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spk02: Hello and welcome to the PACBio fourth quarter 2022 earnings 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 from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Todd, please go ahead.
spk08: Good afternoon, and welcome to PACBio's fourth 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 on the investor section of our website, www.pacd.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, The future availability uses accuracy, coverage, advantages, quality or performance of, or benefits or expected benefits of using PacBio products or technologies, including our Revio and Onzo systems. 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 these products. We refer you to the documents that we file with the SEC, including our most recent forms, 10Q and 10K, 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. During the call, we will also present certain financial information on a non-GAAP base. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. 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 historical U.S. GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the items indicated in our 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 so that we could accommodate everybody in the queue. With that, I'll turn the call over to Christian.
spk04: Thank you, Todd. Good afternoon and welcome to our fourth quarter results and business highlights call. Thanks for joining us today. We have a lot of exciting news to share and I'll kick things off with an update on our performance in the fourth quarter and 2022. I'll then delve into some exciting developments we've seen in the past few months and wrap up with an update on our market segmentation. Susan will then provide a more in-depth look at our financial results and our guidance. But first, a quick recap on Revio, our most transformative long-read sequencer to date. We are just a few weeks away from broad commercial availability of Revio, which is scheduled for next month. Currently, we have dozens of instruments on the manufacturing floor in our Menlo Park facility, and at this point, we don't see any serious supply chain constraints. As a result, I expect that we'll ship at least 25 Revio systems to customers prior to the end of the quarter. We will continue our manufacturing scale up through the second quarter, and I believe we will be at our planned production rate for 2023 by the end of Q2. This is good news as the Revio platform enables our customers to take on projects in the thousands to tens of thousands of samples. With this scale, we believe Revio will be a game changer for scientists and clinical researchers. What would have taken years or even decades with long read sequencing in the past can now be completed in a fraction of the time and cost with the Revio platform. For years, the scientific community has relied on short-read genomes and exomes, yielding valuable insights into the human genome. However, despite millions of short-read genomes being sequenced, much of the genome remains unactionable today and our understanding of our 20,000 plus genes and their role in driving disease is still quite limited. Further, We now know that phenotype is not solely determined by genes as mutations in non-coding regions can cause certain cancers. Our understanding of the impact of methylation on genetic disease is in its earliest stages, and we also recognize that the importance of both sequence length and accuracy in understanding disorders caused by tandem repeat expansions. It's clear that to better understand the human genome, researchers must be able to interrogate its full complexity with high accuracy. We expect that sequencing with the Revio platform will provide researchers with the most complete and accurate view of the genome in a single assay. With Revio, researchers will be able to interrogate the genome from telomere to telomere, obtain phasing information, structural variation, epigenetic profiles, And of course, single nucleotide variants, all at the scale and affordability required for large projects. The early excitement around Revyo and the immense possibility for genomics support our belief that we can grow our revenue towards our goal of a compound annual growth rate of 40 to 50% through 2026. As we work to achieve our revenue growth targets, we see 2023 as a year of product transition. We expect many SQL 2 and 2E users will migrate over to Revio over the course of the year. These transitions are difficult to precisely predict, and as a result, we may see some temporary variability with respect to consumable revenue. On the instrument side of our business, we expect to see continued strength for Revio throughout the year. Additionally, we do expect to place a modest number of SQL 2E systems, and of course, Onso, our short-read sequencer, remains on track for commercial shipment in Q2 of 2023. As a result, our initial guidance for 2023 is that we expect to achieve between $165 to $180 million in revenue, which represents growth from 29% to 40%. Now, turning to our results. In the fourth quarter, PacBio achieved revenue of $27.4 million. a 24% decrease compared to the previous year's quarter. The decline in revenue was primarily driven by the announcement of the launch of Revio in the fourth quarter, which impacted orders and shipments for SQL 2E. We delivered 18 SQL 2E systems during the fourth quarter, bringing our total install base to 512 SQL 2 and 2E systems as of December 31. However, what truly sets this past quarter apart is that we received orders for 76 Revio systems, a record-breaking start for a PacBio launch and far surpassing our expectations. We have seen a growing excitement around the potential of Revio as indicated by the positive feedback we have received from our customers. At the recent AGBT conference, many customers told us how Revio could help them scale their research and interrogate the genome at unprecedented levels. At the Plant and Animal Genome Conference in January, we saw a deep appreciation for the importance of hi-fi sequencing and the enthusiasm for higher output long-range sequencing in the community. We hosted a PACT workshop where researchers from Corteva, UCLA, and HudsonAlpha discussed how PACT biosequencing advances their work in agrigenomics, biodiversity, and plant evolution. We are thrilled to announce that the first Early Access Revio is en route to researchers at the Broad Institute. Over the next few weeks, the team at the Broad Institute will perform their first internal sequencing runs on the platform, and in March, we expect to begin full commercial shipments. The Broad has already ordered 10 Revio systems to scale long-read sequencing for programs like the NIH's All of Us program. To put that in perspective, 10 Revio systems has the equivalent sequencing power of 150 SQL 2Es. We look forward to supporting this project and more population scale research initiatives to come. While on the topic of all of us, I wanted to discuss a recent preprint from researchers involved in the program, which highlights the utility of long read sequencing. The authors noted that HiFi reads produced the most accurate results for both small and large variants and concluded that, quote, long reads have widespread value for generating complete and accurate variant calls, end quote. The study also showed that PacBio is best in class for calling variants even at lower coverage than other technologies. This supports our belief that even a PacBio genome at tenfold coverage can be more than sufficient for many research projects. At tenfold coverage, Arevio can sequence 12 human genomes in 24 hours, or almost 4,000 genomes per year, at a list price of approximately $330 per genome, with methylation included. The demand for highly accurate long reads is increasing as evidenced by the recognition of long read sequencing as Nature Method's Method of the Year. With innovative studies utilizing PacBio's long reads from the Vertebrate Genome Project, Telomere Consortium, and the Human Pan Genome Reference Consortium, we believe Revio can drive further discovery with its enhanced throughput and cost effectiveness. Our existing customers have also recognized the potential of Revio to accelerate their research. For example, Mohammed bin Rashid University of Medicine and Health Sciences, or MBRU, purchased Sequel 2Es last year and ordered multiple RevYos in the fourth quarter to sequence for a very large-scale research project in Dubai. And the Wellcome Sanger Institute, a longtime user of PacBio for plant and animal research, now plans to increase its use of long reads in human applications, such as single-cell transcriptomics and variant detection with the added power of Revio. Moving on to Onso, our beta program is in full swing at the Broad Institute, Corteva Agriscience, and Weill Cornell, each evaluating how Onso's extraordinary accuracy can benefit their various genomic applications. Feedback so far has been excellent, with one partner sharing that they've been extremely impressed by ONSO's levels of accuracy, and another saying how highly accurate reads will be transformative for many genomic applications, including oncology. We're pleased to announce that we're on schedule to begin commercialization of ONSO in the second quarter, with a launch specification of 400 to 500 million reads and 200 cycle and 300 cycle kits. The expected specification for accuracy of over 90% of the bases at Q40+, and the potential to reach Q50+, through improved library preparation, we believe ONSA will set a new standard in the industry. The system has a competitive list price of $259,000, with the 300-cycle kit listed at $1,995. We're collaborating with workflow partners across the short read ecosystem and we'll provide library prep conversion kits so that any current short read assay can move directly onto the Onso platform. Regarding its capabilities, we have validated Onso's performance through various testing methods, including the Seraseq cell-free DNA control with Agilent library prep and capture and our conversion kit. Internal results demonstrate that Onso is two times more sensitive in detecting variant allele frequency of 0.05% and is 1.4 times higher sensitivity even when applying duplex UMI's at four times the coverage with other short read sequencing technologies. These performance metrics highlight the exceptional value that Onso can bring to the market. offering high accuracy and sensitivity to meet the demands of various genomic applications, including cell-free DNA research. In addition to cell-free DNA, in collaboration with 10X Genomics, ONSO achieved 99.8% of the bases at Q30 or better for single-cell RNA reads, showing the potential use of ultra-high accuracy in single-cell workflows. We are dedicated to providing our customers with comprehensive and streamlined solutions for their sequencing workflows. This includes offering a range of tools and workflows that are designed to support their success, from automation to sample preparation and informatics. Our recent initiatives include expanding our MaSeq program to support new assays on the SQL 2 and 2e and Revio sequencing systems. These kits, which build on the success of last year's MaSeq Concatenation technology for single-cell isoform sequencing includes 16S and bulk isoseq and will be available later this year. Additionally, our bioinformatics team is continuously improving interpretation tools, such as the recently launched paraphrase tool that helps characterize the dark regions of the genome linked to spinal muscular atrophy. On top of our internally developed products and tools, we're partnering throughout the ecosystem to make it more plug and play. As such, we recently introduced the PacBio compatible program designed to make PacBio sequencing more accessible, which includes partners across all ends of the sequencing workflow from automation and sample and library prep to secondary and tertiary analysis tools. Moving on, I want to share an update on our internal market segmentation from the previous year. In 2022, human genomics was the largest portion of our business, accounting for nearly 40% of our revenue. Customers in this segment include GeneDx, who recently ordered a Revio to target difficult-to-sequence genes and sequence human whole genomes for rare diseases with previously inconclusive results. And Radboud University, has leveraged PacBio technology to make numerous genetic discoveries and plans to ramp up from hundreds to thousands of genomes using Revio. Beyond human applications, we expect Revio to be utilized in applied markets like plant and animal genomics, which made up about 25% of our revenue in 2022. In this market, customers like Corteva Agriscience are utilizing PacBio to study plant genomes and identify microbial infectious diseases that affect these plants so they can improve crop yields and drive agricultural sustainability. Plant and animal genomics also include research programs like the Darwin Tree of Life Project, which recently celebrated sequencing its 500th HiFi genome. The program aims to sequence 70,000 species of eukaryotic organisms in Britain and Ireland And we expect Revio to enable the researchers to progress towards this goal. Additionally, infectious disease and microbiology, which represented 20% of our revenue in 2022, includes customers like Bioengineering Lab, who plans to use Revio for metagenomics to discover and characterize communities of microbes for industrial and biomedical applications. About 10% of our 2022 revenue was from oncology applications, with PacBio's highly accurate long reads allowing researchers to uncover novel isoforms, fusions, and structural variants with exceptional accuracy. Looking ahead, we expect to address more of this large market with Onsos potential for extraordinary sensitivity in liquid biopsy applications. The remaining portion of our revenue comes from other and emerging applications. This includes gene editing and gene therapy applications. Finally, we are pleased with the support and interest from investors in our equity raise last month. In an upsized offering, we raised 201 million in gross proceeds, which will further bolster our ability to grow our business and drive towards our goal of positive cash flows during 2026. With that, I'd like to turn the call over to Susan, to discuss our financials and guidance in more detail. Susan?
spk11: Thank you, Christian. As discussed, we reported $27.4 million in product, service, and other revenue in the fourth quarter of 2022, which represented a decrease of 24% from $36 million in the fourth quarter of 2021. Interim revenue in the fourth quarter was $6.1 million, a decrease of 62% from $16.2 million in the fourth quarter of 2021. The decline in revenue was primarily driven by the announcement of the launch of Revio in the fourth quarter, which impacted orders and shipments for SQL 2e. We delivered 18 SQL 2e systems during Q4, growing the install base to 512 SQL 2 and 2e systems as of December 31, 2022. Turning to consumables, revenue of $16.7 million in the fourth quarter grew 11% from $15.0 million in the fourth quarter of last year and was a record for PacBio. SQL 2 and 2E consumables represented approximately 94% of our total consumable revenue in the fourth 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 fourth quarter was approximately 127,000. We expect SQL 2 and 2E pull-through to decline throughout 2023 as we begin shipping Revio and customers transition to the new system. Finally, service and other revenue was 4.6 million in the fourth quarter compared to 4.8 million in the fourth quarter of 2021. From a regional perspective, America's revenue of $12.0 million declined 36% compared to the fourth quarter of 2021, primarily driven by lower SQL 2 2E placements with the recent announcement of the Revio launch. Asia Pacific revenue of $10.2 million grew 23% over the prior year. The region continued to recover with growth from both consumables and SQL 2E system sales compared to the prior year period. With the launch of Revio, several customers also purchased the Revio SQL 2E bundle to progress their HiFi sequencing volume, with plans to further expand upon the receipt of their first Revio. Finally, EMEA revenue of $5.2 million was 43% lower than the prior year period, also primarily driven by lower SQL 2 2E placements. In addition, currency fluctuations in the pound sterling and euro drove a 7% headwind. In contrast, the region posted another record consumables quarter. Moving down the P&L, GAAP gross profit of $5.1 million in the fourth quarter of 2022 represented a gross margin of 19% compared to a GAAP gross profit of $16.8 million in the fourth quarter of 2021, which represented a gross margin of 47%. Fourth quarter 2022 non-GAAP gross profit of $5.3 million represented a non-GAAP gross margin of 19% compared to a non-GAAP gross profit of $16.9 million or 47% in the fourth quarter of last year. GAAP and non-GAAP gross profit in the fourth quarter reflects loss on purchase commitments and adjustments for excess inventory totaling approximately $7.1 million. primarily related to a faster-than-expected ramp in Revio demand, which resulted in a faster-than-expected decline in SQL 2 2E demand upon the launch of Revio. GAAP operating expenses were $92.2 million in the fourth quarter of 2022, compared to $81.4 million in the fourth quarter of 2021. Non-GAAP operating expenses were $87.6 million in the fourth quarter of 2022, representing a 10% increase for non-GAAP operating expenses of $79.9 million in the fourth quarter of 2021. Increased GAAP and non-GAAP operating expenses primarily reflect higher sales and marketing-related expenses. In terms of headcount, we ended the quarter with 769 employees compared to 771 at the end of Q3 2022 and 728 at the end of last year's fourth quarter. Operating expenses in the fourth quarter included total non-cash share-based compensation of $16.8 million compared to $17.5 million in the fourth quarter of last year. Gap net loss in the fourth quarter of 2022 was $84.4 million or $0.37 per share compared to gap net loss of $69.3 million in the fourth quarter of 2021 or $0.31 per share. Non-GAAP net loss was $79.6 million, representing $0.35 per share in the fourth quarter of 2022, compared to a non-GAAP net loss of $66.4 million, representing $0.30 per share in the fourth quarter of 2021. Now turning to our balance sheet. We ended the fourth quarter with $772 million in unrestricted cash and investments, compared with $834 million at the end of the third quarter of 2022. Our ending cash and investments exclude gross proceeds of approximately $201 million resulting from the sale of shares of our common stock in a follow-on public offering in January 2023. Inventory balances increased in the fourth quarter to $50.4 million, representing 1.6 inventory turns, compared with $43.5 million at the end of the third quarter of 2022, representing 1.9 inventory turns. The increase in inventory primarily reflects purchases of Revio and Onso instrument and consumables inventory. Accounts receivable decreased in the fourth quarter to $18.8 million, reflecting a DSO of 70 days, compared with $22.8 million at the end of the third quarter of 2022, reflecting a DSO of 71 days. Moving to guidance. For the full year 2023, we expect revenue in the range of $165 million to $180 million, representing a growth rate of approximately 29% to 40% compared to 2022. The lower end of the range assumes that a reduction in SQL II 2E consumables from a faster-than-expected ramp down more than offsets a ramp in Revio consumable revenue later in the year. The high end assumes consumable revenue is flat to slightly higher compared to 2022, and greater Revio shipments in the year. In both high and low ends of the range, we expect service revenue to decline compared to 2022 as customers decommission their SQL 2 and 2E. For the first quarter of 2023, we expect to ship at least 25 Revio instruments as we build and ramp manufacturing capacity. We expect manufacturing capacity scale through the second quarter reaching our planned production rate for 2023 by the end of Q2. Please note that with the annual guidance in place, we do not expect to share insurance backlog or order numbers on a regular basis going forward. Moving down the P&O, we expect 2023 non-GAAP gross margin to be between 36% and 40%, which will exclude the amortization of intangible assets. Lower margins result from a higher concentration of revenue weighted towards instruments with the early shipments of Revio at lower margins due to the combination of lower ASPs from customer loyalty discounts coupled with higher costs during a new platform launch. We expect margin expansion beyond 2023 and maintain our long-term guidance of 55% to 60% plus in 2026. We expect operating expenses to be in line with long-term guidance and therefore non-GAAP operating expenses will grow less than 5% in 2023 compared to 2022. We expect the weighted average share count for EPS for the full year to be approximately 255 million shares, reflecting the recent sale of common shares and shares expected to be issued as part of the Omnium milestone later this year. With that, I will turn the call back to Christian. Christian?
spk04: Thank you, Susan. During last month's JPMorgan Healthcare Conference, I outlined our strategic goals for this year, focusing on delivering results to our stakeholders. Our first priority is to drive widespread adoption of our Revio sequencer by converting existing SQL 2 and 2e customers and attracting new PacBio customers. We're off to a strong start with 76 systems in our backlog as of year end, and approximately 30% of our sales pipeline consisting of new customers as of year end. Second, we aim to demonstrate the unparalleled accuracy of Onso in customers' hands and show its ability to transform research in several genomic applications. As discussed, our internal data shows that Onso's accuracy can detect variants at far greater depth than SPS and beta partners are sharing that they're having an excellent user experience. Third, we're committed to continuing to develop our long read sequencing technology, including ultra high throughput and benchtop systems and a next generation SBB sequencer. This year marks the first step in our journey for offering multiple systems across the sequencing spectrum with Revio and Onso leading the way. Next, we will leverage the current infrastructure to drive towards positive cash flow. As Susan shared with our OpEx guidance, we're going to prioritize and focus on spending on the areas that matter the most. Finally, we plan to expand our partnerships across the ecosystem and workflow to increase customer adoption of SBB and HiFi. With the launch of the PacBio compatible program, we have a framework in place to onboard the best partners in the sequencing workflow. Our long-term goal is to exceed $500 million in revenue in 2026, and we believe that 2023 is the start of a multi-year growth story towards achieving this. I look forward to keeping you all updated on our progress throughout the year. And with that, Operator, would you please start the Q&A portion of our call?
spk02: Yes, of course. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the queue, please press star then two. As a reminder, in the interest of time, we ask that you please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question this evening comes from Kyle Mixon with Canaccord. Please go ahead.
spk05: Hey, Christian and Susan. Thanks for taking the questions. Yeah, hi. So I guess on the guidance, this is kind of the range of what we're expecting. Two questions about this, I guess, within my one here. So on instruments, does this kind of assume you're just straight lining the 25 revios in the first quarter? I'm just curious if you could kind of talk about, like, the cadence of the orders and the shipments and the rev rec going forward. And maybe, like, within that, like, you know, beyond the shipment bolus in March and the recommencement of the shipments in maybe, like, May or June, there's going to be probably, like, an assumption for instrument terms in the second half. So I'm just curious about that. that's for instruments on consumables, maybe just pull through dynamics for SQL two E, um, 127 K I think in four Q. I mean, how quickly could that decline? Could that be like 80 to 90 K by the end of the year? And I think you mentioned Susan Rebio pull through could be, you know, you could, you know, you're assuming some consumables there. What are you thinking about there? Curious about that. Thanks guys.
spk04: All right. A lot to unpack there, Kyle. And, and thanks. Um, I am back in the saddle. So, uh, I'm sorry I missed everyone at AGPT last week. But let's talk about the guidance a little bit and how we thought about it. You know, we do expect that, you know, on a quarter-by-quarter basis, revenues will improve throughout the year. You know, we don't give quarterly guidance on revenues. So I'm not, other than to say that I do think that you're going to see us grow over the course of the year and probably going to stop there. With respect to Revio shipments, You know, 25 is really just the start, and we're prepared to, you know, produce and ship more than that per quarter. We're starting at 25 because we want to make sure we have an incredible customer experience with these early shipments as we scale up. So I wouldn't assume that it's a linear, you know, a linear kind of outlay quarter after quarter after quarter. But I would say that 25 is a good starting point for us to really get the system out in the field and start to see how it impacts both consumables with SQL 2E, but also the utilization of Revio itself. With respect to the pull-through dynamics, as I've said a couple of times, we aren't going to know really what the pull-through dynamics look like for several quarters. And so The truth is we're not going to try to speculate or guess. What we do know is that some of our largest customers are early adopters of Revio, and so that will have, you know, our assumption is that they will use Revio and they will start to slow down the usage of SQL 2E. It may not go totally to zero with those customers, but it will certainly decline as they move to the you know, scale and cost effectiveness of Revio. And so, you know, that could have an impact on, and it's likely that it will have an impact on SQL 2E pull-through probably over the next couple of quarters. Where that ultimately settles out, you know, I think you quoted 80 to 90K. You know, we don't know, and we're not going to make a, we're not going to try to guess at that today. We're going to see how this unfolds over the course of the over the course of the year. I do think that Revio utilization will likely grow over the course of the year, particularly as we start to ship to the larger scale customers first. And then what we will see is we will start to see some sort of normalization of that. I suspect, you know, based on past experiences, it's probably going to take us three or four quarters to really see where that settles out. So hopefully, Kyle, that answers your questions and gives you a sense of how we're thinking about the guidance with respect to the instruments and consumables.
spk05: Yeah, that was great, Christian. I'll hop back in the queue. Cool.
spk02: The next question is from Julia Keen with JP Morgan. Please go ahead.
spk03: Hi, good afternoon. So in terms of the manufacturing capacity for Revio, you said it's 25 shipments in one queue and fully ramped up by two queues. So where do you think the supply will stand at run rate in the second half of the year? And then in terms of the Revio pull-through ramp, I believe you previously mentioned that you expect a barbell distribution in terms of the customer kind of in a volume. So is it fair to expect that, you know, the lower super customers will onboard later this year? Or do you think that's more of a 2024 and beyond dynamic?
spk04: You know, Julia, thank you for the questions. And it's good to talk to you. You know, first of all, thinking about the run rate on manufacturing, you know, the good news is that we have enough production capacity today to satisfy a very wide range of outcomes with respect to demand. And, you know, we are going to scale our production and get to kind of our steady state by the end of Q2. But that doesn't mean we couldn't scale further in Q3 or Q4 and beyond. But what we're trying to do is not put us in a situation where we produce a lot of instruments at one time and then reduce the steady state. We'd much rather be a little bit more, you know, kind of consistent over time because that's how we'll get the best efficiency out of the plant, and that's how we'll get the lowest COGS and improved gross margin. You know, part of Revio is not only the enablement of this new technology for our customers, but it's also for us to drive our gross margin improvement, both through the instrument itself over time, but also and especially because it can be a much higher pull-through instrument, which will drive product mix. And when we think about that barbell distribution, as you were talking about with respect to consumables, you're right that, you know, typically in these markets, you end up with a kind of maybe a bimodal distribution of very high throughput customers with very high utilization and then lower throughput customers. You know, our expectation is with Revio that, sure, the earliest shipments will probably be to the higher throughput and highest throughputs, and that'll probably be mostly through Q1 and even a lot of Q2. But we're gonna, you know, it's really important that we provide this technology to all of our customers. And so we're gonna try really hard to be, you know, to get some of our lower throughput customers, which we think will be the high throughput customers of tomorrow, the system as soon as we can. And of course, we're gonna serve our very large you know, customers and large projects because they really enable, you know, the next sets of large projects to come through to build the business. And so I would expect to see a pretty broad distribution of customers over the course of this 2023, and it'll continue on in 24.
spk03: Gotcha. That's very helpful. And just one follow-up on the SQL pull-through, if I may. I think you mentioned that, you know, there might be some near-term volatilities in the SQL utilization because there is an initial wave of, you know, inventory destocking. But then if customers' early orders aren't fulfilled, they might kind of, you know, have a rebound in utilization. I'm just curious, you know, has your expected or reasonable expectation of revenue supply constrained in that, you know, initial year been communicated to these customers in an attempt to kind of maybe smooth out their inventory management of legacy SQL 2 and how does that kind of tie to the best case and worst case scenario of SQL pull-through that's embedded in your guidance?
spk04: Yeah, so we have been very clear with our customers and we are, you know, one of the things we are trying to do is we are laser focused on our customers. It's one of our core values and helping them understand you know, timing of when they're going to receive Revio, when they, you know, utilization of SQL 2E consumable and 2 and 2E consumables. You know, we really try to work at the grassroots level, each customer, so that they can optimize, you know, their experience. Some customers that have ordered, you know, say recently, it's likely that they're not going to get their Revio for a while, so they're going to continue to run there are projects on SQL 2E, so we're going to want to make sure we help them manage that transition. And it could have, like I said in my prepared marks, there could be some variability or volatility around the consumable revenue as we go through this transition. The good news is that by the, you know, really by the end of the year, this volatility is likely behind us and we're, you know, we're scaling our utilization on Revio, and you're starting to see the consumable pull through from Revio. We're starting to understand what those numbers look like and have more sense. But the next few quarters, it is gonna be transition, and we're just managing that the best we can. The other piece of good news is that we've done a really good job on producing 25M smart cells, and we're in an excellent inventory position already. And if most of you recall, we actually completed the 25M Smart Cell over a year ago at this point. So we've got a lot of experience with it. Yields are already coming up in the manufacturing plant. And so, you know, our ability to supply the market at really any level of demand that we're kind of seeing is already in place effectively, which is super exciting.
spk02: The next question comes from Tejas Savant with Morgan Stanley. Please go ahead.
spk09: Hey, guys. Good evening. And, Christian, it's good to hear your voice. We missed you at AGBT, especially after the sun went down, as a lot of people told you, I'm sure. On the Revio first to kick things off, you've got 76 orders in backlog. You're shipping 25 here in essentially a month here. You've got the April pause as well, which Mark talked about at AGBT is not particularly impactful from a numbers standpoint. But could we actually see you ship all of the current orders and backlog by the end of the second quarter? Or do you see that as more of a third quarter or a mid-third quarter situation? And then my second question here is on Onzo. So first, easy one for Susan. What exactly are you baking into the guide for Onzo? Perhaps any color on the number of shipments here in the back half? And I think you showed really good data at AGPT. I think it was something like 600 to sort of 730 million reads, higher than your 400 to 500 target range. So what exactly remains to be done there over the next few months other than just incorporating some of the learnings from your beta users?
spk04: Yeah. Okay. A lot to unpack there, Tejas. Thank you for the questions. First of all, you're right. We had 76 orders in backlog at the end of December, but the truth is we have more orders in backlog than we did at the end of December today. So And the reason why I start by that is that the reality is that we expect to continue getting more and more orders over the course of the year. And so shipping the 76 by a certain amount of time, I would expect us to carry backlog for quite a while, actually, because I do think the order, the demand for the product is quite substantial. And so- You know, what we're doing is we're working to ship the 25, at least 25 units is what I said specifically, this quarter to get started. And then you're right, in April, we're still going to be manufacturing systems all through April. So it's not like, you know, when we say pause, all we're doing is making sure the field is, you know, that we're very satisfied with how customers are ramping up on Revio. It has nothing to do with, with anything other than that. And so it has exactly zero impact on our ability to deliver revenue in Q2. I just want to make that crystal clear, because it does seem like some analysts have really kind of drilled into that. And what we're focused on is having an incredible launch, and that's part of how you plan these things out to do it exceptionally well. And so, you know, we're not, you know, I'm not really going to say when the 76 gets all shipped. But what I am going to say is that, you know, I do expect us to run in backlog for several quarters this year. And that's partially because I think the order book is going to be very strong all year. And so that's how we think about that. Let's see. Talked about the pause. You know, with respect to what, I'll pass the guidance to Susan in a sec, but just a comment on the, so what do we have left to do? You are right, we've seen some great results from our beta customers with respect to the density. What we have to do now, we're really in the phase of, you know, making sure that the instrument, we can produce the instrument at scale, making sure that we can make sure the chemistry is hardened so that it can get to a broad diversity of customers, working on making sure we get production of flow cells right so that we can deliver to our customers consistently and at scale. And so it really is, you know, there's still some software work to do as there always is. So there is a lot of work to do still to get to full commercialization. But the good news is that you're seeing the chemistry starting to perform. You're seeing the densities improve and getting to commercial specifications. You're seeing the incredible accuracy even in the hands of our beta customers. So out in the field on customer samples, you're seeing that. So all of those signs are really encouraging for us. It'll just be about the ramp scale, finalizing the development, taking feedback from those beta customers and integrating it into the product. And, you know, part of this also is making sure that the Anso launch doesn't interfere with the Revio launch, too. We want to make sure that we do both launches exceptionally well because we think both products are, you know, critical products. to pushing the state of the community forward and allow us to really grow and take a leadership position in this community. And Susan, do you want to comment on Onso into the guidance?
spk11: Sure. So I think with that backdrop, we are super excited by the positive customer feedback on Onso, customer interest in terms of the Revio Onso bundle. But in terms of the year, this is a Revio year in terms of our guidance. I guess to provide some perspective in terms of ONSO, what is baked into our guidance is basically a modest number of ONSO shipments in the year, but it's not a material contribution to the overall revenue number, as this year, again, is mostly driven by revenue.
spk04: Yeah, particularly most of the growth.
spk11: Most of the growth, exactly.
spk02: The next question comes from Dan Brennan with Cohen. Please go ahead.
spk06: Great, thanks for taking the questions. I guess maybe I'll stick with one, but I guess a multi-parter if that's easier. In terms of consumables, it was really helpful to hear some color in the total guide about how to think about consumables at the high end of the guide. And while I appreciate the SQL 2E roll-off is a hard thing to predict, can you give us any more color within that guidance range, like what are the barriers on SQL 2E consumables? And then B, Christian certainly can appreciate that the orders didn't stop at year end. You know, you discussed 76 orders from 43 countries and 30% of those from new customers. That was as of the end of the fourth quarter. Can you just give us some color maybe about how the order book has evolved since early January? And I'll leave it there. Thanks.
spk04: Yeah, I mean, I think, you know, we're going to try to, I mean, realistically, we're going to try to stay out of you know, looking at backlogs and order books and this and that. But to color, you know, what's happened since year end, we've had two very, very, very successful conferences, the Plant and Animal Genome Conference, AGBT. And if anything, the funnels are strengthening the perspective, you know, lots of customers or many customers have actually run samples inside of our labs now in our in our applications labs. So the, you know, customers are getting more confidence around it really is what we say it is. And I think that's really exciting. And so the, you know, the funnel is, it continues to strengthen. It is a global, it is a global funnel and there are a lot of new customers. And I think that's one thing that's, that's really important to me is not only do we want to, you know, get all of our existing customers to scale up with Revio. But it is really important for us to show new customers and see these new customers get engaged with the technology. And so far, I think we've seen a lot of that internally, you know, with our customers. And perhaps maybe most interestingly is the scale people are starting to talk about is different than ever before in the history of PacBio. And so people are starting, people are contemplating, you know, 10,000 sample projects, 20,000 sample project, larger scale, large scale transcriptomics projects, large scale whole genome projects. And I think that's going to be, that's extremely encouraging to, you know, kind of prove out the thesis that we needed to get to higher throughput and we needed to get to uh, economics that enabled that through enabled scale. Uh, we already, and we continue to do it with, uh, with the best accuracy. And as that, all of us pre-print showed, uh, you know, quite frankly, uh, the, the, uh, the high, high five sequencing right now is the most accurate and most complete sequencer you can get. Um, and so that that's all been really well, I know that doesn't help you kind of build your model per se. but anecdotally it makes us feel a lot better. I didn't understand, Dan, your question really on guidance barriers on SQL 2. Maybe, could you ask that question again?
spk06: Sure, I think Susan talked about consumables at the high end of the guide would be flat to up, but that, I presume you were referring to total consumables, so Revio plus SQL? And I just wanted to clarify that, and if it was, I was just trying to think through on SQL itself, you know, within the guidance, any color on, you know, how we're thinking about SQL, you know, SQL 2E consumables at the high end and the low end of the guide.
spk04: Yeah. So, yeah, Susan was talking about the total, the total consumable number, which, which make the total numbers actually the hard number to predict, right? Because you don't know how fast, if it, how fast SQL 2 is going to decline and, You do know that Revio is going to accelerate, and it'll continue to accelerate throughout the year. But we don't really know yet how that will transpire exactly. And so that's why when we think about our guidance, we have contemplated that volatility in the range of different outcomes. I think that's probably the easiest way to put it.
spk02: The next question comes from David Westenberg with Piper Sandler. Please go ahead.
spk01: Hi. Thank you for taking the question. I echo everybody's sentiment when I said we really miss you at AGPT.
spk04: Thank you.
spk01: Let's start with the – I think you've got the number of 30% new to PAC Bio. Would you be willing to discuss whether they might be existing long read customers using maybe ONT, they're looking for maybe accuracy at a lower cost, or if this would be short read customers that really are looking for long reads for all that it offers and the kind of projects that they're looking at. Is there any way to describe that 30% of customers?
spk04: Yeah, you know, I don't have the breakout in front of me, so I can't give you kind of specifics. But the reality is that, you know, there has been a lot of conversations, and, you know, I'm getting the second half because I wasn't at AGPT, unfortunately. But at AGPT, there were lots of conversations where customers were, you know, kind of expressing their need to move to Revio and from their existing long read sequencing paradigm because they see the accuracy, because they see the completeness. And the other thing is they believe in the robustness of the platform that we bring to bear given their market experience with SQL 2E. And so we've seen that, but the predominant portion will still be short read customers moving to long reads. And what everyone has to realize is that virtually every lab that's doing sequencing has a short read sequencer today, or that's the predominant phenotype in the world. And what's happening is that they will bring a Revio machine into their lab, and they'll start to move projects away from short reads to long reads for exactly what you said, the benefits of completeness, structural variation, You know, being able to see phasing straight out of the gate without any tricks, epigenetics, you know, there's just it's just become so apparent that there's so much advantage to looking at long reads over short reads in most applications. that you're starting to see a lot of people start to make that switch and move forward. And I think you're going to see Revio machines sitting right alongside existing short read sequencers, and the Revio machines are going to be capturing more and more of the dollars in many different applications where we clearly have significant competitive advantage. And now we have the scale and the economics to to enable our customers.
spk02: The next question comes from Sungji Nam with Scotiabank. Please go ahead.
spk10: Hi, thanks for taking my question. I can totally appreciate that this is the year for Revio, but given the really positive feedback on Anso and also the really attractive bundle that you are offering, I was just kind of curious what your thoughts are in terms of the the attachment rate, if you will, in the outer years? And also, in order, what do you think might be kind of the biggest barrier in terms of customers, you know, really adopting Anso at this point? Are they looking for more data in, you know, comparing Anso to other short read platforms? If you could talk about those.
spk04: Yeah, I think you're right. There is a lot of excitement about Anso because you know, really for the first time in a very long time, there's significant differentiation in the short read space with Onso. And customers see that, they see the bundle pricing and offering that we have as something unique and no one else can, you know, provide that. And so, you know, it's exactly why our strategy of becoming, you know, the only company with highly accurate long and short read technologies is gives us the ability to talk to every customer in the space and really ask them what questions are they trying to answer and provide them solutions that answer their questions. And that's going to be really powerful, not only as we get out of the gate here, but over the next several years in particular. And what I think customers are going to be excited about is getting Odso into the lab to see what it can do, And then watching our ability to increase the power of the technology through increases in density, driving more reads per run, which would create more value than ever before. And it's really that differentiation. I think the barriers today are probably the biggest barriers. We have to get the product to market to be maybe a little tongue in cheek, but that's really what it is. I think that there's a lot of excitement around the project, we need to finalize the development, make it highly robust, and have an amazing launch. And that's really what we're going to do here over the next, you know, as we get Revio out the door and prepare for Onso. And then you're going to see us continue to focus over the second half of the year and into next year on how you integrate with bundles, how you increase the performance of both Revio and Onso, quite frankly. and then increase our value to the customers. And that's really the plan of attack here. I'm very enthusiastic about it. I mean, we are, from a guidance perspective, we are taking a modest view because we want to make sure we get this right. We know that there's a lot of choice in the market. We believe we have a highly differentiated offering. But we also want to be practical and responsible about how we give our financial guidance.
spk02: The next question is from John Sauerbeer with UBS. Please go ahead.
spk07: Hi. Thanks for taking the question here. Maybe just a question for Susan. And on the greater than 25 shipments in the first quarter, do you think you can recognize those in revenue? Or could you remind us how the revenue recognition is on the shipment? And then follow up. You know, it sounds like the road for the Revio has been shipped out the door. Have they actually received it and up and running? And if so, any early feedback on the installation there and software? Thanks.
spk11: Yeah. So, John, at week 25, those will be recognized as revenue because the predominance of our shipments are the predominance of the instruments we deliver to customers is recognized upon delivery. So that is meant for revenue recognition in the quarter.
spk04: And then on the Revio going to the Broad, it was, you know, we sent it via truck. So the truck's arriving, no, I think it's arriving actually in the next couple days. Yeah. And so the truck will arrive and they'll install it next week. And then they'll, you know, they're very, very, capable, so I wouldn't be surprised if before the end of the month we're starting to see runs come off of the machine, assuming the installation goes well.
spk02: The final question this evening comes from Ross Osborne with Kantor Fitzgerald. Please go ahead.
spk00: Hi, thanks for speaking to me. I know it's been a long call, so I'll be quick. So just curious to hear your view on China. Just with the borders opening, but cases increasing, relatively strong instrument demand, but any insight into overall activity would be appreciated.
spk04: Yeah, so right now, overall activity has been pretty good. We had very strong demand for Revio in China, and I think that's going to you know, that will help us with our Chinese revenue in the quarter. You're right, when I give guidance, one of the things I do worry about is, you know, how does China play itself out this year? Because we all, none of us really know how that will completely play itself out. What buoys my confidence is the fact that we have a new product cycle and a lot of enthusiasm and a lot of orders are ready for Revio, so that will help. But You're right, you know, potential closures, COVID, those kinds of things. There's still headwinds that we face in the market. And, you know, when we were thinking about our guidance, we are trying to think through, you know, through that there still are headwinds sitting out there that, you know, that we're concerned with and watching. But so far, our view on China right now is that, you know, we expect it to be operations as normal. We will be shipping some Revios to China this quarter, and so that will help and get those customers started. But right now, there's nothing extraordinary to report, but we are watching, as is I'm sure all of our competitors and peers, how that will unfold over the next several quarters.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.
spk08: All right. Thank you all for joining us today. We look forward to connecting with many of you later this quarter at our several investor events and updating you on our progress this year. As a reminder, a replay will be available on our website. And this now concludes our call. Thank you.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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