Pacific Biosciences of California, Inc.

Good day, and welcome to the PACBio first quarter 2023 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 touch-tone sign. Please note, this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of IR. Please go ahead.

Thanks, Chas. Good afternoon, and welcome to PACBio's first quarter 2023 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call. a copy of which is available in the Investors section of our website at www.pacb.com or as furnished on Form 8K 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 financial guidance, our REBIO and ANSO systems, and their commercialization plans, the future availability, uses, accuracy, coverage, advantages, quality, or performance of or benefits or expected benefits of using PacFile products or technologies, including our Revio and Anzo systems, and expectations with respect to customer demand for our products and technologies and growth in our business. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially than those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we file with SEC, including our most recent forms 10-Q and 10-K, and our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements, except as required by law. We will also present certain financial information on a non-GAAP basis during the call. The non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under 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 forecasts 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 press release. In addition, please note that today's call is being recorded and will be available for audio replay on the investor section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call. Finally, we will be hosting a question-and-answer session after our prepared remarks today. We ask that analysts please limit themselves to one question only so that we could accommodate everybody in the queue. With that, I will now turn the call over to Christian.

Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today. Last October, we unveiled Revio, a long-range sequencer that is 15 times more powerful than our previous generation sequencer. The system enables researchers to analyze what we believe are the most complete genomes in the industry, with paradigm-changing scale and economics. And as we saw in Q4, these features captured the imagination of scientists and researchers across the community and we started 2023 with a backlog of 76 systems. In March, we began shipping the Revio system at scale to customers around the world. I'm pleased to say our launch of Revio is progressing extremely well and is ahead of our targets. The demand for our new system continues to be robust, so much so that orders for Revio in the first quarter outpaced our shipments of Revio, resulting in a net increase of instrument backlogs. This sets us up favorably to deliver on our growth targets for the rest of 2023. During the first quarter, we delivered 32 Revio systems, surpassing our expectations and demonstrating that our robust manufacturing capabilities can scale and deliver on new instrument launches. With Revio manufacturing capacity scaling up in the first quarter and customers beginning to ramp down SQL 2e and 2e Consumable spending, PacBio still delivered record revenue of $38.9 million in the first quarter. The initial customer reception of Revio, its robust field performance, and our ability to scale manufacturing has given us the confidence to raise our full-year guidance. We now expect revenue to be $170 million to $185 million for the full year, or 33% to 44% growth year over year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total HiFi capacity in the market for our cumulative SQL 2 and 2E install base. This is extremely important for our growth as the increased demand for long read sequencing is clear. And I believe our customers will ramp and fill their sequencers with both new projects and existing samples that may have been sequenced using other short read technologies. Before I move on, I'd like to congratulate our global service and support teams. They were essential to the successful launch of the platform. I'm happy to report that all 32 instruments have been installed in all regions and have completed their first sequencing runs. Additionally, the platform's early field performance has exceeded our expectations. For runs with sample libraries that are 15 kilobases and higher, our customers average above 90 gigabases of output per smart cell, with many customers exceeding 100 gigabases per smart cell. That's 400 gigabases per 24-hour run on Revio. To put that in perspective, SQL 2E generates just 30 gigabases of sequence in 30 hours. The strong early field performance has given us the confidence to accelerate some shipments in April, and we are now actively shipping instruments according to our manufacturing plan. I'd like to take another minute to discuss the composition of customers who have already received Revio. They are a diverse group that spans 10 countries and includes commercial service providers, academic core labs, children's hospitals, pharma, and agriculture. These customers are expected to use their Revio from large-scale human genome projects and human disease research to plant, animal, and microbial research. The scalability and flexibility of Revio can power multiple omic applications and is expected to ultimately drive a diversified customer and install base as the product launch progresses. To highlight the specifics behind a few of our customers in the past quarter, we start with Grandomics, a longtime PAC bioservice provider based in China who successfully implemented Revio and is now preparing to run large-scale cohort studies, pan-genome projects, and biodiversity sequencing efforts. In its first sequencing run, the company reported an average smart cell yield of over 102 gigabases per smart cell, with median Q scores of Q30 or better. Additionally, the Australian Genome Research Facility, or AGRF, they plan to implement Revio to offer long reads at extraordinary scale and affordable cost to its customers. We've also shipped Revyo to multiple sequencing centers that plan to use Revyo to scale up long reads for the NIH's All of Us program. These examples were just a few, as many other early Revyo customers were willing to share their excitement for the platform and their initial experience on social media. I look forward to many more of these posts this quarter and into the future. Revio opens the door to large-scale genomics, and we are currently tracking several multi-thousand sample genome project opportunities. Revio has already enabled us to win some of these projects, and we are in discussions with several other potential partners. Revio not only gets PacBio a seat at the table for these large-scale programs, but it makes us a top competitor as we can deliver what we believe is the most complete, highest-value human genome. This means potentially more insights into genetic disease, a better understanding of cancer, and ultimately improving human health. We take pride in delivering our customers the high-quality, complete sequencing products and services. Delighting our customers, after all, is one of our core values and is a critical part of our mission. So I'm incredibly pleased with our initial results from our in-progress annual customer survey, showing a net promoter score of over 60, a significant improvement over last year, and higher than other sequencing providers have reported. Our survey closes in a few days, and I look forward to relaying more feedback. We've also continued to see interest from NUPAC bioinstrument customers as one-third of the RevioSystems ordered in the first quarter were from brand-new customers, and over one-third of the systems in our sales pipeline for the remainder of 2023 consist of new customers. In fact, our largest instrument order in Q1 was from a new customer, a European genomic testing lab looking to incorporate HiFi genomes to investigate rare disease cases. The customer ordered multiple systems, they indicated that one of the key factors to implementing Revio was the ability to sequence thousands of hyphi genomes under $1,000 a genome so that they can shift from short-read exomes directly to long-read genomes. Another new customer, a hospital in Canada, decided to reallocate a portion of its budget for a high-throughput short-read sequencer towards a acquiring a Revio and expanding its capabilities in highly accurate long-read sequencing. Revio is also reigniting legacy PacBio customers' interest in leveraging long reads, as Weill Cornell Medical Center ordered Revio for their genomics core, which will be their first PacBio instrument since their RS2. Their team is looking forward to partnering with PacBio and has shared with us that they plan to move several active short read projects in applications like human whole genome, RNA, and epigenetics to Revio once their system is installed. In the near term, we expect most Revio shipments will be to existing SQL 2 and 2e customers, which is why we've been investing so heavily in expanding our install base over the past couple of years. Since the end of 2020, we have grown our SQL 2E install base by 150% and more than doubled our SQL 2 and 2E customers. This has helped set the foundation for a multi-year product transition. After our strong launch, we believe the customer conversion cycle to Revio still has a long runway, as only about one-fifth of our nearly 300 SQL 2E customers have placed orders for Revio. As we turn our focus to our groundbreaking short-read sequencer, Onso, I'm pleased to report that our beta program has been quite successful and our partners continue to sequence on their systems. We have recently enabled each site with our latest 2x150 paired-end chemistry, delivering increased sequencing robustness and reliability over our previous versions. Regarding its performance, we're excited to share that the beta sites are seeing output that achieves our commercial specification of 800 million paired N reads and regularly gets over 90% of the reads between Q40 and Q50. Our beta partners are running samples where low variant allele detection is critical, such as circulating tumor DNA and gene editing analysis. and they're looking forward to sharing additional data from these challenging data sample types. On the operational side, our manufacturing team is finalizing scale-up plans for ONSO. We've completed our first ONSO pilot manufacturing builds in-house, with the first runs going well. And on the commercial front, I'm pleased to announce that we've already received multiple ONSO orders as we continue to build our sales pipelines. We believe Onso is likely to be available for commercial shipment around the end of the second quarter. As one would expect, there's been a lot of attention on Revio and Onso platforms, but we continue to make great progress on improving the sequencing workflow. During the quarter, we launched our latest high-throughput nanobind extraction kits to enable fast, reliable, and scalable large fragment DNA extraction across blood, cells, and tissue samples. This new offering lowers extraction time to less than two hours, minimizes sample input, and eliminates the need of harmful chemicals or mechanical homogenization. The new high throughput protocol is automated for a complete walkaway solution, enabling labs to scale their PAC biosequencing. Also on the front end workflow, we partnered with Corteva Agriscience. We released end-to-end workflows that streamline DNA extraction through library preparation, enabling thousands of samples to be sequenced annually. Corteva received its first revios during the first quarter and is beginning to transition sequencing over to the platform. On the informatics front, we continue to develop the tools for researchers to make impactful discoveries. For example, some of the recent tools that we've developed include smart analysis to phase de novo assemblies target or trgt for tandem repeat genotyping and visualization paraphrase to help call highly homologous genes and h hi-fi cnv for identifying large copy number variants across the genome rolling out new and improved ways to interpret long read data and collaborating with third-party providers is a key pillar to our informatics strategy and will help further drive adoption of our platforms. In addition to making the workflow more accessible, we develop kits to power customers' research across various OMIC applications. In transcriptomics, our recently launched MASI kit has already been ordered by 100 of our customers since its launch late last year. MaSeq addresses transcriptomics and single-cell research, which are incredibly important and rapidly growing areas in sequencing. For example, in a preprint in March, researchers at UCLA and other institutions used PacBio IsoSeq to build a full-length transcriptome atlas of the developing human brain, mapping over 200,000 unique isoforms over 70% of which had never been detected before. This can allow us to understand better risk variances associated with neurodevelopmental disorders and help us reshape our understanding of brain development and disease. And then, just a few weeks ago in cancer research, another preprint described the first isoform resolution colorectal cancer transcriptomic atlas using PacBio IsoSeq to identify several hundred dysregulated transcript structures in tumor cells. Both studies used our legacy IsoSeq solution on SQL 2, but with new solutions like MaSeq and the expansion into bulk IsoSeq, along with the throughput of Revio, we can further enable these groundbreaking studies, which ultimately may translate into improved clinical research outcomes. With that, I'll turn the call over to Susan to discuss our financial results in more detail. Susan?

Thank you, Christian. As discussed, we reported $38.9 million in product, service, and other revenue in the first quarter of 2023, which represented an increase of 17% from $33.2 million in the first quarter of 2022. Interim revenue in the first quarter was $20.7 million, an increase of 33% from $15.6 million in the first quarter of 2022. The increase in revenue was primarily driven by the launch of Revio in the first quarter, which is sold at a higher ASP than our previous SQL 2 and 2E platform. We ended the quarter with an install base of 32 Revio systems and shipped six SQL 2E systems. Turning to consumables, revenue of $14.0 million in the first quarter grew 10% from $12.7 million in the first quarter of last year, with approximately 10% of consumable revenue coming from Revio systems and the remainder from other platforms and other consumables. We expect Revio as a percent of total consumables to increase throughout 2023 as we continue shipping Revio and customers transition to the new system. Finally, service and other revenue was $4.2 million in the first quarter compared to $4.9 million in the first quarter of 2022. From a regional perspective, America's revenue of $19.1 million was roughly flat compared to the first quarter of 2022, as the higher ASP and revenue offset a record sequel to 2E placement quarter for the region in the first quarter of 2022. As a reminder, Last year included 18 SQL 2Es delivered to the Broad Institute. For Asia-Pacific, revenue of $12.0 million grew 43% over the prior year. China grew approximately 40% year-over-year and posted its highest revenue since the second quarter of 2021 as customers in the region are taking to Revio and as the country recovered from last year's COVID-19-related lockdowns. Japan also showed strength as consumables continued to grow on top of its record consumable quarter in Q1 of 2022. Finally, EMEA revenue of $7.9 million grew 38% over the prior year period, with changes in FX rates representing approximately a 5% headwind in the region year over year. The region had its highest interest revenue quarter in over a year as customers like the Welcome Singer Institute Radboud University, and MBRU received their first revios to scale their long-read genome projects. Moving down the P&L, a GAAP gross profit of $9.8 million in the first quarter of 2023 represented a gross margin of 25% compared to a GAAP gross profit of $14.2 million in the first quarter of 2022, which represented a gross margin of 43%. First quarter 2023 non-GAAP gross profit of $9.9 million represented a non-GAAP gross margin of 26% compared to a non-GAAP gross profit of $14.3 million or 43% in the first quarter of last year. Gross margin declined year-over-year due in part to insurance mix as Revio insurance sold during the quarter had a lower margin primarily due to customer loyalty discounts provided and higher initial manufacturing costs. Additionally, Gap and non-gap gross profit in the first quarter reflect adjustments of approximately $3.5 million primarily related to excess consumables inventory resulting from a faster-than-expected decline in demand for SQL 2.2e consumables due to the product transition to Revio. This accounted for an approximate 900 basis point headwind on gross margin in the quarter. While we expect gross margin to expand during the remainder of the year, gross margin could fluctuate depending on the pace at which SQL 2.2e usage declines and Revio manufacturing is scaled. GAAP operating expenses were $101 million in the first quarter of 2023 compared to $91.7 million in the first quarter of 2022. Non-GAAP operating expenses were $88.7 million in the first quarter of 2023, representing a 4% decrease from non-GAAP operating expenses of $92.7 million in the first quarter of 2022. The increase in GAAP operating expenses primarily reflects an increase in the fair value of contingent consideration liability during the first quarter of 2023 of $12.3 million related to the milestone payment to Omnium shareholders. Non-GAAP operating expenses declined year over year, primarily driven by the transition of Revio from development to commercialization. Regarding headcount, we ended the quarter with 793 employees compared to 769 at the end of Q4 2022 and 774 at the end of the first quarter of 2022. Operating expenses in the first quarter included non-cash share-based compensation of $16.0 million compared to $20.9 million in the first quarter of last year. Gap net loss in the first quarter of 2023 was $88.0 million or $0.36 per share compared to a gap net loss of $81.5 million in the first quarter of 2022 or $0.37 per share. non-GAAP net loss was $75.5 million, representing $0.31 per share in the first quarter of 2023, compared to a non-GAAP net loss of $82.3 million, representing $0.37 per share in the first quarter of 2022. Turning to our balance sheet items, we ended the first quarter with $875 million in unrestricted cash and investments, compared with $772 million at the end of the fourth quarter of 2022. The change in cash reflects net proceeds from our public offering in January of approximately $189 million, less cash burned of approximately $86 million, which included our annual employee bonus payout and a prepayment for future inventory in the first quarter of 2023. As a reminder, we expect to pay the Omnium shareholders approximately $200 million in cash and equity dependent upon the achievement of a milestone in connection with the commercial shipments of the ONSO platform. Inventory balances increased in the first quarter to 62.0 million, representing 2.1 inventory turns, compared with 50.4 million at the end of the fourth quarter of 2022, representing 1.6 inventory turns. The increase in inventory primarily reflects purchases of Revio and ONSO instrument and consumables inventory. Accounts receivable increased in the first quarter of $29.6 million compared with $18.8 million at the end of the fourth quarter of 2022, while our DSO of 56 days declined in the first quarter compared to a DSO of 70 days in the fourth quarter of 2022. Turning to guidance, as discussed earlier, given the successful launch and positive customer reception toward Revio, we are increasing our guidance for 2023. We now expect revenue in the range of $170 million to $185 million, representing a growth rate of approximately 33% to 44% compared to 2022. The lower end of the range continues to assume a year-over-year decline in consumables as customers transition to Revio. The high end assumes consumable revenue is slightly higher compared to 2022. Service and other revenue is still expected to be lower compared to 2022. We continue to ramp up manufacturing capacity and expect to reach our planned production rate for 2023 during Q2. As such, we expect to continue to increase revenue shipments every quarter this year, and as a result, we expect revenue to be more weighted toward the second half. Moving down the P&L, we expect the 2023 non-GAAP gross margin, which will exclude the amortization of intangible assets, to be lower than our previously guided range of 36% to 40% due to inventory reserves in Q1, resulting primarily from the decline in demand of SQL 2 and 2E consumables due to customers' product transition to Revio. We expect margin expansion beyond 2023 as revenue placements will help drive a mixed shift toward higher margin consumables and higher volume and optimization drive lower manufacturing unit costs. We continue to expect non-GAAP operating expenses to grow less than 5% in 2023 compared to 2022. Additionally, we expect interest and other expenses to have a minimal impact on our full-year EPS as interest income on our cash and investments is expected to offset our interest expense from the convertible debt. We expect the weighted average share count for EPS for the full year to be approximately $255 million, reflecting the recent sale of common shares and shares expected to be issued as part of the omnium milestone later this year. I'll hand it back to Christian for some final remarks. Christian?

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

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you use a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. We ask that you please limit yourself to one question. If you have additional questions, you may reenter the question queue. And at this time, we will pause momentarily to assemble our roster. And the first question will come from Dan Brennan from TD Cowan. Please go ahead.

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

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

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

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

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

Hi, thank you for taking the question. And I echo on these really great instrument orders and placements here. I want to start off with the gross margin here. I know that you had some people that bought SQL 2 in year, like last year. I think they got a discount. And then I was just wondering here, how should we think about gross margins? When do we start to really see the leverage of the manufacturing? And as we get into 2024, maybe you roll off that discount and you're going to see higher ASPs and better gross margins. And then last one on the gross margin side, that $3.5 million of inventory coming off – Is that all the headwind in the guidance for this year, or is there more than that? And I think all those questions are probably for Susan, actually.

Well, I'll take a stab at starting, and then maybe we'll pass it to Susan. You know, first of all, the pricing strategy and launch strategy for Revio was really developed around the notion of delighting our customers and making sure that the transition from SQL to Revio was as painless as absolutely possible. Through lots of experience that we've had over the years, we know these product transitions are tough, and so we set up a loyalty discount program that says, You get X amount of discount if you bought a sequencer in 22, X minus something for 21, and I believe even for 2020. So we gave all of our install base a bit of a discount with the heaviest discounts being that in 2022. So as a result, the first 76 orders were virtually all discounted pretty reasonably. And that program ended in February. And so when we look at our financials and our projections over the year, we would expect a low watermark of ASP to be this quarter, Q1. And then Q2, Q3, and Q4, we expect ASPs to improve and then probably kind of normalize at their normalized rate. in the first part of 2024. So we think that's how ASPs are going to unpack themselves as we ship all of the systems, you know, out of our backlog. If you move to the gross margin and the charge, you know, the charge that we took in Q1 was really based on the consumable demand expectations for SQL 2. And so what I mean by that is we're seeing customers transitioned to Revio faster than maybe we had predicted, because these things are extremely difficult to predict, and we needed to make sure we had enough inventory and capability if the transition was slow or if it was fast. It seems as though it's happening faster than we modeled. And as a result, we took about a $3.5 million charge. Most of that amount is related to consumables. Back in Q4, if you remember, we did take a charge as well, and that was for the SQL 2 instrument. And so at this point, you know, we anticipate that we're through most of those excess inventory issues. And so, you know, we don't see significant, you know, material amounts of issue going forward, I guess is the best way to characterize it.

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

But the other thing, Susan, we probably should point out is that we expect this to be the low water market gross margins for this Q1 of being the low water market. for this year. Exactly. We expect it to improve quarter by quarter and then get the leverage like to talk about really in 24. Exactly. Yeah. So hopefully that answers your question.

And thank you. The next question will come from Kyle Nixon from Canaccord. Please go ahead.

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

Okay, Kyle, that's a lot to unpack. So first of all, and by the way, thanks for joining us, Kyle. The guidance, you know, you could see what we did was we still have a pretty broad range of guidance. And the reason why we have that broad range is really driven by the still trying to understand how fast the SQL to consumable decline affects us and how fast Revio ramps up. And so that's still a question mark for us tactically in the course of 2023 and our revenue performance for the year. The good news is that right now we see a lot of excitement and we see a lot of Revio ramp up. So if you look kind of into the future of the company, It bodes extremely well for us to grow our consumables, you know, significantly over the next several years and grow our gross margins like Susan was talking about before. So we left the range pretty wide because of that. We did increase the guide modestly. You know, we had a very nice quarter and a strong beat, and you're right. we raised by that amount roughly. And the thinking there is that, you know, we do see an incredible funnel continuing to build, and we do see continued opportunity to do, you know, to do really, really well this year. But we're also cognizant of, you know, there are a lot of macroeconomic factors lingering out there, and we don't have a crystal ball. And we figure we had great performance in the first quarter, We see very strong demand for the second quarter, which gave us some confidence to raise here. But it is the first part of the year. And, you know, what we want to do is see how the year unfolds. And if there's opportunity to clarify the guidance on the high end further over the course of the year as we get deeper in, we will. But it was the first quarter. It was a great result. I'm really proud of the team. The demand curve continues to look strong. The order book continues to look really robust. And so, you know, we definitely see a lot of opportunity this year. But right now we're just, you know, we're just taking stock of the fact that we had a great Q1, and we'll see how the rest of the next few quarters unfold. Let's see. Did I get all of that? So, you know, as I said before, we did have more than 32 orders in Q1. You know, the reality is our objective is to be shipping much more than that or getting orders for much more than that on a quarter-by-quarter basis. But the orders in any particular quarter are going to, likely be variable dependent on a lot of different factors. And so I think, you know, when you look out towards the remainder of this year, you know, our objective is to, of course, do better than what we did for orders in Q1. But it may be lumpy from quarter to quarter, but on balance, you know, I see that growing over the course of the year and into next year.

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

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

Yeah, Teja, thank you for the questions. So the pause was quite modest, quite frankly. We were excited to continue shipping because the system's performing so well. But the key learnings were, you know, there were some software issues that any launch will typically have. So we did some patches for bug squashing, which, you know, are mostly behind us now. We also just wanted to see, you know, how the first runs would be going in the field. And as I've said, you know, probably too many times already on this call, the runs have gone really well. And we're seeing, you know, we're seeing above spec output generally across all of our customers. We are seeing, you know, one of the challenges, I guess, if there was one I would point out, is that the loading characteristics of loading your DNA onto the smart cell to get the optimal performance out of the 25M smart cell is a little bit different than the 8M. So our customers have been getting up to speed, basically, for their sample type or their application, optimizing the amount of DNA loading that has to happen. So that's an area where, you know, we probably have learned a little bit and perhaps can put some new processes in place to make that better. And particularly as we scale to even higher density smart cells down the road, you know, we'll take that learning and implement it into our development programs. So those are Those are some of the things. You know, on balance, the launch is going extremely well. It's actually been excellent. And I think customers so far are pretty darn satisfied. We're still going to have run failures. Run failures are at our target spec right now, which is good. We actually think we can do better. And over the course of this quarter, we'll make further enhancements to the platform of to decrease run failures. But, you know, they're really a very small portion of all the runs that have hard failures at this point. So, we launched the system in a very, very robust way. With respect to Max's pull-through and early insights, you know, the truth is there's not enough run data out there to even, you know, glean those insights. The only The only data, so to speak, is the enthusiasm of the customer base. And they're, you know, that they have been buying their consumables probably faster than I expected, which is good. And they are running their systems, getting into, you know, most of the time for the higher throughput labs, what they'll do is they'll run the systems in kind of development mode until they really, lock the workflow down, and then they'll really scale up. And so we're seeing that happen with our higher throughput customers, which is encouraging. And, you know, people starting to set target dates on, hey, I'm going to start my full scale up on this date or that date. So those are all pretty good. But we're not going to really have any, you know, fundamental insights. The one thing I would say is you kind of mentioned a two-year time horizon to potentially get to kind of the optimal throughput, you know, or pull through for a particular customer. First, I think that number is going to be highly variable amongst the customer base. But more importantly, you know, I think that ramp will be much faster than two years. I think we should be thinking kind of in the, you know, I don't know, somewhere between 12 and 18 months to where you start to see that increase. So hopefully that gives you a little bit of color there. And then lastly, on improving the process up front for, you know, automation, we do – the system today is fully automated. We do have protocols. The nanobind was the latest in, you know, improving workflow for high throughput. But we – you know, the biggest bottlenecks are in shearing and in – size selection, and we, you know, we continue to innovate and work on new ways in which we can do that. The, you know, the overall sequencing workflow isn't much longer than, you know, short read technologies, and so it's not really a major, the time is not really a major consideration. It's really just making sure that it's automated. so that you're able to walk away, get high-quality libraries, put them on the sequencer. And with the way we designed Revio is you can load your next run at any time while the sequencer is running. And so to really maximize the capability of the sequencer, you could load the sequencer every day and basically run the sequencer 24 hours a day, seven days a week. Yeah. That's what we're focused on, you know, continuing that. And then, as I said, I guess I'll go one step further. You know, on the back end, we continue to launch lots of new tools to help drive sample throughput through the sequencer.

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

Hi, thanks for taking the question, and congratulations on the quarter as well. I was curious, Christian, in terms of it's really nice to see the RevU install base already up and running very well. I'm just curious if there are differences in terms of how quickly the customers are ramping up between the existing SQL customers, HiFi users, versus new to TACBio customers. And then, you know, including the customers achieving performance characteristics above your expectations, if there are any differences between new users versus existing users. And also, just on so, if you are seeing kind of the orders related to bundling with the review at this point, thank you.

Yeah, great. So, with respect to the, you know, with respect to new versus existing customers, You know, the workflow is essentially the same for SQL 2 to Revio, and that's a real benefit of Revio. And so we are seeing the existing SQL 2 customers typically can get ramped up a bit faster than the new customers. But the system has a lot of innovations to make it easier to use relative to any product that we've ever had in the past. And I think that will help our new customers make sure they get very high-quality DNA out of the gate using our nanobind technology and then get those high-quality samples onto the sequencers. And so I do think the ramp for new customers will be longer before they're kind of at full capacity, probably, I don't know, 30%, 40%, 50% longer maybe. But I don't think, given the ease of use of Revio, I don't think it's going to be, I don't think it's going to really be that onerous, quite frankly. It's still a bit early, but that's the early experience. With respect to Onso, you know, it is really interesting. Lots of conversations going on about bundling. We've had orders, you know, but we also had orders of single Onso systems, you know, straight out of the gate. And It's really exciting to see the demand curve and the power of our sales channel starting to ramp up. And so now we're finishing the late stages of development, getting ready for manufacturing at global scale and full commercialization. And our target date is by the end of the quarter, like we've been talking about, and I think it's going to be right there or right around there, and I think we're going to have a lot to talk about with respect to Onso, which is, you know, when you think about it, launching two major platforms in the same year with a little company like PacBio is a pretty significant task, and when we get it done, hopefully a pretty significant achievement. So look forward to telling you about it more on our next call after hopefully we're shipping the product and then it's getting out in the wild.

And thank you. The next question will be from Julia Kim from J.P. Morgan. Please go ahead.

Hi, good afternoon, and congrats on the strong quarters. Kristina, you mentioned on the prepared remarks about POPC programs that are being brewed in the pipeline. Obviously, we appreciate the strength at the Broad for all of us that you mentioned, but could you give us more color on the other POPC programs and where we are in terms of discussion and the cycle? And then regarding the RevioMix, a third being from short-read users, is that a positive surprise to you? How are you thinking about this mix going forward as probably, you know, both the cost on both the short and long reset continue to go down?

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

And thank you. The next question is from John Sauerbeer from UBS. Please go ahead.

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

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

And the next question will be from Ross Osborne from Cantor Foods. Gerald, please go ahead.

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

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

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

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

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