Good day, and welcome to PacBio's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Kelly Gerra with Investor Relations. Please go ahead.

Good afternoon, and welcome to PacBio's Fourth Quarter and Full Year 2025 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 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. With me today are Christian Henry, President and Chief Executive Officer; and Jim Gibson, Chief Financial Officer. On today's call, we will make forward-looking statements, including, among others, statements regarding predictions, estimates, expectations and guidance. 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 Form 10-Q and 10-K 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. 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. 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 will now turn the call over to Christian.

Thank you, and good afternoon, everyone. Our fourth quarter results exceeded expectations and were highlighted by all-time record consumable revenue and strong instrument placements for both the Revio and the Vega platforms. Our strength in consumables also drove gross margins higher. We believe that the momentum we built as we exited 2025 will continue in 2026 and that we are well positioned to execute on our strategy to drive both revenue growth and gross margin expansion in 2026. As previously announced, fourth quarter revenue grew 14% year-over-year and 16% quarter-over-quarter to $44.6 million. Our sequential step-up was driven by increased Revio and Vega sales as well as record consumables, reflecting meaningful traction across a range of clinical sequencing applications. For the year, we recorded $160 million in total revenue, representing 4% growth over 2024. Consumable revenue drove the majority of our growth, both on a quarterly and full year basis. In Q4, consumable revenue grew 15% year-over-year, reaching another record. And in fact, 3 of the past 4 quarters were record consumable quarters. We were especially pleased by the 55% growth in consumables for clinical and hospital customers in 2025. Our growth in the clinical market was largely driven by a combination of our whole genome sequencing applications in rare disease and targeted applications that leverage our PureTarget kit. This traction has helped offset the continued significant pressure that our customers are experiencing with regard to the academic funding environment, which has adversely impacted our instrument sales in 2025. Turning to instruments. We shipped 21 Revio and 42 Vega systems in the fourth quarter, bringing our cumulative shipments to 331 and 147 systems, respectively. Taking a closer look at Revio, placements were impacted throughout the year due to the challenging funding environment, particularly in the Americas. That said, we were…

Thank you, Christian. I'll be discussing non-GAAP results, which include noncash stock-based compensation expense. I encourage you to review a reconciliation of GAAP to non-GAAP financial measures in our earnings press release. Unless otherwise noted, all growth rates are year-over-year. Total revenue for the fourth quarter grew 14% to $44.6 million, compared to $39.2 million in the fourth quarter of 2024. Consumables revenue increased 15% to $21.6 million in the fourth quarter with annualized Revio pull-through per system at approximately $242,000. The consumables growth was driven by an increase in our installed base as well as consistent system utilization despite the difficult funding environment. Instrument revenue increased 13% in the fourth quarter to $17.3 million, primarily driven by an increase in Vega systems, which had initially commenced shipment in Q4 2024. We ended the quarter with 331 cumulative Revio system shipments and 147 cumulative Vega system shipments. In the fourth quarter, we placed several Revio instruments with key institutions at lower prices, and we believe these strategic accounts will ultimately drive higher utilization and above-average consumable pull-through. As a result, the ASP for Revio in Q4 was approximately $482,000, which was roughly flat compared to the third quarter. Service and other revenue increased 11% to $5.7 million in the fourth quarter, primarily driven by an increase in service contract revenue related to Revio. From a regional perspective, Americas revenue increased 3% to $20.7 million in the fourth quarter, primarily due to an increase in Revio consumables and higher Vega instrument shipments. Asia Pacific revenue increased 4% to $9.3 million in the fourth quarter, primarily due to increased sales related to Berry Genomics following the regulatory approval for clinical long-read sequencing in China as they enable routine clinical testing in hospitals for thalassemia as well as higher Vega instrument sales, which…

Thanks, Jim. 2026 is shaping up to be an exciting year for PacBio. We're focused on enabling HiFi to become the sequencing standard of care through 5 key initiatives: First, we plan to dramatically improve the economics of HiFi and increase penetration across our key markets through the successful launch of our SPRQ-Nx chemistry and multi-use SMRT cells. Second, we plan to accelerate clinical adoption across rare disease, oncology and carrier screening, supporting new as well as our existing customers as they ramp up their utilization of HiFi. Third, we plan to continue to enable population scale sequencing studies. We have hundreds of thousands of samples in various stages of negotiation and approval. And while these studies have long sales cycles, we expect these studies to drive our growth in the longer term. Fourth, we are enabling the next-generation informatics by scaling multiomic HiFi data and applying AI to unlock unique biological insights. For example, several of our customers have been awarded funding through Google's AI for Science initiative, where researchers are leveraging HiFi data alongside AI to address some of the most complex challenges in biology. We believe the depth, accuracy and completeness of HiFi data amplified by AI positions us to unlock new biological insights. And finally, we continue to drive innovation, which is part of our core mission. We look forward to updating you on our progress across each of these initiatives as we progress through the year. Additionally, we are excited to participate in the upcoming AGBT conference in the coming weeks and hope to connect with many of you there. With that, we will now open it up for questions. Operator?

[Operator Instructions] And today's first question comes from Tycho Peterson at Jefferies.

This is Lauren on for Tycho. A few from me. Starting with Revio pull-through, it was pretty stable year-over-year. Maybe how should we think about pull-through progression as SPRQ chemistry lowers per sample costs? Will that lower cost drive higher utilization? Or does it risk pulling revenue forward? On consumables, another record quarter for you guys. What gives you confidence that this growth is structurally sustainable versus being driven by a smaller cohort of power users? And then lastly, going forward, how should we think about steady state mix between Vega and Revio? And what does that imply for average system ASPs?

Well, Lauren, you gave us a lot to start off with. Thank you for the questions. We'll start with Revio pull-through. So pull-through was -- you're right, it was pretty stable from year-to-year. And my expectation is that the opportunity provided with SPRQ-Nx will lower the price per sample, but is likely to increase utilization on the systems and certainly expand our market share. And so when you think about it, what we're trying to accomplish is through a more attractive price, the ability to win larger scale studies, which would drive both instrument sales as well as expanded utilization within those fleets of instruments and to drive kind of broader adoption across the entire base. So at the end of the day, the focus is on driving the revenue up which would effectively have pull-through kind of in a similar range, anywhere from [ 225 to 250 ] is what we've been -- is what we've been talking about. I don't think it will change that much. You may see some short-term dislocations depending on the timing of when samples come in and which customers are adopting. So we'll be watching out for that over the course of the year. But on balance, this is a fundamentally enabling technology that allows us to increase our footprint and drive consumable revenue up at the same time and of course, expand our gross margin because this is one of those rare occasions, where the product actually is very beneficial to customers, but it's also expanding our gross margin on consumables. So really important. When you start to think about your second question about kind of structural growth, we certainly see that the market is going to be expanding because of the nature of HiFi first and foremost. And then now we're…

And our next question comes from Subbu Nambi with Guggenheim.

What should we expect OUS to do this year from a clinical growth perspective? And did you see any budget flush, particularly from Europe in 4Q?

Subbu, can you start with the first part of your question again? It came in a little bit garbled. I kind of got the budget flush part, but not the first part.

What do you expect like outside of the United States to do this year from a clinical growth perspective?

Okay. So clinical growth and then budget flush. I'll start with the easy one. Budget flush, we really didn't see a lot of budget flush at the end of the fourth quarter. I mean there's always a little bit of opportunistic purchasing. I can think of one order where we were able to capture a large consumable PO from a competitor actually and in that process, got a new customer. So that was actually a really exciting win for us, but we didn't see a lot of actual budget flush. And then with respect to clinical growth, you saw that we had really strong growth in 2025. The base was a little bit smaller. So the 55% is exciting, but it's off of a smaller base. So we have to be mindful of that. But when we look into 2026, we see very strong growth in the clinical side of our business, particularly in rare disease and whole genome sequencing and largely in -- in EMEA, we've really seen them start to move from kind of the pilot phases to actual production. And you've seen press releases from folks like RadBoud who are expanding from 5,000 to tens of thousands of samples, and that's -- there's lots of examples of that where we're seeing that in the market. And I think that will be a driver of clinical growth. Of course, some of that's enabled through the SPRQ chemistry. So we have to balance out the more favorable pricing with respect to accounts like that, for example. So it's kind of a bit of a balancing act there. We're also seeing strength in targeted -- our targeted portfolio as the PureTarget platform continues to -- and assay continues to gain more traction, and we're seeing some of the higher throughput targeted customers expand their fleet. We saw that in the fourth quarter, and I think that will help us scale clinical consumables in 2026.

Super helpful. And a quick follow-up, not really a follow-up, a separate question altogether. When thinking about international expansion for multi-use SMRT cells, how are you considering rollout in tandem with the U.S. if your aim is to keep elasticity contained this year?

Yes, it's a good question, Subbu. So we are -- we started the beta program just with accounts in the United States really so that we could keep tabs on the users and understand how their workflow is working and all of that. And now we're very pleased with how it's gone. I mean we're seeing 25% increase in yield, which is amazing for customers. and then the workflow, you can see the consistency of yield from run to run from the first use to the second use. So we're expanding -- we're expanding our program over the next couple of weeks into EMEA and ultimately APAC. And then over the course of the year, we will just continue to roll out the product as customers have the samples that are ready to go. So we want to try to monitor and meter out this rollout so that we can get as many samples onto the systems as possible at the favorable pricing so that we can see continued consumable growth. And so we're going to be in kind of this beta early access program until the spring, late spring, early summer. And then ultimately, it will be rolled out to everyone. So we have a good plan. The innovation is working really well. And it's -- we're going to start heading into the second phase of beta and scale-up phase over the rest of the first quarter and into the second quarter.

[Operator Instructions] And our next question today comes from Doug Schenkel at Wolfe Research.

So you are continuing to successfully reduce OpEx spending. Where is the biggest opportunity to do that this year without hindering the pace of recovery? And just one follow-up, and I'll get back in the queue. I think in your prepared remarks, you called out, I think you said industrial weakness. If so, is that new? And I guess to the point, if so, what is it? Is that ag or Symbio , both something else? Could you just tell us what's going on there?

Yes. Doug, so just to clarify, I don't think we called out any specific industrial weakness per se. What we're trying to say is that, that part of the business hasn't -- consistent with the academic world hasn't been very strong. And what that really is, is kind of the agricultural business. And so is that what you were referring to in your question?

Yes. That makes a lot of sense. All right. Sorry about that, Christian . Thank you for clarifying.

No, it's fine. No, I just wanted to make sure I got the question right. And then with respect to OpEx, we've worked pretty hard to take a lot of cost out of the business. And I think in 2026, that will continue. First, we'll get the full year benefit of the reductions in force that we saw in 2025. And so that will naturally give us a bit of a tailwind to start the year off. But the next places to focus are -- we're going to be focusing on managing G&A expense, managing R&D, staying focused in R&D. So we have a few very critical programs going on, and we're going to make sure that they're very well funded, and we have all the people we need to be successful. But we're going to be very thoughtful and mindful about adding new priorities to the equation, and that will help us save money because we'll have -- we'll be able to save on kind of non-headcount-related spend and things like that. Of course, the counterbalance is we're in the -- we are in the -- we are in the meat of developing the next-generation platforms, and that comes with a lot of expense. So it's cost for prototypes and alphas and betas, things like that, which we'll see some of that this year. So we'll be focused on overcoming that. And then finally, $1 is a $1. So we're really focused also on the gross margin line and reducing production costs. And so we're in-sourcing more, which allows us to leverage our overhead more effectively and therefore, reduce costs overall, which will help expand our gross margin. So it's really a concerted effort across the organization. And I also think there's some opportunity in our marketing organization to be mindful about investing in the right events to make sure that we have the presence we need, but also make sure we get ROI on the events. We will be expanding the commercial -- the sales organization a little bit this year because I do think that there's opportunity for us. And so that gives you a bit of a kind of a broad tour of operating expenses. We also have some ongoing litigation that we'll be spending on this year that will be incremental to last year. And this is from litigation that's been going on since 2019. So it's long before I even got to the company. But that gives you a sense of expenses. I do think we're going to be able to do better than we did in 2025. And the focus is, of course, getting to breakeven.

And our next question today comes from Kyle Mikson at Cantor (sic) [ Canaccord ].

Kyle from Canaccord. I want to follow thought with the cost. So on -- first on the short-read divestment last week. So was there any cost taken out of the P&L from that move? I think based on the 8-K with the pro forma results, it seems like there's a tailwind to gross margin, for example. So if you could just dive into that, it would be helpful. And then secondly, there was a slide in the earnings deck, I think it's Slide 9, comparing long read to the standard of care at a beta site, a clinical customer. You got performance better with respect to diagnostic yield, turnaround time. I'm just curious if cost improves when you go to long read from standard of care.

Yes, Kyle, great questions. It's great to catch up here. So I'll start with the short-read business. There won't be substantially more costs taken out. We covered -- in our reduction in force last year, we eliminated a lot of those costs. We are still supporting the Onso system through the year. And so we will have costs associated with that as we support that. And then as that hits end of life, we'll have savings there, but that will likely be more in 2027. You are right that there's a tailwind to gross margin in the sense that the Onso platform was not a very high gross margin instrument relative to the rest of our portfolio. And so -- but we didn't really sell many, if any, Onso in 2025. So on a year-over-year basis, that you're not going to see any incremental tailwind from that. And then the long-read -- long-read business with respect to diagnostic yield, that slide is really meant to show how not only is diagnostic yield improving with long-read sequencing. And that's what we've been -- all of us have been working on for the last several years is to show the power of HiFi because it's so -- because it's such a unique data type and you get so much information. But on top of that, customers like Radboud now are taking 6 other tests, 6, 7 other tests and combining them into 1 genome and that using one HiFi genome to answer all those questions. And so as a result, you're seeing faster turnaround time, better diagnostic yield and lower cost. And this is going to become a much broader message that you're going to hear a lot this year as we -- especially as we launch SPRQ-Nx , not only are you getting better answers, you're actually getting better answers faster and cheaper. And it's a real opportunity for us to go to these hospitals, clinics, labs and demonstrate that not only is it the direct comparison of short-read versus long-read sequencing or other long-read sequencing players, but it's really the holistic approach to how much does it cost to get an answer and how much we can benefit. And so that's really exciting, and we're in the early days of demonstrating that. But now we have examples of customers that are doing that. And so we're going to amplify that and help other customers kind of achieve the same result. Very exciting for us.

And our next question today comes from David Westenberg at Piper Sandler.

So I just -- it's kind of a recurring theme about the elasticity of demand, but you cited cumulative customer gigabases growing at 60% year-over-year. It's a great number. With the promise of a sub-$300 genome with SPRQ-Nx, I want to look at the changes in dynamics. I am one of the people that does believe in elasticity of demand. It always has been in the past, but that's not always linear. So how should we think about SPRQ-Nx balancing the elasticity of demand with the price headwind over the cadence of kind of the next few years?

Yes. That's an excellent question, and it is something that we're very focused on. First thing I'll say before we get into kind of some of the nuance is that the reality is that the samples exist already in the market. So when you think about elasticity of demand, what you're really thinking about is substitution of HiFi in place of other technologies that are already existing. And that really is -- that is a bit different because the samples are generally available on day 1. Now each customer will have a ramp phase and a conversion, time horizon. So there will be some variability. But it is different in the context of other elasticity curves that we've all seen in this space for a very long time. That said, I think you phrased it exactly right. It's not always going to be linear. And in the short term, you may have periods where the samples aren't available yet at scale relative to the price and -- but over the course of a year, 2 years, like you've kind of mentioned, you certainly will see substantial elasticity of demand. And you'll see not only more gigabases being generated, but this will help drive more instrumentation sales and as we get to higher throughput instrumentation, very much higher levels of consumable pull-through, which will be at much substantially higher gross margin. And so on balance, it really adds to the whole portfolio of what PacBio can deliver, starting with a better genome and enabling the customers to scale up both in discovery mode and in clinical mode with the whole genome, as I talked about in the last question. And you see all of that coming together with the ability to substitute long-read sequencing in a whole genome context for the exome, for other short-read approaches. And all of that on balance gives us an opportunity to really generate dramatically more demand, but it will be lumpy over the course of the first part of the launch of SPRQ-Nx. And one of the ways we're trying to manage that is by having a very controlled early access phase to make sure customers have the samples ready to go so that they can better utilize their systems and then help us drive our consumable revenue in the right direction. It's tricky, but it's a very exciting time for us because since we announced SPRQ-Nx at ASHG, the nature of the conversations has just fundamentally changed, part of the reason why we had such a nice fourth quarter, and I think the year 2026 is set up to have a strong result.

And our next question today comes from Jack Meehan at Nephron Research.

I had 2 modeling questions for you. The first is, is there any color you can share on the first quarter, just expectations for pacing in the year? And then, Jim, on gross margins, it's good to see the traction. I wanted to see if you could give a little bit more color on the component volatility you flagged, just what's driving that and what's reflected in the guide?

Yes. So maybe, Jack, good to hear from you. I'll start with the Q1 and then, Jim, why don't you take the gross margin part of the response. With respect to Q1, we do think Q1 consistent with seasonal patterns will likely be a little bit lower than Q4, but certainly above Q1 of 2025. And so we expect to be growing and we expect to be expanding. We think that we think we'll have -- we -- our expectation is that we'll have continued strength in Revio and Vega should be -- should get off to a good start. And I do think we are being cautious about how we're thinking about academic and government spending. And I think although the budget has kind of improved the outlook a little bit perhaps, it's a long way from the budget to the actual dollars getting spent in -- especially with respect to acquiring new capital equipment. And so we're going to be pretty cautious in that. We do think that Europe is going to continue to be strong. I think on this call a year ago, I said Europe was going to be our strongest region. And quite frankly, they exceeded my expectations. I would not be surprised to see Europe continue to be strong in 2026 and perhaps our strongest region again. We'll see. There's -- I was just out at the Europe and APAC sales meeting. So there's a little bit of competition, which is really good to see as a CEO there. But I do think you'll see Q1 probably be a little bit lighter than Q4. It really does just seasonality and then we'll grow from there. And we set guidance in a place, assuming that the academic and government funding does not come back in any meaningful way. We figured that's the best place to start. We do think our growth will be driven by the expansion of the existing clinical accounts that we've won over the course of '24 and '25 and new accounts coming into the fold. So that will be opportunities for more Revio placements and certainly some Vega placements. We do think we're going to have a strong year with respect to Revio. We're seeing a lot of interest in the funnel growing because, quite frankly, SPRQ-Nx is enabling a new -- that price point is enabling a new level of scale that I think Revio will fit really well. So hopefully, that gives you a little bit of color on the outlook and pretty excited to get going here. I think the quarter is off to a reasonable start. And Jim, you want to talk about gross margin?

Sure. So Jack, as you pointed out, one of the things that -- when we gave our guide of 100 to 400 basis points for '26, one of the things we highlighted is the impact of some of the memory shortages that we and a number of companies are seeing right now as we look to lock in agreements with our suppliers. As you probably know, since we provide such robust data, we do have compute as a significant component of our cost of our Revios and to a lesser extent, in our Vegas. So as you think about our guide, we did bake that impact into our guide. I think as we think about the lower end of the guide, that would be a consistent and continuous impact on compute. We're hoping that's not the case. We're hoping that with a lot of things, it will stabilize as we get into the middle of the year, and that is baked into the 100 to 400 basis point increase.

And our next question comes from Dan Brennan with TD Cowen.

Maybe just a couple. On placements and pull-through, did you guys give color on how to think about that? That would be helpful. I know you talked about Revio pull-through being consistent, but just wondering if there's any more color across Vega and Revio. The burn, like I know we could probably back into the burn ourselves, but is there a burn that you guys are targeting in 2026? And then the final one would just be with EMEA clinical surging and Christian, you sound like it's going to continue to be strong. What will it take to see U.S. clinical growth really accelerate?

Yes. Thank you for the question, Dan. So I think with respect to placement and pull-through, I do think we believe that the [ 225 to 250 ] range for Revio for pull-through continues to be a pretty realistic place for us to be. We will see how SPRQ-Nx obviously impacts that from a short term. We do think placements for Revios will be consistent, if not a little bit better than 2025. And then if you look at Vega, we haven't really talked a lot about Vega pull-through, but we now have 147 systems out there. And based on kind of what we're seeing, it's likely that pull-through kind of sits in the [ 25,000 to 40,000 ] range over time. And right now, it's about [ 25,000 ] give or take. So it's a little bit at the lower end of that range, but I do think it has a bit of upward potential. But I think it's going to be kind of that [ 25,000 to 40,000 ]. You're going to see lots of instrument placements. We do expect instrument placements to grow in the Vega product line this year over 2025 levels. And the sales funnel support that. The other thing that's great about Vega is we've actually had much faster sales cycles and lots of many more intra-quarter leads turning into orders than -- certainly than Revio, but actually in general, at a pretty nice clip. So we're pretty excited about that. With respect to the burn for '26, the burn for '26 will be -- we're going to be working to kind of try to keep the burn relatively consistent, but the challenges we're going to face are really around alpha, beta builds of the next-generation system driving some more spend than we otherwise…

And our final question today comes from Mason Carrico with Stephens.

So are you guys expecting multisystem placement orders to become more common in 2026? And if so, should we expect that to have an impact on ASP via discounts? Or are you able to generally maintain pricing for those orders?

Yes, it's a good question, Mason. And the truth is those are difficult and unpredictable. So I can't really give you a -- they're going to be consistent every quarter or how many we're going to get. But we -- what we do see is that clinical customers, customers that want to do whole genomes in a kind of a clinical context are generally going to buy multiple Revios because they want to have redundancy at a minimum and then they want to scale up. One thing we did see in 2025, and I think we'll continue to see is customers adding to their capacity and scaling on the Revio system. And so we saw that in a number of different accounts in '25, and I think that will -- that will certainly continue in 2026. Both of those have an impact on ASP. And so we are thinking holistically about driving the lifetime value of revenue for those accounts. And the faster we can get them running consumables, the more valuable those accounts are. And so oftentimes, we will make a bit of an ASP trade-off for accelerating consumables -- and also on top of that, driving -- for customers that are adding to their fleets and expanding, obviously, our cost structure to serve those accounts goes down, which is certainly useful and the volume goes up, which gives us more of that higher gross margin consumable revenue. So it's a long-winded answer to basically say the timing of multisystem orders will continue to be variable and we'll see how that goes over time. But I do believe we're seeing customers add to their fleet. And those fleet additions are very positive for the company, both from a revenue perspective overall, lifetime value to customer and then improving -- driving that gross margin up and also really the operating margin associated with that particular account. We don't talk about that a lot, but if I can have one sales rep managing $15 million of revenue out of an account versus $5 million, that obviously pays dividends for us. And so that's how we think about it, Mason. Hopefully, that helps.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Christian Henry for closing remarks.

All right. Well, we thank everyone for their time today, and we hope to see some of you at AGBT in a couple of weeks here. And then we have other conferences in March that we'll be attending. And as usual, you can always reach out to us if you have questions offline. Thank you, everyone, for your attention, and have a great evening. Cheers.

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.