Pacific Biosciences of California Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 12 speakers on the call.

Operator

Good day, and welcome to the PacBio Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and welcome to PacBio's Q2 2024 Earnings Conference Call. Earlier today, we issued a press release outlining the financial results we'll 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. Copy of our earnings presentation is also available on the Investors section of our website. With me today are Christian Henry, President and Chief Executive Officer and Susan Kim, Chief Financial Officer. On today's call, we will make forward looking statements, including, among other statements, regarding predictions, estimates, expectations and guidance.

Speaker 1

You should not place undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Forms 10Q and 10 ks and our press releases to better understand the risks and uncertainties that could cause 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, which 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.

Speaker 1

GAAP. Reconciliations between historical U. S. GAAP and non GAAP results are presented in our earnings release, which is available on the Investors section of our website. For future periods, we're unable to reconcile non GAAP gross margin and non GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, certain acquisition related items that may arise during the year.

Speaker 1

A recording of today's call will be available shortly after the live call in the Investors section of our website. Those electing to use the replay are cautioned that forward looking statements may differ or change materially after the completion of the live call. I'll now hand it over to Christian.

Speaker 2

Thank you, Todd, and thank you for joining us today. The first half of twenty twenty four has been challenging for PacBio. However, early in Q2, we successfully initiated a significant restructuring, which we expect will reduce our non GAAP operating expenses by more than $75,000,000 on an annualized basis and significantly reduce our quarterly cash burn. Even with this restructuring, we are making significant progress in our product development pipeline and serving our customers with best in class support. There were several bright spots in many areas of our business in the quarter, including several customers adopting Revio in a clinical setting.

Speaker 2

We are now seeing signs that lead us to believe that we will see sequential growth throughout the remainder of the year. I want to thank all of our employees for their dedication and support as we pursue our mission of enabling the promise of genomics to better human health. On our last call, I outlined the following 4 strategic priorities for the remainder of the year. Number 1, improving our commercial execution to drive adoption of both Revio and Onset. Number 2, continuing the development of new platforms that are expected to broaden our product offering and drive revenue growth.

Speaker 2

Number 3, improving our gross margin and driving manufacturing efficiencies. And number 4, reducing annualized non GAAP run rate operating expenses. In my remarks today, I will comment on the progress we are making against the top two priorities, specifically focusing on our end markets and related commercial execution. Susan will then spend some time focused on our 3rd and 4th priorities and outlining our financial results. But first, let's do a quick overview of our 2nd quarter results and our updated guidance.

Speaker 2

Total revenue in Q2 was $36,000,000 which was below our expectations. Our revenue reflects a shortfall in instrument placements, which we believe is due to the ongoing impact of the difficult macro backdrop and elongated customer purchasing cycles. 2nd quarter revenue included 24 Revio systems, representing 4 systems below our expectations. Although we shipped fewer Revyos than anticipated, the average selling price of Revyos increased during the quarter. We continue to see elongated instrument purchasing cycles in each of our regions during the quarter, which we believe is due to a number of factors.

Speaker 2

Number 1, several companies and organizations are awaiting funding for their systems and we're seeing that funding is increasingly delayed. Number 2, we continue to experience unanticipated delays in the procurement process, which include tenders in Europe and APAC, which are taking longer than expected. And number 3, sample volumes are not materializing as we expected for some potential new ReVio customers causing them to delay their purchases. On the consumable side of our business, we delivered revenue of $17,000,000 growing 24% year over year and 7% sequentially, as customers continue to ramp up their Revio usage. We saw strength in EMEA with consumable revenue growing 42% year over year and 50% quarter over quarter, hitting an all time high.

Speaker 2

The growth in consumable revenue in EMEA was driven by new customers scaling long read sequencing during the Q2. Notable customers include the University of Tartu sequencing for the Estonian Biobank and BioSentia, a leading global provider laboratory testing services in Germany, which is scaling its testing offerings. We are further encouraged by the growing excitement for long reads in the region. NovoGene, for instance, has implemented Revio in its brand new lab in Munich, Germany to serve customers across the European scientific community. Despite the total growth in consumables, revenue was slightly below our expectations, which we believe was primarily due to a large research project in the United States losing funding and weakness in the Asia Pacific region, notably in China.

Speaker 2

Looking ahead, for the full year, we now believe revenue will be around the low end of our previously guided range of $170,000,000 to $200,000,000 which we believe is primarily due to the continuation of the headwinds we experienced in the first half of the year and the expectation that organizations will continue to operate in a capital constrained environment for the rest of 2024. Indeed, external challenges are affecting PacBio and others in the industry, particularly with respect to capital equipment purchases. In order to drive instrument placements, we have implemented a number of programs to make Hi Fi Long Read Sequencing more accessible than ever before, including promotions designed to ease customers' upfront capital expenditure requirements, while maintaining PacBio's overall economic value. In the Q2, we shipped several instruments to customers utilizing some of these promotions and are actively working to close several more deals in the second half of this year. Additionally, we announced last week that our leasing partner Mitsubishi Capital is offering one of the most attractive deals on a Revio instrument through a 2 year rental agreement for eligible customers in the United States.

Speaker 2

With this offer, Mitsubishi will purchase the Revio directly from PacBio and then rent the system to customers with an option for the customer to buy the Revio at the end of the Easter. This program does not require a consumable purchase commitment, which is appealing to research customers that are primarily project based. We expect this new promotion to make Hi Fi sequencing even more accessible to a broader range of customers. As for Onso, we launched a promotion for the system in late May to make it what we believe is the most attractive mid throughput short read instrument on the market. As a result, customers can trade in any NGS system and acquire Anso for $99,000 with sequencing costs as low as $4 per gigabase.

Speaker 2

This promotion has already garnered customer interest and increased the order opportunities in our sales pipeline. Consequently, we anticipate a substantial ramp up for the platform in the second half of the year. In order to continue building our sales funnel, we held several major marketing events throughout the world during the quarter. These prism marketing events were an overwhelming success. The 6 events attracted approximately 800 attendees and help drive dozens of new REVEO opportunities, some of which have already closed and others that we're actively working on closing in the second half of this year.

Speaker 2

On the consumable side, we are seeing indications that give us confidence that consumables will continue growing in the second half of the year. For example, we are now seeing several large projects such as University of CAR 2 sequencing for the Estonian Biobank, the Singapore Precise project and the Gregor Consortium project, all scaling up. In addition, we continue to see positive book to bill ratios for consumables as customers are placing longer term purchase orders for their smart cells and reagents, a potential leading indicator for quarterly growth. While we remain cautious about the outlook in China for the remainder of the year, customer utilization trends have started to improve in the past couple of months and July marks the highest utilization month for the region this quarter, we introduced a histogram chart of our Revio installed base by utilization rate. As a reminder, we can monitor the utilization the majority of our Revio fleet.

Speaker 2

As one might expect, newer customers take longer to ramp utilization levels and we continue to see this in Q2. However, what was encouraging is that compared to last quarter, we saw more instruments move from the low utilization bucket into the medium or high utilization buckets and we saw increased pull through from both medium and high utilization customers. Our focus will be to continue simplifying our workflows and helping our customers get up to their planned utilization rate as fast as possible in order to maximize our consumable revenue opportunity. Now let's take a look at a few of the other commercial highlights during the quarter. We continue to be encouraged by the growth in sequencing data as data produced from the Revio platform grew quarter over quarter and total data output from PacBio sequencers grew 2.2 times from the Q2 of last year.

Speaker 2

Bevyo continues to be the fastest growing instrument in our history, in part through its ability to gain market share via new customers. In the first half of twenty twenty four, new customers accounted for nearly half of total shipments, highlighting the growing value proposition of HiFi sequencing and the expanding range of applications that Revio addresses. At the same time, we see significant opportunities to drive adoption among the remaining 180 plus SQL2 customers who have not yet ordered a Revio. Further encouraging are the results from our annual customer survey, which shows an NPS 456 among those surveyed. In addition, 9 out of 10 respondents reported being satisfied or very satisfied with their Revio system.

Speaker 2

We are pleased by the diversity of customer types that are adopting Revio. In the second quarter, we delivered multiple Revios to a range children's hospitals, human genetic research organizations and pharmaceutical companies. This customer diversity is expected to lead to more applications and greater penetration into our end markets. Additionally, we expect adoption by diagnostic and LVT labs can potentially establish a long term revenue stream as these companies expand their testing menus. Notably, we delivered multiple Revios to Quest Diagnostics to support the company's development of tests for neurological disorders, leveraging the advantages of our recently launched pure target repeat expansion panel.

Speaker 2

Chula Longkorn University Faculty of Medicine in Thailand has adopted its 2nd Revio system to scale its Hi Fi sequencing capabilities. The organization plans to sequence 1,000 human genomes annually over the next 5 years to improve health outcomes. HealthInCode, a leading company in genetic diagnostics, is bringing the 1st Revio system to Spain, becoming PacBio's 1st service provider in Southern Europe. This system is expected to enable large scale Hi Fi long reads to improve the detection of variants in complex regions for customers throughout the region. We're continuing to see the adoption of transcriptomics and single cell RNA sequencing with our Connex kits, which launched last December.

Speaker 2

In Q2, Connex already surpassed $1,000,000 in quarterly revenue and helped drive Revio placements, including a Revio system at a prominent cancer research center in Texas. In 2nd quarter, in Ecuador, for example, has sequenced 700 patient samples as part of a 2,000 sample oncology project and is looking to expand into other stages of developing a new Revio consumables, which we expect will meaningfully increase the system's throughput without the need for additional capital investment. The new consumables are also expected to significantly decrease input, DNA input requirements and add additional methylation calling capabilities. We believe these improvements will unlock more samples and increase Revio's capacity, providing our customers with more value than ever before. We look forward to sharing more about this consumable upgrade later this year.

Speaker 2

Additionally, we're continuing to make progress in our work to develop a low throughput, long read platform and a high system. Finally, we're supporting our customers and R and D pipeline while reducing our costs and cash burn. As we discussed last quarter, we initiated a restructuring plan to reduce our non GAAP operating expenses and expect to exit this year with annualized run rate savings exceeding our previous non GAAP target of $50,000,000 to $75,000,000 As a result of this restructuring, we believe our cash burn will continue to decline sequentially in the Q3 and the Q4 of this year. With that, I'll hand the call to Susan to discuss the financials in some more detail. Susan?

Speaker 3

Thank you, Christian. I will be discussing non GAAP results, which include non cash stock based compensation expense. I encourage you to review a reconciliation of GAAP to non GAAP financial measures in our earnings press release. As discussed, we reported $36,000,000 in product, service and other revenue in the Q2 of 2024 compared to 47 point $6,000,000 in the Q2 of 2023. Interest revenue in the Q2 was $14,700,000 a 51% decrease from $29,900,000 in the Q2 of 2023 due to lower Revio unit shipments.

Speaker 3

We ended the quarter with an install base of 225 Revio systems. Turning to consumables, revenue of 17,000,000 dollars increased 24% from $13,700,000 in the Q2 of last year. Approximately 74% of consumable revenue came from Revio systems, which reflected an annualized pull through of the Revio system of approximately 251,000 with the remainder coming from a mix of other systems. Finally, service and other revenue was 4,300,000 2nd quarter compared to $3,900,000 in the Q2 of 2023. We expect to see modest sequential increases in service and other revenue as the commencement of Revenio service contracts is expected to more than offset the decrease in service contract revenue resulting Sequel 2 and 2E decommission.

Speaker 3

From a regional perspective, the Americas revenue of $20,800,000 exceeded our internal expectations due to greater revenue placements, but represents a decrease of 13% compared to the Q2 of 2023. Growth in consumables was offset by lower revenue placements compared to last year. For Asia Pacific, revenue of $8,200,000 decreased 36% over the prior year, driven mainly by lower revenue in China, which continues to face challenges with funding in a weaker macroeconomic environment. We expect many of our customers to benefit from the government announced stimulus program, but we don't expect any impact from such programs until 2025 at the earliest. Finally, EMEA revenue of $7,000,000 decreased 35% over the prior year.

Speaker 3

As we discussed, the region saw record consumables as customers ramped up their Revio usage, which was offset by lower Revio placement. Moving down the P and L, 2nd quarter profit of $13,200,000 represented a non GAAP gross margin of 37% compared to a non GAAP gross profit of $15,700,000 or 33 percent in the Q2 of last year. The 2nd quarter's non GAAP gross margin improved approximately 400 basis points from the Q1 of 2024 as Revio ASPs improved and in particular, as we continue to realize production cost savings on the Revio instrument build. Non GAAP operating expenses were $71,000,000 in the Q2 of 2024, representing an 18% decrease from $86,700,000 in the Q2 of 2023. Non GAAP operating expenses also declined 19% sequentially compared to the Q1 of 2024 as we began to realize cost savings related to our Regarding headcount, we ended the quarter with 581 employees compared to 796 at the end of 20 23 and 818 at the end of the Q2 of 2023.

Speaker 3

Our restructuring reduced our non GAAP operating expenses, some of which was a result of a 25% reduction in total headcount. Operating expenses in the 2nd quarter included noncash share based compensation of $16,100,000 compared to $16,700,000 in the Q2 of last year. Non GAAP net loss was $55,200,000 representing $0.20 per share in the Q2 of 2024 compared to a non GAAP net loss of $65,600,000 representing $0.26 per share in the Q2 of 2023. Non GAAP net loss excluded $93,200,000 in non cash goodwill impairment charge due to the decline in stock price, among other factors, $18,000,000 of restructuring expenses and $6,900,000 related to the amortization of acquired intangible assets. Turning to our balance sheet items.

Speaker 3

We ended the 2nd quarter with $509,800,000 in unrestricted cash and investments compared with $631,400,000 at December 31, 2023. Inventory increased slightly in the 2nd quarter to $68,600,000 representing 1.6 inventory turns compared with 67 point 3 $1,000,000 at March 31, 2024, representing 1.7 inventory turns. Accounts receivable increased in the 2nd quarter to $32,400,000 compared to $30,300,000 at March 31, 2024. Turning to guidance. As Christian mentioned earlier, we expect full year 2024 revenue to be around the low end of the previously guided range of $170,000,000 $200,000,000 The low end of the full year guidance range assumes 80,000,000 dollars of interim revenue, which includes 115 Revio shipments.

Speaker 3

We expect 72,000,000 in consumable revenue, which assumes an annual pull through of $260,000 for the Revio platform. With revenues at the low end of our range, we also expect non GAAP gross margin to be around the low end of our previously guided 35% to 38% range. As we discussed, we have made significant progress on improving the per unit production cost of both Revio instruments and Revio consumables and expect both to end the year approximately 20% lower than when we launched the platform. We anticipate that these costs and operational improvements will continue beyond 2024 and are expected to drive quarterly gross margin expansion this year and going forward. However, our total gross margins in the second half may fluctuate quarter to quarter based off on product mix, customer project mix and ASPs.

Speaker 3

Moving to operating expenses. We remain diligent in our efforts to lower cash burn and spend profile and expect non GAAP operating expenses to be around the lower end of our $300,000,000 to $310,000,000 range. The low end of the operating expense guidance range assumes $140,000,000 in non GAAP research and development expenses and $160,000,000 in non GAAP selling, general and administrative expenses. We continue to expect full year non GAAP operating expenses to decline in 2025 compared to 2024 and expect to exit the year at a full year run rate that reflects savings significantly above the high end $75,000,000 non GAAP reduction target. We expect interest and other income to be around the high end of our $5,000,000 to $10,000,000 range.

Speaker 3

Our operating expense and cash management discipline is allowing us to maintain our ending cash, cash equivalents and investments guidance in the range of $435,000,000 to $450,000,000 representing a cash burn of $189,000,000 at the midpoint. But more importantly, our expected quarterly cash burn exiting this year will be reduced materially, helping to set up 2025 with a much lower cash burn than 20 4. We still expect 273,000,000 in weighted average shares outstanding for the full year 2024. Finally, we remain committed to turning the business cash flow positive by the end of 2026. We intend to do this by executing on our strategic priorities, which are anticipated to result in revenue growth in 2025 and beyond with new products and consumables expansion from the increasing revenue installed base.

Speaker 3

Expanding gross margins with lower per unit production costs and continued mix shift to consumables and lower non GAAP operating expenses in 2025 with minimal growth thereafter. We will provide more details on our assumptions and updated long term guidance at a later date. I'll hand it back to Christian for some final remarks. Christian?

Speaker 2

Thank you, Susan. While the first half of twenty twenty four has certainly been challenging, I'm encouraged that we're taking the difficult but necessary steps to streamline our business by reducing non GAAP operating expenses and driving costs out of our manufacturing. I'm also encouraged by the incredible progress that we continue to make in our product development pipeline. We continue to improve the performance of the Revio platform, which will provide more value to our customers than ever before. And we have made substantial progress in our low throughput, long read throughput, long read platform, which will enable us to reach a broader customer base.

Speaker 2

Commercially, we are seeing increased adoption of Revio in more clinically focused accounts as these customers are leveraging the platform in applications that are extremely difficult for short read sequencing technologies. We're also seeing signs that we will return to growth in the second half of the year as we've seen several customers choose to expand their Revio fleet and we continue to see a large number of our Revio purchases from new customers. We remain optimistic about our business and prospects for both our long and short read sequencing technologies. I firmly believe that we are on the path to building a PacBio into a leader in life science tools and that we are on track to becoming cash flow positive by the end of 2026. And with that, I'd like to open up the call to Q and A.

Speaker 2

Operator?

Operator

We will now begin the question and answer The first question comes from Dan Brennan with TD Cowen. Please go ahead.

Speaker 4

Hi, this is Tom on for Dan. Thanks for taking the question today. I want to focus on your consumables and for the back half of the year. It looks like you're taking a more measured look at that. I want to understand maybe given the installed base is a bit more mature and a lot of the new installs will be in insurance that are new to PACCAR or customers that are new to PACCAR.

Speaker 4

Kind of what gives you confidence coming into 2025 that you do get that utilization up? And maybe talk through a bit about that sample comment you made earlier in the prepared remarks? Thanks very much.

Speaker 2

Sure. Thanks for the question. So I think the what we saw in the Q2 was we did have a reasonably good consumable result and we saw some pretty exciting pockets such as what's happening in Europe right now. And what gives me some confidence that we're seeing those trends and we expect those trends to continue is really a couple of different things. First, we're seeing customers that have been in low utilization bucket, which are traditionally the new customers are actually moving into kind of the mid utilization bucket and some even into the higher utilization bucket.

Speaker 2

And what we're seeing is in the mid and high utilization in the second quarter is we actually saw higher consumable pull through. That higher consumable pull through is really related to larger projects that are starting to get up to speed, which we announced a number of those. And then some kinds of customers are starting to be those clinical type customers that run very consistent and have that consistent revenue stream. As we move into 2025, I fully expect us to see even more of that, more clinical read technology because it can do things that short read technologies just can't do. And we're starting to see more of the big projects.

Speaker 2

Now in the Q2 and for 2024, there is a mitigating factor. 1 of the large projects in the United States lost a lot of its funding or most of its funding, which will impact our back half of 2020 for some. But on balance, we're seeing more consumable utilization and more consumable usage, which I think bodes well for future instrument pull through and improving significant improvement from where we are today.

Speaker 4

Thanks. And if I could just follow-up on that kind of POPSEQ topic. Some experts we've spoken to are excited about the ability to run larger scale studies on lower coverage, but that they've run into some sentiment in the community that people are still focused on doing a 30x depth genome. I guess what do you think changes that? And over what timeframe do you think that changes?

Speaker 2

Well, it's interesting. This has been one of the big questions that we've had to address over the last few years. If you for those of you that have been following this space for a long time, 30x has been around and was really somewhat of an arbitrary level of coverage. And as we know in the real world, customers do experiments at a whole range of coverages, some much higher than 30x and some much lower than 30x. But what we've done is pretty extensive titration experiments comparing PacBio HiFi sequencing to other technologies at 30x and lower.

Speaker 2

And what we consistently see is that customers are very comfortable below 20x even comparing a HiFi genome to an alternative genome. And so I think the community as more papers continue to get published with those lower coverage levels that will build more confidence. But even if the coverage stays at 30x, we continue to improve the Revio system. I talked about really for the first time today, talked about new consumables that we will be shipping at the end of this year roughly that will significantly improve the throughput of the Radia, which will drive the cost per gigabase down even further and also significantly lower the DNA input amounts. I'm not going to give too many of the specifics today because we want to save that for when we get in front of customers, but it is quite flexibility, whether they want to sequence at 10x, 20x, 30x, 50x, whatever they decide.

Speaker 4

Thanks, Christian. Appreciate that.

Operator

And the next question comes from Tejas Sivan with Morgan Stanley. Please go ahead.

Speaker 5

This is Yuko on the call for Tejas. Thank you for taking our questions. Could you provide early feedback on the new PacBio capital program announced? And provide indicators that make you believe that access to capital is the key hurdle for Revio placements rather than the excess capacity enabled by substantially higher throughput with Revio?

Speaker 2

Yes. So several of the 24 systems that we closed in Q2 we're under our various promotional programs. Some of those are through the PacBio Capital. We announced a new program last week with Mitsubishi Capital where there's no reagent commitment and it's just a straight rental, which is great for some research organizations. And the reason why we feel it's still more capital driven than excess capacity in the market is that when we go through the instruments that didn't close in the quarter that we were hoping to close, almost all of them or the vast majority were due to funding constraints or timing around the funding and not the decision to purchase because they have too much capacity.

Speaker 2

Now in some cases with some service providers, that's certainly the case where they've acquired a Revio and it's so much more powerful than the SQL 2e that it takes them time to order their second Revio. But we still see quite frankly in the deals that didn't close in the second quarter, the vast majority were funding related and timing of receiving that funding.

Speaker 5

And then separately, last quarter, you talked about improvements in manufacturing, providing you the flexibility to lower list price on Onso flow cells. Have you passed on any of the cost saving from manufacturing improvements to customers to catalyze greater adoption?

Speaker 2

We certainly have. With respect to Onso in particular, we've done a couple of things. We've introduced promotional pricing in late May with respect to the capital and now right now you can trade in any other NGS system and get a 99 ks on so. But we've also lowered the cost per gigabase to now as low as $4 And when we launched the product, we launched it at $15 a gig. So yes, we've taken some of that benefit, quite frankly, the majority of that benefit and pass it on to our customers to drive adoption with respect to ONCEO.

Speaker 2

And to kind of go back to the long REIT portfolio, we certainly are doing some of the same things. Our yields have been improving on consumables, which are helping to drive our ability in bigger projects to give very nice pricing, but also drive better margins over time. And as Susan pointed out and probably one of the things that the operations group is especially proud of is they've significantly taken the cost of Revio out, production costs of Revio down and that's resulting in a lot more price flexibility. Turns out in the Q2, we really didn't need that. We the ASPs were up a bit.

Speaker 2

But it is part of our whole plan to get the cash flow breakeven, drive our gross margins up. And I think you're seeing early indications with the 400 basis point improvement this quarter that we're on a path make that happen.

Operator

And the next question comes from Soudi Namby with Guggenheim. Please go ahead. I apologize.

Speaker 2

Sudi, can you please repeat your

Operator

question there?

Speaker 6

Sure. This is Ricky on for Sohu at Guggenheim. Thanks for taking our question. You mentioned that you're expecting a 20% reduction in the REVO instrument and consumable costs by the end of the year and you're expecting that to continue beyond 2024. So how much more room is there to reduce the costs from there?

Speaker 6

And then with respect to the source of the cost reductions, how much of this is due to scaling up production volumes and how much of it is from more production based actions that you could carry across the other products as you launch them?

Speaker 2

Yes, that's a great question. And Ricky, to be clear, we talked about a 20% drop in REVO production costs, not the consumables per se. The consumables are going down as well. So we're going to see significant improvements. Those are both durable improvements that will persist and they were not due to not really due to increases in manufacturing volumes.

Speaker 2

They on the Revio instrument side, those reductions are due to innovation that we've been able to do to take move the BOM and make the BOM less expensive. So that's improved algorithms which drive less the requirements for less compute or fewer GPUs which drive cost down. They also include manufacturing changes in how we manufacture, the relationship between our contract manufacturer and ourselves, we're in sourcing more of the production. And as a result, we're able to eliminate the margin that our contract manufacturer would receive, which is substantial and still have a very high quality product consumable radio consumable side, the benefits we're seeing, we're seeing increased yields. And so yields have been improving, which are a direct impact on the level of cost.

Speaker 2

And then we have new we're tightening up our supply chain, which is also giving us benefits. So you're seeing durable impacts that will subsist into or persist into 2024 and beyond.

Speaker 3

I think the one thing that I'll add to that as well is that our restructuring, it also entailed a restructuring of our service organization, which enabled us to take out some costs, which is, again, going to help improve our gross margin.

Speaker 2

Yes, that's a good point, Susan.

Speaker 6

Great. Thank you. And just as a follow-up, can you confirm how much of those cost reductions are baked into your guidance?

Speaker 2

Well, we certainly are anticipating them and they're very real. So they're generally in our guidance, right, Susan?

Speaker 3

That's right. And so Christian had talked about in sourcing a key component, which we initiated in Q2. There are other ideas that our manufacturing team has that we're more confident that we're going to in force more. A lot of that is not baked into our guidance. It could be upside for this year, but if not, it will come into 2025.

Speaker 3

But we still have improvements in reducing the bond that is embedded in our guidance that is reflected in the graph that you see in the earnings presentation.

Operator

The next question comes from Jack Meehan with Nephron Research. Please go ahead.

Speaker 7

Hi, thanks. Good afternoon. I wanted to ask, Christian, just about your confidence around growing sales sequentially in the year end. Even if you land at the low end of the $170,000,000 I think that implies something like $45,000,000 $50,000,000 per quarter in the back half. So I was just curious, did you build any backlog in the quarter?

Speaker 7

Or is this just really like timing you can see the orders and they're going to start coming in, in the second half?

Speaker 2

Yes, it's a good question, Jack. We did actually our book to bill ratio was over 1 in the quarter. So we did build a little bit of backlog. But really, it's we see the sales funnels and we see we have building I would expect the I would expect the Q3 to be lower than the Q4. And also in the Q3, we may see some government year end spending as well as in the Q4 kind of general year end spending.

Speaker 2

So that might help us. And actually if you look at the mix of revenue for the year versus most other years, it's not really that far out of line. Typically you see 45, 55 or of course in terms of percentages of the year, we're not that far off from those kinds of metrics. So if you look at the past, it's not unreasonable to kind of think of how this is going to play out. And if you look at the detailed sales funnels, we see Revio instrument placements improving.

Speaker 2

We see the on so funnel is significantly bigger than it's been, which should help. And then also the consumables, we're getting more we had nice bookings in Q2. Some of those will a lot of those will ship in Q3 and all through all for the next 12 months as more customers are getting on standing purchase agreements, which allows us to really have so much better visibility into the consumable number. So we have building confidence. The economic environment is still tough.

Speaker 2

I think most of our peers have been talking about a tough capital environment on their calls this quarter. We don't see I mean, we think it's going to be difficult the rest of the year. And when we considered our guidance, we considered it was still going to be tough.

Speaker 7

Great. And just one follow-up is the build of revenue in the year end, is this predominantly coming from REVO? I know you talked about the new program as it relates to Anso for trade ins. Is there any color you can share on what's embedded for Anso in terms of second half versus first half? Thank you.

Speaker 2

Yes, I think I mean Onso we haven't we don't break out Onso revenue, but Onso revenue is forecast to be significantly better than it was in the first half. So that will when you look at growth, that will be one of our fastest growth areas if our forecasts hold. But most on a relative basis, right, the revenue instruments a lot more revenue per unit. And so I would expect Revio instrumentation as well as the scale up in growth in consumables, those will be the predominant drivers of growth in the back half.

Speaker 8

Thanks, Jack.

Operator

Thanks, Chris. And the next question comes from Doug Schenkel with Wolfe Research. Please go ahead.

Speaker 6

Hi, this is Madelyn Mollman on for Doug. Gross margin improvement is one of the keys to financial viability of PacBio. Just wondering how are you thinking about the exit rate for gross margin given that you now expect to be at the low end of the guide?

Speaker 2

Susan, do you want to answer that one?

Speaker 3

Yes. So you're right that we had guided the year's gross margins to be at the low end of 35% to 38% gross margin. And our gross margins, we are structurally reducing the cost base of manufacturing our instruments and our consumables. And it's very much front and center when we think about the new products we're developing and how we what components we include and how we think about the pricing and margin at launch. And so overall, our gross margins will expand as our revenue grows.

Speaker 3

That 35%, of course, if you look at how we've done in the first half, does assume that there's some fluctuation quarter to quarter. And as my prepared remarks described, sometimes you do have some fluctuations in gross margins related to ASP mix, customer and project mix, revenue mix, that can change some of the quarter to quarter gross margins. But I think the important takeaway is that structurally, our cost base is coming down such that when you look at 'twenty five and 'twenty six as our revenue continues to grow, our gross margins will expand and we'll get nice leverage on our gross margin as our revenues continue to grow.

Speaker 2

I think the one thing I would add to that is revenue mix is essential here. PacBio for its entire existence has been so dependent on instruments, which carry lower gross margins than you know, Resio for the first time truly gives us the ability to have to generate consumable revenues that are high enough that really positively contribute to the gross margin. So although we may exit 'twenty the year 'twenty four kind of at the lower end of the guidance when you look at the whole year. As consumables continue to grow, that will provide a natural uplift. Also, we fully expect the new products that we're developing to carry higher gross margins than our existing products.

Speaker 2

And so those will all be contributing to as we start to look at 20252026. It's a front and center issue for us. No question about it.

Speaker 6

Great. Thank you.

Operator

And the next question comes from David Westenberg with Piper Sandler. Please go ahead.

Speaker 4

Hi, this is John on

Speaker 9

for Dave. Thanks for taking the question. First, I'd just like to ask about your headcount reduction. Could you give any thoughts on how confident you are that the reduction won't impact sales growth? Thank you.

Speaker 2

Well, I think you asked the question for sales growth in the headcount reduction specifically. And so I'll address that first. But we did make cuts across the organization and surely the sales impact sales organization was impacted some. But it was less impacted than some of the other groups. And so we've spent a lot of time building out a commercial infrastructure to support the long run of the company.

Speaker 2

And what we've done is in this last restructuring, we reorganized the commercial organization a bit so that we can have fewer spans and layers and have much more executive touch, so to speak, at with the customers directly. And so I feel pretty confident that that's helping and that's driving conversations. Of course, Q2 is when we executed all this. So we'll see over the next few quarters how we do. But the early signs are pointing to that we are maintaining those customer relationships, we're building new relationships and we are acting faster, which is encouraging.

Speaker 2

If you look at the rest of the business, we also cut very significantly across R and D, but we were very focused on focusing making sure that we invested appropriately in the near term revenue driving projects like platforms. And those new platforms are fully staffed and we're making great progress. And quite frankly, when you look at Q2, the revenue result was not what we expected, but the R and D result was actually ahead of what I was expecting. And so I'm very excited about the progress we're making even though we had to make some very painful decisions with respect to the restructuring.

Speaker 9

Great. Thank you. And if you could give any thoughts that you have on what the pipeline looks like for population sequencing projects globally and what the appetite is for long read sequencing generally, that'd be great. Thank you.

Speaker 2

I missed the second part of that question. Yes, top 10 was the first part. What was the second part? Appetite to long re sequencing in general. So with respect to top gen, we're still tracking many, many, many 10,000 plus sample projects that are working their way through the system.

Speaker 2

We are very happy to see some of the bigger projects get off the ground in Q2. So the Estonia Biobank project started sequencing, the Gregor consortium project started sequencing, PRECICE started sequencing. So those are all strong projects that are going to that are really starting to scale. We see lots of opportunities around the world. And it really comes down to these projects take a long time to get the sample cohorts in place as well as all the funding and all the infrastructure required to execute on them.

Speaker 2

But with respect to seeing more of those later this year, I wouldn't be surprised to see us announce some other projects this year. Certainly over the next 18 months, there are lots of projects and lots of fleet expansions that we are seeing that I think are real opportunities for the company. One thing I would say that is really encouraging and probably the brightest spot in the quarter is just the amount of clinical adoption we're starting to see is really fantastic. And it was really driven off of we launched a new product called Pure Target, which is a panel, which a lot of the clinical diagnostic companies are leveraging that panel and creating their own versions of the panel to do everything from carrier testing to neurology and other kinds of clinical testing. These are going to be very large customers over time for us.

Speaker 2

That's our expectation. And they will be running thousands and thousands of samples, which will create a durable source of revenue. And I think that's happening on a timeline, quite frankly, faster than I would have expected. So encouraged by the population sequencing, also very encouraged by sequencing uptake in general. I do think that we are still absorbing some capacity with particularly with the service providers and kind of the classic academic core labs.

Speaker 2

And so we're working hard with them to help them get projects so that they can fill their instruments up. And eventually we'll have the low throughput long read instrument, which will be a great complement to Revio. And we'll see I wouldn't be surprised to see many customers have Revio and the low throughput instrument in their labs and then other customers allowing a more distributed long read sequencing capability using HiFi with the low throughput instrument. So looking forward to getting that product out the door too.

Operator

And the next question comes from Yves Bernstein with Bernstein.

Speaker 8

Hi. This is Alberto on for Yves. I remember having a discussion with you on customers in China generally having very high utilization rate. Yesterday, one of your competitors said that stimulus in China would not affect NGS, while you mentioned that it could be actually a tailwind. So how are the conversation going with these customers and potentially other customers in the region?

Speaker 8

And what do you guys expect for 2025, especially after a rough year in China for everyone around the year?

Speaker 2

Yes. That's a good question. I don't think the funding, any stimulus funding wouldn't necessarily be a tailwind. I think it's maybe perhaps a bit of a more of a return to normalcy. Our business is very different some of our competitors in China in particular in that we have several large service providers as our primary customers and then they mark it out into the Chinese market and it's mostly a service business for us.

Speaker 2

The implications of that are that we perhaps get more aggregated revenue into a concentrated customer base. Those service providers have been having a tough year this year. But we do think the stimulus just will add more projects, which will help those service providers and as we get the low throughput instrument into the market as well give other Chinese customers the opportunity for that low throughput instrument. If you look at the rest of Asia Pacific, there are a few bright spots, but actually Asia Pacific as a whole has been pretty tough. Korea is not in very good standing.

Speaker 2

Japan is doing okay. The rest of Southeast Asia at least for us is doing maybe just a bit below expectation but not radically not radically strong either. So Asia is really a tough market for us and overall this year, mainly driven by that China, the China challenge. Do I think 2025 will be better than 2024. I do think the stimulus will help, some new products will help and we'll go from there.

Speaker 8

Okay. Thank you. And another question I had, I saw from your graph and also from your comments that actually the Quest partnership is going very well. How would you stipulate your strategy around clinical market and partnership? We've seen other like your main competitor having large partnership with even equity investments in there.

Speaker 8

How would you articulate your strategy in the clinical market? And what are the aside from neurological applications, what are the main areas in which you're seeing the most interest that could actually rescale and to the next level?

Speaker 2

Yes. So in the clinical market, our strategy is to develop products and kits and technologies that really compete and do things that short read sequencing can't do very well, 1st and foremost, and use that as a beachhead to get into those accounts and then demonstrate that the power of HiFi can subplant even short read sequencing. This is evident for example at BioSentia in Germany where they're converting many tests into 1 Hi Fi whole genome test. And they're eliminating and for them economically it makes incredible sense because they're eliminating all of these other tests and using a long read whole genome to get the results. And so our strategy is to penetrate with applications that are difficult for short routes to accomplish, if not impossible.

Speaker 2

And then spread by demonstrating our value proposition and our competitive costs and economics across the entire workflow. So that's the fundamental strategy. The early of course, in rare and undiagnosed disease, where we're seeing institutes like Children's Mercy to continue expanding their fleet. And they've now they're now using a Hi Fi whole genome as the first line diagnostic for these kids coming in with rare disease, which is just quite frankly very gratifying and quite remarkable. We're also seeing customers interested in panel various long testing, where we can do where we can long read sequencing can be much more effective at many different disorders for potential diagnostic problems in when thinking about having a baby than what short read sequencing can do.

Speaker 2

And then the third is this whole genome approach where you do a whole genome and you replace a battery of other tests. And so the combination of those is where we're seeing a lot of traction. And really, we saw that was certainly one of the biggest bright spots for us in Q2. Over time, we think we're going to see more oncology testing, particularly in the blood cancers using long reads. As we drive our sample input requirements down as with the new radio consumable, that will enable us to do more than we ever have before as well.

Speaker 2

So we see the clinical opportunity as fundamentally really important. We're very focused on it right now by providing technologies that no one else really has and we can do things that others can't.

Speaker 8

Thank you.

Operator

And the next question comes from Sung Ji Nam with Scotiabank. Please go ahead.

Speaker 10

Hi, thanks for taking the questions. A lot of my questions have been answered. But just wondering about the your existing SQL customers and this might be I might not be doing the math fast enough, but the ones that have not converted yet to Revio that are kind of waiting for funding or whatnot, are they still utilizing consumables kind of at a pretty steady rate? And do you expect them to continue to do so? Or has there been any slowdown in terms of consumable pull through for that segment of your customers?

Speaker 10

Yes.

Speaker 2

I mean the customers that are still SQL users are generally using their instruments. The pull through of the installed base has gone down, down some. So they are using them less, but the reality is they're still using consumables. They're still regularly using them. And I would expect over time, they will move on to Revio or they'll move on to the low throughput system when that's available.

Speaker 2

I would suspect some of those people customers are also outsourcing maybe perhaps their bigger projects to Revio Core Labs, which is okay, but it's also it's another indication that we need to keep pushing long read samples into the market so we can drive so that we can really take advantage of the throughput and the capability of the radio system.

Speaker 10

Got you. And then just on the low throughput long read, just as a clarification, that's what you used to call bench top long read sequencer. Is that correct? And then, sorry if I missed it, but what's the timing in terms of the launch there? And is that a platform where you expect to do some sort of an early access program to get a sense of kind of the customer feedback?

Speaker 10

Or is that something that you can just launch and it's a plug and play?

Speaker 2

Yes. So the low throughput system is certainly the bench top system. You're right. Maybe we should have used that terminology. With respect to an early access program, the reality is that it uses the bench top flow cell or SmartCell as the principal tool there.

Speaker 2

And so we expect it to basically it's going to work with all applications straight out of the box. So I don't think we'll have a very extensive early access program. I think we'll go pretty much straight to market. We're deep in our development right now. We haven't announced the launch date.

Speaker 2

So I'm not going to use an earnings call to do that. But I do think it is a mission critical platform for us. We've made a lot of progress and we're not that far away.

Operator

And the next question comes from Matt Sykes with Goldman Sachs. Please go ahead.

Speaker 7

Hey, good afternoon. Thanks for

Speaker 11

taking my questions. Just in interest of time, I think it's got 2 quick ones. I'll ask them both upfront. The first one is just, Christian, on ASPs. You've made a couple of mentions of higher ASPs in the quarter.

Speaker 11

One, what's driving that higher ASP? What are your expectations of ASPs going to the back half? And just given the mix programs you have to onboard customers, is there any particular program that's driving that? And then secondly, just on the demand and your comments on reacceleration of back half, you outlined a couple of points for Q2 that are hurting demand, 2 of which the delays in procurement and the sample volumes. Do you expect those to improve or do you expect more to persevere through those issues that could last throughout the course of the year?

Speaker 11

Thanks.

Speaker 2

Yes. Good questions, Matt. First of all, ASPs were higher. ASPs are going to vary from quarter to quarter. The reason why I highlighted that on the call was I just wanted to point out that ASPs, although we didn't have a great unit quarter relative to our internal expectations, we also didn't give away the farm to get to the numbers that we got to and that was important.

Speaker 2

I think that ASPs will probably stick around the same range we're in right now, give or take for the rest of the year. The promotional programs, you know what's important about those? Usually what happens is you get some deals on those promotional programs. But the most important part of these promotions is it gives us opportunities to market the products and get it drives building the funnel, drives interest. Some customers are can take advantage of promos like we have a promo now where you don't pay any money down for the instrument, but you have to take a certain amount of consumables every month, so to speak.

Speaker 2

And basically the price of the instruments baked into the price of the consumables. Some customers can do that because they have a steady stream and they know where they're going. Other customers can't because they run from project to project and they worry that they may not have a use for the consumables in other in the off month, so to speak. That's why I'm so excited about this Mitsubishi program where it's a straight rental. I haven't seen that done very much in our field in the past.

Speaker 2

So that'll be interesting to see how research customers take that up. But either way, it's a really good way for people to for us to get out there and be in front of our customers, demonstrating flexibility and driving sales. With respect to kind of the challenges with accelerating demand, procurement and numbers of samples, I think procurement is an area where you just have to persevere. I think the rest I think the capital market is the market for capital equipment is going to still be tough. It's probably going to be tough all next year and perhaps even to next into next year.

Speaker 2

So we just have to be very much in tune with our customers and understand everything it takes to get a sale done and through the procurement process so that we can, number 1, forecast accurately, but number 2, accelerate the deals as fast as we practically can. With respect to samples, I think samples are continuing to increase. One of the metrics Todd kept talking to me about was the fact that we sequenced the Revio we sequenced over 2.2 fold more sequence in the last year when you compare on a year over year basis. That's dramatic and it shows that long reads demonstrates that long reads really are taking hold in the market and becoming a very important part of the market. What we I do think more and more samples are coming into the market.

Speaker 2

And so that one I think can be will be rectified probably much faster. And also as we continue to develop new And We talked about with the Revio new Revio consumables that are coming, the DNA input requirements are going to go down very, very significantly. And that is also going to drive more samples into the Revio platform. So I'm much more bullish on samples coming into the market than solving the procurement challenge to be honest. Thank you,

Operator

Matt. Okay. 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, Dave, and thanks everybody for the questions and the time today. We look forward to connecting with many of you later this quarter at the various conferences and we'll talk soon. Take care.

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Earnings Conference Call
Pacific Biosciences of California Q2 2024
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