity is what's hamstringing sales here a little bit beyond just the macro.

Speaker 2

And maybe the solution is helping those applications for long read mature and scale versus just place more boxes. I think you alluded to some of that on the commercial org side of things, but perhaps you can elaborate on what you plan to do differently there? Thank you.

Speaker 1

Yes, Tayejos, thank you. Those are good questions. Let's see. Let's start with we'll start with the cost cuts and the improvement. What we're really seeing is we have been laser focused on reducing the production costs of Revio and we're doing that through a couple of different things.

Speaker 1

First, we're just getting more efficient and more effective in our manufacturing. We have pulled back some of the stuff that we've been sourcing to in source it which lowers the cost. We've been improving our supply chain and doing a lot of work around that that's driving the cost down. But second, we've actually been improving our software and technology, which has given us the ability to reduce the amount of compute required or the power of the instrument. And so we're on a path, a glide path to be able to buy cheaper GPUs, less expensive GPUs and get the job done.

Speaker 1

So that's those are things that are getting starting to get realized now in Q2 and will continue to get realized through the rest

Speaker 3

of the

Speaker 1

year. Some of that will get passed on to the customers, some of it will drop to margin. It really depends on the situation. I don't have the exact breakdown in front of me because it will be dependent on the customers. But certainly, we're taking advantage of that to improve our gross margins and in cases where it makes sense, get that Revio installed and up and running consumables faster because the long run that will drive better margin to the whole business.

Speaker 1

So we're doing a little bit of both. On the 25 ms, we continue to make efficiency gains and improvements. Yields have been getting better. That's where we've been taking a lot of cost out is where yields are starting to get better. We're improving our efficiency there.

Speaker 1

That is that's really great because that simplifies our plant, but it also enables us to price wherever we need to price and improve our gross margin. A lot of that is going to our improvements in gross margin. So that's exciting. With respect to the pipeline, the next generation smart cell is actually really important to the company. I agree that there is a lot there is more capacity in the market in the last 12 months than ever before in the history of long reads and customers are absorbing that capacity and the next generation smart cells been in development for a couple of years now and these are very long development programs and we're pretty much at the end of the development of the SmartCell itself.

Speaker 1

Once we have the SmartCell, then we can decide when we develop the system around that and launch it into the market. But it is important to have core technology available to us. So the reason why we're continuing on investing in it right at this moment is that the SmartCell itself is almost done and we're working with external partners that we want to maintain those relationships with. But then that also gives us the flexibility to decide how and when to launch an ultra high throughput system and that will be dependent on how the market moves.

Operator

Thank you. The final question tonight comes from Rachel Vatinstall with JPMorgan. Please go ahead. Hello. This is Martyn Azerovitz on for Rachel from JPMorgan.

Operator

Thank you for taking my question. I just wanted to touch quickly on So can you reconcile for us the 13 revenues that slipped in the quarter with the 28 placements and what that really means for your backlog at the

Speaker 3

end of 1Q? Thank you.

Speaker 1

Susan, you want to take that one?

Speaker 3

Yes. So I might have missed the second half of the question. But, so at the end of the year, last year, we did have $19,000,000 in product backlog. We disclose our backlog once a year. We are not disclosing it on a quarterly basis.

Speaker 3

But one of the things that we have said that this year is going to be a year in which there is going to be more books shipped, more turns in the year than we had last year. That's just the nature of being in the 2nd year of a new product launch. So that is part of our assumption, and that is also included in our updated revenue guidance. One of the trends that we have seen, which started in the customers, when they purchase the Revio instruments, some are too customers when they purchase the Revio instruments, some are choosing to go ahead and place an order for consumables with a shift schedule. And also one thing on the interim side is that we did not ship all of the interim backlog.

Speaker 3

So we do still have interim backlog, and we do we plan to continue to maintain interim backlog throughout the year, but that kind of gives you some of the characteristics that's embedded in our guidance.

Operator

Thank you very much. Great.

Speaker 1

All right. Please go ahead. Thank you everybody for joining us today. That's going to conclude our call for today and we look forward to connecting with you throughout the quarter and updating you on our Q2 results later this summer. Good one.

Speaker 1

Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Pacific Biosciences of California Q1 2024
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