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

Good afternoon and welcome to PacBio's first quarter 2023 earnings conference call. Earlier today, we issued a press release outlining the financial results, we will be discussing on today's call, a copy of which is available in the Investor section of our website at www.pacb.com or as furnished on Form 8-K on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer and Susan Kim, Chief Financial Officer. Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance, and others, including expectations regarding our financial guidance, our Revio and Onso systems and their commercialization plans, the future availability, uses, accuracy, coverage, advantages, quality or performance of, or benefits or expected benefits of using PacBio products or technologies, including our Revio and Onso systems, and expectations with respect to customer demand for our products and technologies and growth in our business. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially than those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we filed with the SEC, including our most recent forms 10-Q and 10-K, and our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. We will also present certain financial information on a non-GAAP basis during the call. The non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under US GAAP. Management believes that non-GAAP financial measures, combined with US GAAP financial measures, provide useful information to compare our performance relative to forecasts and strategic plans, and benchmark our performance externally against competitors. Reconciliations between historical US GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the items indicated in our press release. In addition, please note that today's call is being recorded and will be available for audio replay on the Investor section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call. Finally, we will be hosting a question-and-answer session after our prepared remarks today. We ask that analysts please limit themselves to one question only so that we could accommodate everybody in the queue. With that, I will now turn the call over to Christian.

Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today. Last October, we unveiled Revio, a long-read sequencer that is 15 times more powerful than our previous generation sequencer. The system enables researchers to analyse what we believe are the most complete genomes in the industry with paradigm changing scale and economics. And as we saw in Q4, these features captured the imagination of scientists and researchers across the community and we started 2023 with a backlog of 76 systems. In March, we began shipping the Revio system at scale to customers around the world. I'm pleased to say our launch of Revio is progressing extremely well and is ahead of our targets. The demand for our new system continues to be robust, so much so that orders for Revio in the first quarter outpaced our shipments of Revio, resulting in a net increase of instrument backlog. This sets us up favorably to deliver on our growth targets for the rest of 2023. During the first quarter, we delivered 32 Revio systems, surpassing our expectations and demonstrating that our robust manufacturing capabilities can scale and deliver on new instrument launches. With Revio manufacturing capacity scaling up in the first quarter and customers beginning to ramp down Sequel II and Sequel IIe consumable spending, PacBio still delivered record revenue of $38.9 million in the first quarter. The initial customer reception of Revio, its robust field performance and our ability to scale manufacturing has given us the confidence to raise our full-year guidance. We now expect revenue to be $170 million to $185 million for the full year, or 33% to 44% growth year-over-year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total HiFi capacity in the market for our cumulative Sequel II and Sequel IIe…

Thank you, Christian. As discussed, we reported $38.9 million in product, service and other revenue in the first quarter of 2023, which represented an increase of 17% from $33.2 million in the first quarter of 2022. Instrument revenue in the first quarter was $20.7 million, an increase of 33% from $15.6 million in the first quarter of 2022. The increase in revenue was primarily driven by the launch of Revio in the first quarter, which is sold at a higher ASP than our previous Sequel II and Sequel IIe platform. We ended the quarter with an installed base of 32 Revio systems and shipped six Sequel IIe systems. Turning to consumables. Revenue of $14.0 million in the first quarter grew 10% from $12.7 million in the first quarter of last year with approximately 10% of consumable revenue coming from Revio systems and the remainder from other platforms and other consumables. We expect Revio as a percent of total consumables to increase throughout 2023 as we continue shipping Revio and customers transition to the new system. Finally, service and other revenue was $4.2 million in the first quarter compared to $4.9 million in the first quarter of 2022. From a regional perspective, America's revenue of $19.1 million was roughly flat compared to the first quarter of 2022, as the higher ASP in Revio offset a record Sequel II/IIe placement order for the region in the first quarter of 2022. As a reminder, last year included 18 Sequel IIe delivered to the Broad Institute. For Asia-Pacific, revenue of $12.0 million grew 43% over the prior year. China grew approximately 40% year-over-year and posted its highest revenue since the second quarter of 2021, as customers in the region are taking to Revio and as the country recovered from last year's COVID-19 related lockdowns.…

Thank you, Susan. As you can see from our prepared remarks, we're off to a strong start for the year. We're driving the rapid adoption of Revio with over one-third of our sales funnel being new to PacBio instrument customers and existing customers sharing how they plan to increase the amount of long-read sequencing with the platform's 15-fold throughput capacity increase. For Onso, our beta program is progressing well and we're scaling our operations with an eye towards commercial launch at the end of this quarter. We look forward to more customers getting their hands on Q40 Plus accuracy and becoming the only company with both leading long-read and short-read technologies in the market. Financially, we remain well-positioned with $875 million in cash and investments on our balance sheet. We believe our strong financial position allows us to drive toward both our growth targets and our goal to become cash flow positive during 2026. 2023 is the first step in this journey of becoming a multi-platform, multi-product company, and we look forward to updating you on Revio and Onso throughout the year. And with that, I'll turn it over to the operator so that we can begin the Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Dan Brennan from TD Cowen. Please go ahead.

Great. Thank you. Thanks for taking the questions. Congrats on the quarter. Maybe just a couple. Christian, you kind of kicked it off, I think, saying Revio is exceeding your expectations. You've been obviously pretty optimistic given the profile of the box. Maybe just give us some flavor for like where that is, how that is. Is it the pipeline, is it the number of customers, is it the initial kind of performance? Just give us some color on kind of where it's more optimistic. And then I'm just wondering, you guys, I know you're not giving order numbers out, obviously, but you did talk about a record backlog, so obviously orders were greater than what was placed. I'm just kind of trying to get a flavor for any other color around that in terms of the extent of that and/or the funnel, things of that nature. And then I might have a quick follow-up. Thank you.

Great. Hey, Dan. Thank you. So Revio is exceeding my expectations on a number of different fronts. First, our ability to execute and get the product shipped on time, get the product working in the hands of our customers with very -- almost straight out of the gate and then seeing the actual run performance, how our customers on real-world samples are getting at least 90 Gb per SMRT Cell, but oftentimes over 100. So the overall performance of the system this early in the launch is actually quite encouraging for me and the ability for us to deliver on that. The second piece is the breadth of applications and the breadth of demand, quite frankly. I think that it demonstrates -- we've seen orders from people doing microbial research to whole human genomes, plant and animal research, really very broad. And I tried to highlight that in our written remarks that this really is a broad adoption of the platform and people really do need the throughput that Revio brings to bear. And so although I was hopeful that would happen, to see it actually happening and at the level that it's happening across the entire community, it's gratifying and also kind of sets us up well for looking out into the future demand. When you talk about orders, of course we've been very clear that we're not going to give quarter-to-quarter order numbers. But what we tried to say is that the actual order book was very strong in Q1. It was well above what we shipped, which is fantastic, and sets us up well for the rest of the year. The funnel continues to be healthy with lots of new customers coming into the product, lots of customers that are thinking about scale. And so when you look at the outlook into the future for Revio and how it's going to continue its growth trajectory, it gives me a lot of excitement and a lot of opportunity. Of course, we always have a lot of work to do, but I do think we're in a very, very good position. So hopefully that answers your question, Dan.

Yeah. Super helpful. And maybe just a quick follow-up. I know it's obviously super early. It's May 2nd. First customers got this at the end of March. But in terms of kind of filling the boxes and when we think about what Revio could do with -- you've discussed maybe four quarters out is when you actually could see a run rate pull-through. Just kind of what are you hearing from customers on that front in terms of the box can generate -- I think sequence 1,300 genomes. So as we think about modeling out pull-through and the early users and kind of the demand trends like what would the -- that early traction suggest about the utilization of Revio?

Yeah. Dan, it is really impossible for me to really kind of predict the future, but a couple of things that I can kind of comment on. First of all, the consumable shipments for Revio were higher than we had modeled, even straight out of the gate. And so what that says is there's enthusiasm to get going. Second, in my prepared remarks, we talked a lot about there are lots of customer conversations that we have where people are moving short-read projects to long-read. And so what that means to me is that first of all, they see utility in long-reads and utility on Revio. But secondly, it means that samples exist to make that transition happen reasonably quickly. And so those are both two encouraging signs. So far, since, as you said, most of these systems were delivered anywhere from mid to late March, and so it's still way too early to really to have a read. But the one other thing I would say is people are using their systems. Hundreds of SMRT Cells have been run, hundreds upon hundreds have been run. And overall, the results are -- the performance is quite high, which gives us -- which helps the new instrument funnel, of course. But it also helps you say, hey, this is going to be a robust product that customers can run hard and over time. So that's about all I could say on it now, but we will watch from quarter-to-quarter and try to give color where we can. And as we get a few quarters into this, start to report some of those kind of pull-through metrics and our perspective on where they're going. But it's a bit early yet, Dan.

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

Hi. Thank you for taking the question, and I echo congrats on these really great instrument orders and placements here. I wanted to start off with the gross margin here. I know that you had some people that bought Sequel II in year -- like last year, I think they got a discount. And then I was just wondering here, how should we think about gross margins? When do we start to really see the leverage of the manufacturing? And as we get into 2024, maybe you roll off that discount and you're going to see higher ASPs and better gross margins. And then last one on the gross margin side. That $3.5 million of inventory coming off. Is that all the headwind in the guidance for this year or is there more than that? And I think all those questions are probably for Susan, actually.

Well, I'll take a stab at starting and then maybe will pass it to Susan. But first of all, the strategy -- the pricing strategy and launch strategy for Revio was really developed around the notion of delighting our customers and making sure that the transition from Sequel to Revio was as painless as absolutely possible. Through lots of experience that we've had over the years, we know these product transitions are tough. And so we set up a loyalty discount program that says you get X amount of discount if you bought a sequencer in '22, X minus something for '21, and I believe even for 2020. So we gave all of our installed base a bit of a discount, with the heaviest discounts being that in 2022. So as a result, the first 76 orders were virtually all discounted pretty reasonably and that program ended in February. And so when we look at our financials and our projections over the year, we would expect the low watermark of ASP to be this quarter, Q1. And then Q2, Q3 and Q4, we expect ASPs to improve and then probably kind of normalize at their normalized rate in the first part of 2024. So we think that's how ASPs are going to unpack themselves as we ship all of the systems out of our backlog. If you move to the gross margin and the charge, the charge that we took in Q1 was really based on the consumable demand expectations for Sequel II. And so what I mean by that is we are seeing customers transition to Revio faster than maybe we had predicted because these things are extremely difficult to predict, and we needed to make sure we had enough inventory and capability if the transition was slow or if it was fast. It seems as though it's happening faster than we would have -- than we modeled. And as a result, we took about a $3.5 million charge, most of that amount is related to consumables. Back in Q4, if you remember, we did take a charge as well and that was for the Sequel II instrument. And so at this point, we anticipate that we're through most of those excess inventory issues, and so we don't see significant -- material amounts of the issue going forward, I guess is the best way to characterize it.

I think the one thing that I'll add, David, that you were asking, just in terms of when do you start to get the leverage on gross margin. So we talked a lot about the consumable mix being a big part of helping to get that leverage on gross margins. And so with the growth of the installed base -- and as you can tell from our guidance, this is a very instrument revenue heavy year. And so next year, you start to see more of the consumable revenue as our installed base for Revio has grown. And so that's going to help in terms of the gross margin expansion that you'll start to see more of in 2024 relative to this year.

But the other thing, Susan, we probably should point out is that we expect this to be the low watermark of gross margins for this -- Q1 being the low watermark for this year. We expect it to improve quarter by quarter and then get the leverage like to talk about really in '24.

Exactly.

Yeah. So hopefully that answers your question.

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

Hey, guys. Thanks for taking the questions. Congrats on the strong start out of the gate here, living up to the hype so far. I wanted to just ask two I guess a multi-part question. First on the guidance update. You literally raised the guide by the beat in the first quarter, yet Revio is ahead of expectations. And you said, I think, Christian, the 32 Revio was matched the total HiFi capacity in the field currently, pretty interesting data point. Maybe just provide a bit more detail on some of the assumptions for the remainder of the year at this point, both like company-specific and macro, and just to kind of frame that. I'm curious like how much conservatism you're baking in. Maybe it's too early. What would kind of let you beat this $185 million high end? And then secondly, just you received over 32 Revio orders in the first quarter that compares to the 76 you put up after that huge ASHG coming out event. I guess how are you thinking about orders going forward? I mean, could a run rate be half this 32 number? Just kind of curious about that. And I guess importantly, would you end the year still at -- like with a backlog of instruments? Thanks.

Okay, Kyle, that's a lot to unpack. So first of all -- and by the way, thanks for joining us, Kyle. The guidance, you could see what we did was we still have a pretty broad range of guidance. And the reason why we have that broad range is really driven by still trying to understand how fast the Sequel II consumable decline affects us and how fast Revio ramps up. And so that's still a question mark for us tactically in the course of 2023 and our revenue performance for the year. The good news is that we -- right now we see a lot of excitement and we see a lot of Revio ramp up. So if you look kind of into the future of the company, it bodes extremely well for us to grow our consumables significantly over the next several years and grow our gross margins, like Susan was talking about before. So we left the range pretty wide because of that. We did increase the guide modestly. We had a very nice quarter and a strong beat. And you're right, we raised by that amount, roughly. And the thinking there is that we do see an incredible funnel continuing to build and we do see continued opportunity to do really, really well this year. But we're also cognizant of there are a lot of macroeconomic factors lingering out there and we don't have a crystal ball. And we figure we had great performance in the first quarter, we see very strong demand for the second quarter, which gave us some confidence to raise here. But it is the first part of the year and what we want to do is see how the year unfolds. And if there is opportunity to clarify the guidance on…

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

Hey, guys. Good evening. So, Christian, one on the hardware side and then a couple of the consumables. So on the instrument side for the Revio, can you just walk us through what your key learnings were in terms of the customer feedback you received during that April shipment pause that you had called out earlier in the year? And then on the consumable side of things, you've talked about sort of max pull-through on the box being about 400k or so, so about 30%, 35% of the max pull-through rather. Any early insights from these placements around the slope of that ramp? Is this sort of a two-year dynamic in your mind or could it be sort of more of a longer-term thing? And then my final sort of consumables question here is, can you just share some color around the process and duration of the workflow for long-read sequencing? I mean, you highlighted the new Nanobind Extraction Kits, but are there any other sort of key areas you feel you need to do work in to support the higher throughput that the Revio enables? Thank you.

Yeah, Tejas. Thank you for the questions. So the pause was quite modest, quite frankly. We were excited to continue shipping because the system is performing so well. But the key learnings were, there were some software issues that any launch will typically have. So we did some patches for bug squashing, which are mostly behind us now. We also just wanted to see how the first runs would be going in the field. And as I've said probably too many times already on this call, the runs have gone really well and we're seeing above-spec output generally across all of our customers. We are seeing, one of the challenges, I guess if there was one, I would point out is that the loading characteristics of loading your DNA onto the SMRT Cell to get the optimal performance out of the 25M SMRT Cell is a little bit different than the 8M. So our customers have been getting up to speed, basically for their sample type or their application, optimizing the amount of DNA loading that has to happen. So that's that scenario where we probably have learned a little bit and perhaps can put some new processes in place to make that better. And particularly, as we scale to even higher density SMRT Cells down the road, we'll take that learning and implement it into our development program. So those are some of the things. On balance, the launch is going extremely well, it's actually been excellent. And I think customers so far are pretty darn satisfied. With any particular -- we're still going to have run failures. Run failures are at our target spec right now, which is good. We actually think we can do better and over the course of this quarter, we'll make further enhancements to…

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

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

Yeah, great. So with respect to the -- with respect to new versus existing customers, the workflow is essentially the same for Sequel II to Revio, and that's a real benefit of Revio. And so we are seeing the existing Sequel II customers typically can get ramped up a bit faster than the new customers. But the system has a lot of innovations to make it easier to use relative to any product that we've ever had in the past. And I think that will help our new customers, make sure they get very high-quality DNA out of the gate using our Nanobind technology and then get those high-quality samples onto the sequencers. And so I don't -- I do think the ramp for new customers will be longer before they're kind of at full capacity. Probably, I don't know, 30%, 40%, 50% longer, maybe. But I don't think -- given the ease of use of Revio, I don't think it's going to be -- I don't think it's going to really be that onerous, quite frankly. It's still a bit early, but that's the early experience. With respect to Onso, it is really interesting. Lots of conversations going on about bundling, we've had orders, but we also had orders of single Onso systems straight out of the gate. And it's really exciting to see the demand curve and the power of our sales channel starting to ramp up. And so now we're finishing the late stages of development, getting ready for manufacturing at global scale and full commercialization. And our target date is by the end of the quarter like we've been talking about, and I think it's going to be right there or right around there. And I think we're going to have a lot to talk about with respect to Onso, which is -- when you think about it, launching two major platforms in the same year with a little company like PacBio is a pretty significant task and when we get it done, hopefully a pretty significant achievement. So look forward to telling you about it more on our next call after, hopefully, we have orders shipping the product and then it's getting out in the wild.

Thank you. The next question will be from Julia Qin from JPMorgan. Please go ahead.

Hi, good afternoon and congrats on a strong quarter. Christian, you've mentioned on the prepared remarks about POP-seq programs that are being included in the pipeline. Obviously, we appreciate the strength at the Broad for All of Us that you mentioned, but could you give us more color on the other POP-seq programs and where we are in terms of discussion and the cycle? And then regarding the Revio mix, a third being from short-reads users, is that a positive surprise to you? And how are you thinking about this mix going forward as probably both -- the cost on both the short-reads and long-reads continue to go down?

Yeah. I think that -- so thanks, Julia. I'm going to try to be quick here. But with respect to the Revio mix and short-read samples coming onto the platform, that's not surprising at all because we've achieved the economics and throughput that that's enabling. And it's actually kind of the fundamental piece of the thesis here is that we're going to be able to take market share and be able to expand the market with the unique capabilities of Revio. So I think it just helps -- taking samples from existing projects helps us grow faster and get the Revio further up to speed sooner. But I'm not that surprised by it because of the capabilities. With respect to POP-seq, there are lots of projects that are percolating right now. I don't want to get into specifics of any one project because for competitive reasons, quite frankly, but there are early stage and there are mid stage and there's some late stage projects. The later stage ones are the ones probably we could focus on, and we would expect to be achieving -- or basically winning or participating in those programs as early as later this year. So it was important to talk about in the prepared remarks to give people a sense of the -- Revio has made it such that we can be a strong competitor, and the projects are -- have taken notice of Revio. And so not only are we reaching out, people reaching out to us. And I think it's that combo that's really powerful. And if we can win some of these deals, of course that will be great for our growth. So that's what I'll say about that for today.

Thank you. The next question is from John Sourbeer from UBS. Please go ahead.

Hi, thanks for taking the question and congrats on the quarter. Just a couple of quick clarifying ones here. China was pretty strong in the quarter. Just any thoughts on how that ramps throughout the year in reopening? And then just a follow-up to that last question. On the third of new customers to PacBio, are those all new to long-read customers? Do you have a sense on how many of those might be maybe existing Oxford Nanopore customers that are converting over? Thanks.

Yeah. So first of all, China was a really strong result, 40% growth in the quarter, and really it continues to be strong. China, as always, can -- as we've learned over the last 24 months, can be variable. But I do think Revio and actually Onso are both helping us allay any headwinds that are -- that maybe other companies have with respect to China, so new product portfolio certainly helps there. So we see that business continuing to be strong in the year. With respect to new customers, yeah, most of those -- when we talk about new customers, they're generally new to long-read. They're certainly -- they may have done some long-read program projects with service providers, but they're generally new to long-read. And some of them have tried Oxford and some of them haven't, but I don't know the exact breakdown. What's interesting is that although we both have long-read technologies, we both attack different parts of the market. And so we don't see each other as much as maybe one might think. We still do, but maybe not as much as one might think. But it's exciting to see the industrialization, the scale, the cost advantages of Revio excite even Oxford Nanopore customers.

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

Hi, congrats on the quarter, and thanks for taking our questions. So I guess, first of all, I'll re-ask Kyle's question regarding color on your comment that Revio placements matched HiFi demand in the market, as I do not believe it was addressed, but did think that was an interesting comment. And then for my question, can you just walk us through how you're balancing meeting stronger than anticipated Revio demand while trying to launch Onso without cannibalizing the strong Revio demand?

Sure. Those are good questions, Ross. So just a little bit of color. What we were trying to point out with that comment was that with Revio launching, we are now increasing the capability for customers to generate HiFi data. And we think that the more HiFi data that is created, that will drive demand for even more HiFi data. And so Revio really is the beginning of the flywheel that drives a fundamental paradigm shift in our mind of how researchers think about their projects and how long-read technology can really go toe to toe with short-read technology and build up significant market. And I think that was really -- the point was really that hey, now we're starting to get that kind of capacity into the world. And from our perspective, that's essential to driving the flywheel for long-term growth. So that was really the reason for the comment. The last question of balancing demand and thinking about making sure we have a great Onso launch, that's something that I think about every single day. I think it's really important right now as Onso is showing a lot of promise and we do think there's a lot of good opportunities. And the way we're managing that is that we have specialist folks that are focusing principally on Onso. We still have one unified commercial organization, but we are definitely ramping up the intensity of focus on Onso. We don't think that is impacting our Revio focus. And in particular, if you look out over the last six months, we've really pushed the Revio story hard so that we could drive and create a big funnel, and now we can execute on it, and now we're in a position to continue executing on that funnel. And we're building the Onso funnel. We still need to continue to demonstrate the power of Onso and the data, and so you'll see us continue to publish a lot more data and that will help drive the commercialization. But you're right, it is a balancing act and it's going to require good execution for us to stay focused. The good news is that our team has a lot of experience with multiple platform selling and it really -- and thinking about how you sell solutions rather than just products. And I think that will serve us well. But it's something we have to stay focused on. So I appreciate you highlighting it, Ross.

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

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

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