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spk03: Hello and welcome to the PACBio third quarter fiscal year 2022 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. please limit yourself to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Please go ahead.
spk08: Good afternoon, and welcome to PACBio's third quarter 2022 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call. a copy of which is available on the Investors section of our website at www.pacb.com, or is furnished on Form 8K available on the Securities and Exchange Commission website at www.scc.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 REVIO and ONSO systems and their commercialization timeframes. 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, including those inherent in developing and commercializing new products. 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 as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures combined with U.S. GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans and benchmark our performance externally against competitors. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings 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. We ask that analysts please limit themselves to one question and one follow-up question so that we can accommodate everybody in the queue. I will now turn the call over to Christian.
spk05: Good afternoon, everybody. Thanks for joining us today as we discuss our third quarter results and business highlights. Before I begin with my prepared remarks, I'd like to remind everyone that we are hosting our first Investor Day in New York City on November 15th. You can find out more about the event in the investor section of our website. On today's call, we will first recap the product announcements we shared two weeks ago at the American Society for Human Genetics Conference in Los Angeles. Then we will discuss our third quarter financial results, and then I'll provide some commentary on our commercial activity during the quarter. Then I'll hand it off to Susan to walk through our quarterly financials in more detail, and of course, as always, there will be plenty of time for Q&A. When I joined the company in September of 2020, I outlined two important aspects of our strategy for growth. First, we needed to develop a new long read platform that offered our customers significantly higher throughput at much lower cost. And second, since we believe that understanding biology is becoming a more multiomic endeavor, we need to develop multiomic capabilities so that we could provide the right solution for our customers depending on the biological question that they are trying to answer. At ASHG on October 25th, with the announcements of Revio and Onso, two groundbreaking new sequencers, we demonstrated that we are well on our way to achieving these two critical aspects of our strategies. Let's start with Revio, our next generation long read sequencer. Revio is expected to provide 15 times more data output than our current flagship sequencer, the SQL 2e. At the core of Revio is a completely redesigned smart cell, which has 25 million zero-mode waveguides, more than three times as many as the Sequel 2e. Revio then utilizes up to four 25m smart cells in every run to enable the sequencing of up to 100 million single molecules of DNA simultaneously. As a result, the system provides up to 360 gigabases of highly accurate HiFi data, enabling researchers to not only see SMVs and indels, but also structural variation and important epigenetic data in every single run. Finally, the runtime has been reduced by 20% to just 24 hours. Revio was designed with the customer in mind, including requiring fewer consumables, and the ability to load the next run while an existing run is in progress. In addition, the 20-fold increase in relative compute power leverages the latest NVIDIA GPUs and enhances base calling with Google Deep Consensus on board. This makes it easier for our customers to start interpreting the data directly from the instrument. We believe Revio is poised to transform the whole genome sequencing market. This platform enables customers to take on large-scale genome projects with the accuracy and completeness of HiFi. One Revio system can sequence up to 1,300 human genomes a year at less than $1,000 per genome at 30x depth coverage, or approximately $11 per gigabase at list price. and at lower coverage, several thousands of genomes per year at just hundreds of dollars per genome. At ASHG, we hosted a packed booth over all three days and demoed the Revio over 150 times. Feedback from potential customers has been fantastic. On social media, we had more than 10 million impressions over the course of the conference, more than tenfold over other instrument providers. Some comments included one researcher calling it, quote, the most important genome sequencer to launch since the Illumina GA2X, end quote. And another customer who has already placed a multi-system order said, quote, it'll be a game changer in the medical genomics field, end quote. We've already booked multi-unit orders from several customers and are actively discussing system orders with dozens more. With excitement around Revio, several customers have asked about an upgrade path, and we're pleased to have customer loyalty programs in place to support their transition from the SQL 2e to Revio. It's clearly a seminal moment that we launched this paradigm-shifting sequencer as PacBio recently surpassed its 1,000th sequencer shift since the launch of the RS platform in 2011. Over the past decade, PacBio long reads have enabled approximately 400 instrument customers to accelerate their research by allowing them to view biology in ways others can't. From assembling telomere to telomere pangenomes to sequencing some of the largest, most complex genomes on this planet, hundreds of publications over the past few years reinforce our belief that the combined accuracy and length of HiFi are unmatched. With the throughput, power, and attractive price point of Revio, we are thrilled to usher in the next phase of PacBio. In addition to Revio, we announced Onso, a mid-throughput short-read sequencer based on the highly accurate sequencing by binding technology we acquired through Omnium last year. ANSO is a highly differentiated sequencer due to the incredible accuracy of the SPB chemistry. Internally, we've consistently demonstrated accuracy at the Q40 plus levels, which we believe is more than 10 times more accurate than other recently announced chemistries. The beta program has commenced, and we've started shipping units to our beta partners. These partners include the Broad Institute, Weill Cornell, and Corteva Agriscience, who will be using their beta systems over the next few months. We look forward to these partners providing valuable feedback on ONSO's performance in the field. Once the beta program is complete and we incorporate their feedback into the product, we will finalize the development and begin commercial scale-up activities. We expect to begin shipping ONSO commercially in the first half of 2023. As a result of all these announcements, we've suspended our financial guidance so that we can understand the impact that Revio will have on the demand for SQL 2E. However, at our investor day on November 15, we expect to share our longer-term financial targets and update you on market response to Revio and ONSO. Let's move on to our Q3 results. We reported $32.3 million in revenue, representing a 7% year-over-year decline, with changes in foreign exchange rates driving 2% of that decline. The decline was driven by lower SQL 2E sales. We believe some customers deferred their instrument purchases in anticipation of a new product launch and that this impact was greater than we anticipated in the quarter, particularly in the Americas region. Other drivers of the instrument shortfall included customers deferring purchases due to lapse-based issues and funding delays. We expect many of the current and deferred opportunities to migrate to REVIO. However, we anticipate of sustained, albeit lower, demand for SQL 2E going into the fourth quarter and into 2023. Since SQL 2's launch nearly four years ago, we've advanced the platform with the 2E upgrade, significantly reduced the secondary analysis time, and lowered data storage needs by up to 90%. Additionally, we launched new kits that reduced DNA input requirements fivefold, seamlessly integrated methylation calling on every run, and released several application protocols and workflows for AAV, SARS-CoV-2 sequencing, and single-cell transcriptomics. As you can see, we've built a robust ecosystem around SQL 2E. It remains an extremely reliable and powerful sequencer at an attractive entry price for customers looking to do lower-throughput, long-read sequencing. Although we shipped fewer instruments than we were forecasting, we continue to expand the SQL 2E customer base with over 40% of our instrument shipments in the quarter to new PacBio customers. In the past four quarters, we have onboarded approximately 65 new instrument customers. SQL 2E's success in attracting new users gives us confidence that the throughput, economic, and workflow improvements of Revio will even further catalyze the next wave of new customers to PacBio. In the third quarter, we were also pleased to report record consumables of 16.1 million, an increase of 10% year-over-year. We saw pull-throughs steadily increase sequentially as customers in China increased utilization and EMEA booked record consumable sales. Outside of new sequencing platforms, perhaps what our customers are most excited about is our recently launched MASI kit and its game-changing potential for transcriptomics and single-cell research. This new kit leverages 10X Genomics single-cell expression technology and allows customers to achieve a 16-fold throughput increase compared to regular single-cell isoseq libraries. Despite being an important component in understanding genetic variation and disease, we still know so little about isoforms because of short-read limitations in sequencing them at their full length. With the combination of throughput and cost improvement provided by MOSSEQ, coupled with the 15-fold improvement with Revio, we believe HiFi will be the go-to technology in single-cell transcriptomics. In response to this launch, a principal investigator from a major university told us that he believes that, quote, it is clear that in the next few years, long read sequencing will become the de facto gold standard in transcriptomics research. Over the past couple of years, we've been broadening our collaborations to deliver customers turnkey solutions for understanding biology. An example is the release of the off-the-shelf target enrichment panels for long-read HiFi sequencing in collaboration with Twist Bioscience. These panels include a 400-gene panel covering medically relevant genes in regions that are difficult to sequence using short-read methods, including genes tied to spinal muscular atrophy, Alzheimer's, and cardiovascular diseases. We're also offering another panel to capture 50 pharmacogenomic genes. By providing targeted panels in addition to whole genome workflows, we can address a broader set of customers across human genomics. Further, we also launched the Tandem Repeat Genotyping Tool, or TRGT, target to allow scientists to fully characterize the sequence and methylation status of tandem repeats across the genome. Genetic variation in tandem repeat regions has been linked to many neurological and intellectual disorders such as ALS, Huntington's disease, and Fragile X. Turning to commercial highlights, in our human germline applications, which again in Q3 represented over one-third of our product revenue, we delivered additional SQL 2Es to support multiple customers in their sequencing for a large, population genome scale project in the United States. Additionally, we shipped multiple SQL 2Es in a competitive deal to a customer in the Middle East planning to launch a large population scale program. We expect this customer to transition to Revio over the next year to accelerate its sample volume. As previously mentioned, we expect some customers to continue sequencing on their SQL 2E platforms like DNA Link in Korea, who purchased a Sequel 2e to begin sequencing for the Korea Disease Control and Prevention Agency, and plans to use HiFi Viral to sequence 10,000 SARS-CoV-2 genomes. And Averro Diagnostics, a new PacBio customer, who purchased a Sequel 2e in the third quarter to support its microbiome DTC test offering, and could potentially scale the system to provide tens of thousands of tests per year. We also expect AAD sequencing applications to continue to use the SQL 2E, with the addition of SQL 2Es in the third quarter shipped to several customers in this application area. Lastly, I'd like to welcome the members of the newly created Scientific Advisory Board. Dr. Ewan Ashley and Dr. Jody Puglisi of Stanford University, and Dr. Jay Shendure from the University of Washington. These renowned leaders in biology and chemistry will provide critical feedback and direction to our product roadmap. We had our first meeting this past week, and I was delighted to hear the SAB's enthusiasm for PacBio's new platforms and what they believe can be accomplished in many diverse genomics applications. Now, with that, I'll hand the call over to Susan to talk about our financial results in more detail. Susan?
spk01: Thank you, Christian. As discussed, we reported $32.3 million in product and service revenue in the third quarter of 2022, which represented a decrease of 7% from $34.9 million in the third quarter of 2021. Interim revenue in the third quarter was $11.4 million, a decrease of 28% from $15.9 million in the third quarter of 2021. We delivered 34 SQL 2E systems during Q3, growing the install base to 494 SQL 2 and 2E systems as of September 30, 2022. Turning to consumables, Revenue of $16.1 million in the third quarter grew 10% from $14.6 million in the third quarter of last year and was a record for PacBio. BQL2 and 2E consumables represented approximately 90% of our total consumable revenue in the third quarter with the rest from older systems and other consumables. Annualized pull-through per system on the SQL 2 and 2E install base in the third quarter was approximately $125,000. Consumable revenue in China continued to improve, partially offset by newer PacBio customers being slower to ramp and certain customers dealing with sample delays. Of note, global supply chain constraints related to auxiliary equipment has had an impact on new instrument ramp times, And one of the other reasons noted was a lack of nitrogen at the time of installation, which we're pleased to say will not be a requirement with our new REVIO platform. Finally, service and other revenue grew $4.8 million in the third quarter compared to $4.4 million in the third quarter of 2021, reflecting our growing install base. From a regional perspective, America's revenue of $16.7 million declined 14% compared to the third quarter of 2021, primarily driven by lower SQL 2E placements as customers delayed purchases due to lab space limitations, funding, and deferred orders due to the anticipation of a potential new sequencer launch. The region also experienced lower utilization as certain customers dealt with sample shortages and as newer customers take longer to ramp. Asia-Pacific revenue of 9.6 million grew 4% over the prior year, primarily driven by a recovery in China post-lockdowns. The region posted its highest consumable quarter in nearly five years. Lower instrument ASPs partially offset the growth in consumables. Finally, EMEA revenue of 6.0 million was 6% lower compared to the prior year period with currency fluctuations in the pound sterling and euro driving a 10% headwind. The region was most affected by FX, which represented approximately a 10% headwind compared to Q3 2021. The region posted record consumables in the quarter, particularly as a large plant and animal sequencing project regained momentum. Moving down the P&L, GAAP gross profit of $13.5 million in the third quarter of 2022 represented a gross margin of 42%, excluding amortization of intangible assets Third quarter 2022 non-GAAP gross profit of $13.7 million represented a gross margin of 42%, compared to a non-GAAP gross profit of $15.7 million, or 45%, in the third quarter of last year. The decrease compared to the third quarter of last year was partially driven by lower interim volumes and lower interim ASPs, partially offset by higher consumable volumes. Gap operating expenses were $88.2 million in the third quarter of 2022. Excluding change in fair value of contingent consideration of $4.3 million and amortization of intangible assets, non-gap operating expenses were $83.8 million. This represents a 42% increase from non-gap operating expenses of $59.1 million in the third quarter of last year, reflecting a full quarter of operating expenses from omnium and increased headcount. In terms of headcount, we ended the quarter with 771 employees compared to 728 at the end of 2021. Operating expenses in the third quarter included total non-cash stock-based compensation of 18.0 million compared to 26.6 million in the third quarter of last year. Excluding merger-related expenses, non-GAAP operating expenses in the third quarter of 2021 included 15.1 million of non-cash stock-based compensation. Gap net loss in the third quarter of 2022 was $77.0 million or $0.34 per share. Excluding amortization of acquired intangibles and change in fair value of contingent consideration, non-gap net loss was $72.5 million, representing $0.32 per share, compared to a gap net income of $16.5 million and a non-gap net loss of $47.2 million, representing $0.23 per share. Now turning to our balance sheet, we ended the third quarter with $834 million in unrestricted cash and investments, compared with $899 million at the end of the second quarter of 2022. Inventory balances increased in the third quarter to $43.5 million, representing 1.9 inventory turns, compared with $36.1 million at the end of the second quarter of 2022, representing 2.3 inventory turns. The increase in inventory primarily reflects purchases of Revio and Anso inventory, coupled with lower than expected SQL 2E shipments. Accounts receivable decreased in the third quarter to 22.8 million, reflecting a DSO of 71 days, compared with 27.1 million at the end of the second quarter of 2022, reflecting a DSO of 70 days. Moving to guidance, As a result of our announcement of Revio, our latest high-throughput long-read sequencing system expected to ship in the first quarter of 2023, we withdrew all prior 2022 financial guidance. We look forward to connecting with you next week on November 15 at our Investor Day in New York, where we plan on providing additional details related to our longer-range financial outlook. With that, I will turn the call back to Christian. Christian?
spk05: Thank you, Susan. It's been an exciting time for PacBio in the field of genomics. We're months away from the first Revio shipment and from what we believe represents the biggest technological milestone in long read sequencing. We hope to see you all next week as we dive deeper into our strategy, products, markets, and financial outlook at our inaugural investor day. I will now turn the call back to the operator to begin. Operator?
spk03: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Tejas Sevant with Morgan Stanley. Please go ahead.
spk04: Hey, guys. Good evening. So maybe question one for you. Can you just share some early customer feedback on the relatively high price point for Revio and just some perspective on how you see the degree of discounting and trade-in sort of play out here over the next 12 months? particularly in light of the macro and the worsening FX headwinds?
spk05: Sure. Thanks, Tejas. You know, I didn't really get a lot of pushback on what you call to be a high price point. I think people saw the incredible value and opportunity associated with, you know, long read sequencing for 10, 11 bucks a G at list. and getting lower than that in genomes at scale. So I didn't really get any pushback hardly at all. Now we do have, as with any product transition, there's always customers that just bought at the end of the third quarter or people that bought in 2022. And so we were very thoughtful about that and put together pretty aggressive customer loyalty discounts that would account for them. and give them an opportunity to get into Revio and still get some power out of the SQL 2E until Revio is broadly available to them. What that really did was it said, if you bought in 2022, you're going to get a bigger loyalty discount than if you bought in 2021. We tried to basically recognize that. the newness of the system. And so far, we haven't had much pushback on that discounting scheme. And so I think in the long run, you're going to see discounting less than what we discount the SQL 2E. But for the trade, not trade-ins, but for the loyalty discounts, I want to be very clear, it's not a trade-in program. The loyalty discounts, you know, you will see customers that bought most recently get a very good price. And, you know, we're happy to do that because that was part of the strategy is to enable the market with the larger install base so that we could go upgrade that install base to Revio as quickly as possible.
spk04: Got it. That's helpful. And then one on the consumables line, and I'm not sure, you know, how much visibility you have on there at the moment, but Just curious as you think about the ramp down in SQL consumables, particularly given some of these larger studies that are already in flight, How are you thinking about the consumables line winding down for the legacy platforms? And then on the other side of that, can you share some color on the theoretical maximum pull-through at 30x coverage in the Revio? Is it fair to think of it as a low to mid-single-digit multiple of the $175,000 a year that you saw on the SQL 2E?
spk05: Yeah, just to go backwards, yeah, that's probably right. You know, it will depend, obviously, on how people think about coverage. One of the things that we've found and we've been doing a lot of work on this year is understanding what long-read coverage you need using HiFi relative to the traditional 30X metrics. And, you know, as with anything, it really depends on your application. But if you're doing population-scale genetics, you know, kind of large projects, you could go anywhere from, you know, 10. We see some customers talking about 10 and some talking about as high as 20x. So you could kind of think about an increase in scale relative to even that 30x paradigm. But that being said, you know, from a pull-through perspective, you talk about a multiple of SQL 2E. I think that's the right way to think about it. When you think about what's the max opportunity, You know, you can do the math. You know, it's a 24-hour run time, and so, you know, you probably think you're using the system 50 weeks a year, and you can multiply and just start with, you know, start with the list price and then apply whatever discount metric you want to use for a price per genome, and that probably can give you, you know, give you enough to do the math to figure that out. Um, but we expect, you know, with respect to the ramp down, SQL 2E will be continued to be used for quite a long ways from here. You know, we will be scaling up Revio and we will have, I suspect we will have, we've had an incredible amount of interest already. And so we will have a lot of customers, uh, you know, upgrading their systems. It's too early to kind of gauge what that ramp down and consumables might, might look like specifically. But that ramp down would probably occur more in the back half of next year than the front half. And so that's one thing to talk about. And I think next week at the Investor Day, we'll try to provide some more detailed color on that, kind of how we see that playing itself out. Because you're right, it's going to be a bit of a nuanced thing for a few quarters here as we get the product launched and shipped and people convert their samples, and then scale up on new projects because people are imagining things they could never do before, and that's why the world's so excited about Revio, quite frankly.
spk04: Got it. And one last one for me on Omnium. Just on that sort of price-for-insight value prop that you've talked about in the past question, if you think about sort of the higher accuracy enabling lower depth of coverage, can you just share some sort of thoughts on what that means for consumable pull-through, or do you expect that the sample volume will inflect enough to offset some of that dynamic there?
spk05: Well, I think the sample volume will clearly have a big impact there. And I think it's too early to kind of game out the throughput, so to speak, or the pull through, because it's going to really depend on how the customer decides to use the system. If they use it for kind of doing what they do today, but just with less coverage, that will result in more samples. But if they do it in a way that they want to find variants that are even deeper, that they can't find with any other platform, that will result in more sequencing. Either way, it means samples coming to the platform and a unique opportunity for us in the area that we're pointing the ONSO system. As we get closer to actual shipments, we'll try to provide as much color as we can. Then it'll be one of those things where we'll get to see you know, how our customers leverage this major advancement in accuracy.
spk04: Very helpful. Thanks, guys. Appreciate the time.
spk05: Yep.
spk03: The next question comes from Julia Keen with J.P. Morgan. Please go ahead.
spk02: Hi. Good afternoon. Thanks for taking the question. So regarding the reveal, Christian, I was wondering if you could share a bit more color on the order book in terms of the number of instrument orders you've placed so far. And what's the mix looking like between different applications, POPC, human genome, plant animal, and how does that compare versus your expectations?
spk05: Well, I think the, I mean, to be honest, the expectations so far has blown my expectations away. And that's just, that's to be, that's honestly the truth. When you think about, we had 10 million social media impressions last week or two weeks ago at the conference. It just showed me how much demand there is for long read sequencing, how much demand there is for a new paradigm of completeness and a new paradigm of seeing the whole picture. Those messages seem to resonate. And our sales team at ASHG was extremely busy, which was really incredible to see. As I've said, we do have several multi-unit orders already on the books. I'm not going to share all the details today. We probably will share some more details next week at Investor Day. But even then, you know, I think it's really all about this building demand curve and setting us in a whole new trajectory for the future of the company. And the early indication is that, you know, all of those facts seem to be bearing themselves out.
spk02: Got it, great. And then in terms of the legacy platform, how should we think about the residual demand here? Is the idea that you'll still keep SQL 2.2e as maybe an easier entry point for new to long read customers? And how should we be thinking about the mix of the legacy versus Revio instrument mix and demand going forward?
spk05: yeah that's a good question julia so we we in the prepared remarks we tried to give you a little color there uh on the fact that there's still some applications where uh where the sql 2e will be quite adequate and quite frankly a great platform things like aav and and even some of the power you get on using the moth kit on isoform sequencing you get really nice you can get really nice scientific results. And so there are going to be applications where SQL 2E will be very useful. We do expect, though, that Revio will become the predominant platform that we sell over in 2023. But we do expect a kind of smaller level of kind of consistent demand throughout 2023. And that's probably about as far out as I want to talk about right now for the SQL 2E platform. So we're definitely going to keep supporting it, keep all of our existing customers who are using it happy and making sure the platform is robust and doing all the things it needs to do. But there certainly is a big push in the market and strong demand for Ravio.
spk02: Got it. That's helpful. And lastly from me, could you talk about your manufacturing capacity for Revu and also respectively and how to think about the ramping in the agenda?
spk05: Yeah, so actually one of the agenda items at Investor Day is operations because I knew this question would come. And so Mike Golubev, our SVP of manufacturing and operations, will give you much more detail on that next week. But what you can be assured of is we've had a lot of experience with managing platform transitions over the years, this team of executives. And so we are appropriately scaling up both Revio and getting ready for Onso so that we can meet the demand. However, it's likely when we start at the beginning, we will ship a bolus of units make sure they get into the market and are robust and doing what they need to do, and then scale from there. In other words, we don't want to ship all of the demand necessarily in one quarter. We want to make sure we have a very, very smooth launch. And we've really worked hard on getting the supply chain ready for broad commercialization. I think that's one of the key competitive advantages we have over particularly the emerging sequencing companies to, you know, meet all of the demand. And that's probably all I want to say about it right now, Julia.
spk02: Gotcha. Well, thank you very much.
spk05: Yep.
spk03: The next question comes from Dan Brennan with Cohen. Please go ahead.
spk06: Great. Thanks for taking the questions. Look forward to next week. Just wanting to get back to you to address this question at the onset, just on the radio filter. We'll obviously hear a lot more next week. But it sounds like the theoretical answer Upside here is dramatically higher with, you know, over a million dollars of potential annualized pull-through. And it sounds like, Christian, at this early juncture, saying that the actual pull-through could approximate two to three-fold or, you know, several times what you're seeing on SQL 1 and SQL 2 certainly seems like a reasonable starting point. I mean, not out of the gate, obviously, but as, you know, as the install base starts using the product.
spk05: Well, I think, Dan, we're not going to comment on that today. I think we have to see how things unfold. Obviously, the math, being able to run four smart cells at a time, 24 hours a day, seven days a week, gives us an incredible opportunity. And it's actually really, really important to driving the gross margin story over time, because that product mix will change where consumables will become a much larger portion. But on today's call, we're not going to speculate on exactly what that number is going to look like in terms of pull-through, nor the relative revenue mix. I think we've learned, at least I've learned over the course of my career, that you have to watch the consumables pull through for several quarters before you kind of have confidence that you can nail down what that is. But there's no doubt that Revio is an inflection point. And there is also no doubt that there's elasticity of demand in the market for long read samples. And they're going to come from two spots. They're going to come from new demands for new projects and others transitioning from short reads to long reads because the economics are such that they can see the whole picture. for economics that they can afford at a scale they can handle. So I think there's plenty of samples in the world for us to go after, and we'll see how that transitions. And as you said, right at the beginning, that's not really the metric. It's really when you look out four quarters from launch, let's say, how are we doing at that point? Hopefully that helps a little, Dan.
spk06: Yeah, definitely. And then maybe just one other, you know, we can look at, what the RS to S1 and S1 to S2 happened, but in terms of the number of placements that have occurred and the pull-through that's occurred, but you talk about a whole new trajectory for the company. I guess it's a long way of saying, you know, when we look at the growth in the install base and how each successive box, you know, expanded that install base by, you know, kind of by a factor, maybe one and a half, two-fold, Is it fair to say like maybe the old playbook, you throw it out the window because now you're at a point where you really are, like maybe it's nonlinear, like you're tapping into new markets and new opportunities that you really couldn't penetrate even with the RSC S1 and the S2?
spk05: Yeah, I do think that it is a new playbook for sure for a couple of different reasons. The first reason is that we spent the first part of my tenure here building out a new commercial infrastructure that is prepared to hit the whole market immediately as opposed to what the company has done in the past. I think that can't be underestimated. All of this strategy, all of this is very consistent with the strategy that I've laid out for everyone from the first day I got here was build a commercial infrastructure, build a multi-product portfolio, and then collaborate with others really well so that you could demonstrate the power of hi-fi. This is just another part of that. I fully expect the commercial organization to leverage that to give us a stronger inflection than has happened in the past. I do also think that the market itself is so much bigger than it's ever been and the interest in HiFi in particular because it is so accurate and provides all of the benefits of completeness and structural variation and epigenetics, which are all going to be really important to disease research and translational research into actual clinical application where we get that long-term durability. And so, yeah, I do think you've got to change the playbook because we've changed the company pretty significantly.
spk06: Great. Thanks, Christian.
spk00: Yeah.
spk03: The next question comes from Kyle Mixon with Cantor. Please go ahead.
spk07: Hey, it's Kyle Mixon from Canaccord. Thanks, guys, for the questions. I guess just starting first with the fourth quarter and then going to the new products. So on 4Q, just any qualitative comments, Christian, on customers that were in your 4Q or even like 1Q23 SQL to order funnel that you think like have converted to Revio or like will convert? and you pull guidance, so the fourth quarter could be strong, could be light, we don't really know for sure, I guess, if there is a shortfall, how much of that do you expect will be the macro pressures versus delayed instrument purchases?
spk05: Yeah, great question, Kyle. I think I'll start with the kind of the how does our fourth quarter funnel look today versus it did two weeks ago? And I would say that Revio has, you know, everyone is going back to see if they can find the additional capital, or many people are trying to find the additional capital so that they can purchase Revio. I think there is an impact there. There still is SQL 2Es in the funnel that we expect to close in the fourth quarter. We're pretty confident we'll close as SQL 2Es, not Revios. Whether they get across the goal line every quarter is a new adventure. But we're seeing kind of a base level line of demand for SQL 2E, but obviously predominant demand for Revio. We've got lots and lots of quotes out there already. It's a real testament to our commercial operations group. They were ready to go as soon as I got on stage. at the Novo and we were quoting effectively that night already, which was pretty cool. When I think about Q4, Q1, we're doing all this under a pretty negative macro backdrop. We still have inflation fears and interest rates have gone up a lot, so people that are leasing their systems, that's getting more expensive for them. Europe continues to be challenged just all around. As Susan pointed out in her remarks, America's in Q3 wasn't really a great quarter for us in Q3 for principally macroeconomic and kind of the whisper that new products were on the horizon, and so we had to manage that. We knew that day was going to come. And we felt very strongly that if we could announce the new products early in Q4, that would give people time to get their budgets ready for next year. So there was a lot of strategy behind figuring out how to do this in Q4 if we could. And so that's where we are. I think I kind of answered your question in a pretty circuitous way, but it is a combo of macro factors still going to be overhanging us, I think, you know, well into next year. I don't really see that. The one bright spot is I do think China is starting to open back up. You know, we talked about strong consumables there, and there's definitely strong demand for Revio in APAC, no question about it. So we'll see how that goes.
spk07: Okay. That was a great question. Thanks for that. And, you know, at ASHG, there was a lot of excitement and demand, I guess, for Revio and Foranza. Based on the last few weeks since the announcement, can you just talk about like the customer types that you think Revio has unlocked kind of like beyond the legacy SQL 2 user base? And with respect to the synergies with Onso, like how does the dynamic that I just kind of mentioned, like how can I help you get in the door there? So are any of these incremental customers like obvious users of a platform like Onso that wouldn't have been a touch point for you previously?
spk05: I think it's a little bit of everything. Basically, we're just broadening our reach and our footprint pretty generally across the space, but I can think of specific examples of population scale programs that are either underway or being contemplated now that, wow, Revio should be a bigger part of that than they ever thought maybe PacBio should be, or if we'd be even in the in the game at all. So I would say that's one really exciting area. I do think that, you know, kind of continued translational research in rare and undiagnosed disease, this gives better price points, faster turnarounds, you know, better, more data. And so I think that there's real opportunities there. And we have had a lot of customers, you know, ask us about, you know, two things, the Revio SQL 2E bundle, because that's a short-term program that we have, so people can get into SQL 2E. We've had some interest in that, but also interest in the Revio Onso bundle. And what's cool about that is that at list price, it's still cheaper than some of our competitors' larger systems. and gives you best-of-breed capabilities in long and short reads. And I don't think that's lost on customers. I think they have a view of, wow, if I can get best-of-breed solutions from one company, that it's actually a pretty intriguing opportunity. We'll see how it actually plays itself out as we get on so closer to actual shipments, but there definitely is a lot of excitement about that.
spk07: Perfect. Okay. Thanks, Christian. Appreciate it.
spk05: Yeah, thank you, Kyle.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.
spk08: Thank you. As a reminder, a replay of this call will be available on the investor section of our website. Thank you for joining us. This concludes our call today, and we look forward to seeing you next week at our Investor Day in New York. Thank you.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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