Hello and welcome to the PacBio First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Good afternoon, and welcome to PacBio's first quarter 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 as furnished on Form 8-K 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, 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 actual results to differ materially from those projected or discussed. We refer you to the documents that we file with the SEC, including our most recent Forms 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. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement in understanding of the company's operating…

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 will also discuss the steps we are taking to return to revenue growth and why we are confident in the assumptions underlying our updated financial forecasts. Finally, we will share our re-focused 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 multi-billion dollar sequencing opportunity. But first, let's recap the first quarter. Consistent with our pre-announcement on April 16, revenue of $38.8 million for the first quarter was below expectations due to an increasing number of customers delaying instrument purchases and softness in consumable shipments. Based on the first quarter 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 million to $200 million. 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 first quarter 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 Sequel II and IIe customers who are planning to upgrade to a Revio are waiting for the samples to drive that upgrade, and an increasing proportion of the sales pipeline…

Thank you, Christian. As previously mentioned, we reported $38.8 million in product, service, and other revenue in the first quarter of 2024, compared to $38.9 million in the first quarter of 2023. Instrument revenue in the first quarter was $19.0 million, a decrease of 8% from $20.7 million in the first quarter of 2023. The decrease was due to lower Revio unit shipments. We ended the quarter with an installed base of 201 Revio systems. Turning to consumables, we delivered revenue of $16.0 million in the first quarter, a 15% increase from $14.0 million in the first quarter 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 Sequel II and IIe's share of total consumables to continue declining as we continue shipping Revio and customers transition to the new system. Finally, service and other revenue was $3.8 million in the first quarter compared to $4.2 million in the first quarter of 2023. The decline was primarily due to customers transitioning to the Revio systems, which includes a first-year warranty, and opting not to renew their Sequel II/IIe service plans. From a regional perspective, revenue in the Americas was $17.7 million, a 7% decrease compared to the first quarter of 2023. This was driven by a decline in Revio shipments as Revio systems sales took longer to close. We believe the majority of Revio system opportunities that slipped out of the first quarter 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 $12.8 million, up 7% versus the prior year with headwinds in…

Before we move to Q&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. Two, 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 right-sizing our organization and expenses to align with the lower near-term revenue expectations. We are also firmly committed to our plan of achieving positive cash flow exiting 2026. 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 countless stories of customers utilizing our 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&A. Operator?

[Operator Instructions] Today's first question comes from Kyle Mikson with Canaccord.

So Christian, a few years ago you set 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. I think you probably seem confident 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 Revio forecast, maybe some of the other products as well that you plan on watching. 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-read sequencers as well as PacBio's ability to provide appropriate and achievable financial guidance going forward?

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. 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 long-read technologies and building a short-read business as well is still intact in our view. We still see, on the long-read 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 in 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 -- 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. 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 expect and then revenues -- improving gross margins and ultimately profits and positive cash flow. So a lot of work to do, 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.

The next question comes from Dan Brennan with TD Cowen.

Maybe a 2-parter. Maybe just the first one, Christian, just on -- PacBio has been developing the long-read technology for over 10 years, and you guys are really differentiated there. And in this iteration, it's really -- the Revio has -- 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-read 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, how come -- is it the right strategy to still be so committed to the short-read 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 on Onso 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 you had on long-read, not only on Revio, but on the mid throughput, I'm just wondering why not cut back significantly on short-read to give investors more confidence in the path to this positive free cash flow? And then the second part, it would just be on Revio as we think ahead, this year and next year on placements. 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.

Yes. Dan, thanks for the question. And sure, 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 million of cash on the balance sheet. 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? And what I would say to that specifically is, first, we just scaled up our production capability for the Onso systems. So the reality is that we've seen increasing shipments each quarter [ to 3Q, 4Q, 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 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 the way we're thinking about this is that we aggressively drive our marketing activities and our commercialization efforts right now on Onso. We think we can do that without sacrificing any of the commercialization opportunity with respect to Revio. And so we are going to be aggressively marketing the product over the next several quarters. And we'll see how the product does in the market.…

The next question comes from Doug Schenkel with Wolfe Research.

Listen, it was a tough start to the year and you had to make some tough decisions quickly. So I hope you know that is appreciated. It's always tough to start the year this way. And I appreciate you moving quickly. 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 cost. But that ultimately hurts your ability to kind of scale up to be a bigger company. 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 costs and you're not pruning the portfolio, 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 Revio, I think. So help us understand, Christian, maybe I'm wrong, 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.

Yes. Doug, it's a great question. And I do think in challenging times, it forces you to be even more focused. It forces you to push the teams to 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. There's actually really 3, right? 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&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 benchtop system is much -- is pretty far along and we're leveraging other technologies coming from Revio, for example, to make that system fly. 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 -- as a percentage, just as much in G&A and commercial as we did in R&D. And that is getting u -- those reductions are focused on making us leaner, more flexible,…

The next question comes from Sung Ji Nam with Scotiabank. For your benchtop long-read sequencer under development, Christian, appreciate that, that could alleviate some of the capital spending constraints in the current environment. But was curious what the overlap might be there for the addressable market. You mentioned a 1,000 or so labs, so with your existing customer base. Are the 2 segments meaningfully differentiated? And then over the longer-term, how do you see the benchtop 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?

Yes. These are great questions. Thank you for them. The first thing is we do believe that there's over a 1,000 customers that could be opportunities for the benchtop long-read system. And people -- there -- always in these product portfolios, there's perhaps a little bit of overlap, say, between Revio and the benchtop. 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 1 year or 2, they end up scaling up. 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 a more expensive higher throughput pieces of gear. I think that's exactly the same thing. I don't think the specifications on the long-read 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. The benchtop 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 a number of different applications in those clinical labs. When we talk about the benchtop system with our high-throughput customers today, every single one I've spoken to so far literally has said we want to have the benchtop system sitting right next to our Revio so that when we have an experiment that just makes sense to do on the benchtop 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. So we see that. Now the question is whether or not the benchtop long-read system narrows our short-read opportunity. I don't think so at all. I think our focus in short-reads is on needle-in-a-haystack applications. And what that means is that we will be focused in areas where the benchtop long-read system really won't have a lot of strategic capability. And so I do think that they will be very separate.

The next question is from Luke Sergott with Barclays.

This is [ Sam ] on for Luke. Thanks for the questions. I think you've mentioned before that some 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? Or you kind of see more in 2Q, given when the promotion -- it 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 did those come from POPSEQ projects?

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 cycles. And I think that we've seen these elongated sales cycles. This will probably help push people across the finish line and shrink the sales cycle some. So perhaps it'll have some impact in the second quarter. 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. And so we definitely see that partially because, one, we see where the funnels are, but also because the larger scale POPSEQ-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 second quarter. We've already -- we're already seeing the Singapore project, it's slated to start this quarter. The All of Us project's been continuing. The MVP project -- veterans project is continuing. And the Estonia project's actually ramping really quickly. We've installed the systems, 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. And so hopefully this quarter that will get up and ramped as well and then 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.

I think one other thing that I'll add is, Sam, if you see in the earnings presentation, we had included 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 consumables revenue going forward.

Yes. That's a good point, Susan.

The next question is from Tejas Savant with Morgan Stanley.

Christian, sort of sticking with the needle threading and 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. Can you just share how much will be passed on to customers via further 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 SMRT 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? 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 just elaborate on what you plan to do differently there?

Yes. Tejas, thank you. Those are good questions. Let's see. Let's start with the cost cuts and the -- 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. 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 outsourcing to in-sourcing 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 our technology, which has given us the ability to reduce the amount of compute required or the power of the compute required in 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. So those are things that are getting -- starting to get realized now in Q2, and will continue to get realized through the rest of the 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'll 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 in the long run, that will drive better margin to the whole business. So we're doing a little bit of both. On the 25M, 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. Yields are starting…

The final question tonight comes from Rachel Vatnsdal with JPMorgan.

This is [indiscernible] on for Rachel from JPMorgan. I just wanted to touch quickly on Revio backlog here. At the end of 4Q, you shared that the total product backlog was $19 million, most of it was Revio. So can you reconcile for us the 13 Revio's that slipped in the quarter with the 28 placements, and what that really means for your backlog at the end of 1Q?

Susan, you want to take that one?

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 million in product backlog. We disclose our backlog once a year. We're not disclosing it on a quarterly basis. 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 [ book-ship ], more turns in the year than we had last year. That's just the nature of being in the second year of a new product launch. So that is part of our assumption. And that is also included in our updated revenue guidance. One other trend that we have seen, which started in the second half of last year, is that customers are placing more standing orders for consumables, which has been a nice trend. And so customers when they purchase the Revio instruments, some are choosing to go ahead and place an order for consumables with a ship schedule. And also one thing on the instrument side is that we did not ship all of the instrument backlogs. So we do still have instrument backlogs. And we plan to continue to maintain instrument backlogs throughout the year. But that kind of gives you some of the characteristics that's embedded in our guidance.

Great,. All right. 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. Have a good one.

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