Pacific Biosciences of California, Inc.

Good afternoon, everyone, and welcome to the PACBio third quarter 2023 earnings conference call. All participants will be in a 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 and then one. To withdraw your questions, you may press star and two. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Todd Friedman, Senior Director of Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good afternoon, and welcome to PACBio's third 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 on the investor section of our website at www.pacb.com. or is furnished on form 8K available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer, and Susan Kim, Chief Financial Officer. On today's call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance, and others, including expectations with respect to our growth potential, instrument, and consumable sales, and GAAP and non-GAAP growth guidance. You should not place undue reliance on forward-looking statements because they are subject to risks and uncertainties that could cause our factual results to differ materially from those projected or discussed. We refer you to the documents that we file with the SEC, including our most recent Forms 10-Q and 10-K and our recent press releases 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 basis. 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 the tables within our earnings release. In addition, please note that today's call is being recorded and will be available for 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 only so we can accommodate everybody in the queue. I will now turn the call over to Christian.

Thank you, everyone, for joining the call today. PacBio achieved another milestone in the third quarter as we grew revenue by 72% year-over-year to $55.7 million, exceeding $50 million in quarterly revenue for the first time in PacBio's history. All three regions, again, posted record quarterly revenue. In the third quarter, we shipped 52 Revio instruments for revenue, which is a record number of instrument shipments in one quarter. This brings our installed base as of September 30th to 129 RevYo systems. We also shipped our first Onso units in the third quarter. I'm pleased with our order momentum and broad customer interest in this new platform. We've received orders from 10 countries across various customer and application types and expect to continue ramping up shipments in the fourth quarter. I look forward to sharing the installed base for the Onso system at a later date as the platform matures and we further scale manufacturing. We also recorded consumable revenue of $16.9 million in Q3. In just its second full quarter on the market, Revio consumables of approximately $9.3 million surpassed SQL 2 and 2E consumables. This ramp was faster than we had originally expected. We shipped well over 9,000 Revio Smart Cells in the quarter, For context, it took SQL 2.2e 11 quarters to surpass 9,000 cells, which further underscores customers' rapid adoption and the elasticity of the new platform. In Q3, Revio utilization increased compared to the second quarter. Our customers used more cells per installed system as they began their ramp into production. In fact, the total data output for the Revio fleet in the third quarter already surpassed the output from the total 500 plus sql 2 2e fleet at its peak the increased instrument utilization resulted in an annualized consumable pull through of 483 000. although it is exciting to see our customers generating more data than ever before i would also say that we are still early in our launch cycle and we do not know if this level of consumable pull through will represent the long-term pull-through of the Revio platform. The continued uptake and adoption of Revio is allowing us to increase our 2023 revenue guidance again this year. We now expect full-year revenue to be between 195 and 200 million, representing 52 to 56 percent growth over 2022 and above the long-term targets we set out at our investor day last November. One of the most important metrics we're tracking for Revio adoption is new customer uptake, as it shows how the platform enables more and more users to migrate from other sequencing technologies onto PacBio. Again, we're pleased to report that over 40% of our Revio system orders in the third quarter were from new PacBio instrument customers. Additionally, we continue to expect a multi-year opportunity for existing SQL 2 customers to migrate over to Revio, as less than 30% of the approximate 300 SQL 2 and 2e customers have ordered a Revio to date. Our new customers include Helix, who ordered a Revio system to strengthen its offering by incorporating native and accurate long reads into its population genomics business, which currently provides an end-to-end sequencing platform for several large-scale programs across the United States. In addition to new customers purchasing the platform, some of our existing customers are already expanding their Revio capacity, like Children's Mercy Hospital in Kansas City, which has recently shared how Revio has enabled them to consolidate tests, increase efficiency, and improve solve rates while accelerating turnaround time. Further, the hospital shared that they can achieve results in just two weeks with five-base HiFi sequencing compared to months using multiple legacy tests. Similarly, we are also collaborating with GeneDx and the University of Washington to study the capabilities of HiFi long-read whole-genome sequencing to improve our ability to understand genetic conditions in pediatric patients. We believe that with HiFi and Revio, our customers may be able to consolidate a menu of different tests onto one integrated, complete, long-read genome. We continue to see strong momentum in the genetic disease segment for HiFi sequencing, as other children's hospitals implemented Revio during the quarter. This includes another leading institution in the Midwest that upgraded from SQL2E to scale whole genome sequencing for its rare disease cohorts, and to implement isoseq to further its research in pediatric and adolescent cancer patients. In large-scale genomics projects, we were pleased to see initial data from researchers at Mohammed bin Rashid University of Medicine and Health Sciences, or MBRU, in developing an Arab pangenome reference, which uncovered over 100 million base pairs of novel sequences compared to other recent pangenome references. PacBio HiFi was a key contributor to unlocking this new data, which is why the team decided to ramp on Revio to begin a larger multi-thousand genome sequencing project this year. One of the hallmarks of PacBio has been our ability to create additional value for our customers by adding new features to our sequencing platforms. With Revio, We are continuing this tradition by improving the performance of our systems in the field and adding valuable new features to the platform later this year. I'd like to spend a few minutes discussing some of these enhancements. In Q3, we rolled out a software update that optimizes the preload feature on Revio. The preload feature enables customers to load their next run onto the instrument while a sequencing run is underway. This gives Revio the potential to always be running and truly enables production scale long read sequencing. Over the past few months, we learned that some of our highest throughput, most industrialized customers were having some challenges using this feature. And as a result, we made some changes to improve the preload function, which was included in this recent software release. Now, customers can preload as expected, allowing high volume customers to potentially further increase Revio utilization. In the fourth quarter, we plan to add several new enhancements to the Revio platform. First, we will incorporate the highly anticipated adaptive loading feature popular on our SQL 2e platform. Adaptive loading tailors the DNA loading to better fit the customer sample, providing a backstop to prevent smart cell overload. This can enable customers to load more DNA more confidently and ultimately achieve higher and more consistent yields. We will also enable support for libraries that are less than three kilobases long, which will position Revio more favorably in applications like AAV, ISO-Seq, and 16S microbial sequencing. Further, it will enable 12-hour and 30-hour run times so users can optimize their runs for shorter and longer DNA inserts. Finally, the update will also include a run preview feature, allowing users to see their run statistics after the first four hours during the sequencing process and enabling customers to better plan for future sequencing runs. We're not just focused on enhancing the sequencing platform, but we are also improving the end-to-end workflow. We believe that by improving the workflow from sample preparation through data analysis, we will enable our customers to truly leverage the power of HiFi sequencing. In the sample preparation process, next year, we plan to release improvements that leverage the technology acquired from Circulomics to improve size selection on the smart cells. This will improve our customers' ability to achieve higher sequencing output with each smart cell and consistently achieve longer read lengths. Additionally, in order to enable our customers to take full advantage of the throughput of Revio, we have collaborated with leading automation providers including Hamilton, Integra, Revity, and TCAN to fully automate sample preparation protocols for both Revio and the SQL 2.2e systems. On the analysis front, earlier this month, we launched the PacBio Whole Genome Sequencing Variant Pipeline, or WGS Variant Pipeline. This standardized computational method consolidates over 10 separate secondary and tertiary analysis tools into a single user-friendly workflow, enabling users with all levels of bioinformatics experience to access hi-fi whole genome sequencing. Over the past few years, I've often discussed our goal to make PacBio more multi-omic company. This is important as multi-omic approaches allow us to better understand the underlying connections from the genome and the epigenome to the transcriptome and the proteome, and ultimately glean greater insights into biology and disease. With the flexibility and increased throughput of Revio, combined with HIFI single molecule detection capabilities, we're starting to see how Revio can be a multi-omic Swiss Army knife of sorts. For example, in a preprint last month, researchers from the University of Washington and other institutions showed how Revio could produce data on four separate high-quality ohms on just one Revio smart cell, the genome, the methylome, chromatin epigenome, and the transcriptome. In analyzing a participant in the undiagnosed disease network, the researchers reported how data from each of the four ohms explained one or more of the participant's genotypes. This study is yet another example of how a synchronized single long read multi-ohmic test can more effectively uncover unexplained rare conditions than multiple one-off tests. In another study, scientists at the University of Dresden and Max Planck Institute used PacBio IsoSeq to look deeper into the transcriptome to understand the impact of alternative splicing on isoform diversity and protein structure and showed that isoforms have a critical role in determining protein structures and biological functions in brain development and concluded that alternative splicing has greater potential to impact protein diversity and function than previously thought independently from changes in gene expression. To address this growing transcriptomics market, we're excited to launch our new Kinex kits, enabling scalable, cost-effective, full-length RNA sequencing on PacBioRevio and SQL2e. With the MOS sequencing method introduced late last year, customers can concatenate smaller inserts into one long insert to dramatically increase output in single-cell RNA experiments. Now, with the expanded and rebranded Kinex kits, we can better address bulk RNA applications, allowing scientists to reveal the role of isoforms for the biology of health and disease, in addition to obtaining the gene expression information. This truly enables this application on Revio, allowing customers to perform large studies, thousands of samples per year, on a single Revia system, thereby providing access to projects in neurology, rare disease, and cancer research, as well as other markets. The Kinex line of kits also includes the 16S kits. The 16S gene is found in bacterial genomes and has long been used to identify, classify, and quantify species and strains in a microbial community sample. At about 1,500 base pairs long, Short-read sequencing has difficulty reading the whole gene, while long-read sequencing would leave unused capacity on the sequencer. With Kinex, customers can concatenate the 16S gene into long libraries for hi-fi sequencing. This puts Revio and SQL2 on par with short-read sequencing regarding cost, positioning Revio to better address the multi-hundred-million-dollar microbial genomics market. These kits further expand our competitive offerings in human genetics, oncology, and microbiology, and we look forward to discussing them more with researchers at ASHG later this week. Before I pass the call over to Susan, I'd like to welcome David Maline to our Board of Directors. David brings extensive experience to our board as a finance leader in various life science and healthcare companies, most recently Moderna Incorporated. And with that, I'll pass the call to Susan to discuss the financials. Susan?

Thank you, Christian. As discussed, we are pleased to have reported $55.7 million in product, service, and other revenue in the third quarter of 2023, which represented an increase of 72% from $32.3 million in the third quarter of 2022. Interim revenue in the third quarter was $34.7 million, an increase of 203% from $11.4 million in the third quarter of 2022. The continued momentum of Revio primarily drove the increase in revenue as we shipped 52 instruments for revenue in the quarter. We ended the quarter with an install base of 129 Revio systems. Turning to consumables, revenue of $16.9 million in the third quarter increased 5% from $16.1 million in the third quarter of last year. It was a record for PacBio with approximately 55% of consumable revenue coming from Revio systems and the remainder from other systems and other consumables. We expect SQL 2 and 2E as a percent of total consumables to continue declining as we ship Revio and customers transition to the new system. Finally, service and other revenue was 4.1 million in the third quarter compared to 4.8 million in the third quarter of 2022. From a regional perspective, as Christian mentioned earlier, all three regions posted record revenue in the third quarter. America's revenue of 29.0 million grew 73% compared to the third quarter of 2022, with sequential and year-over-year growth across instruments and consumables. For Asia Pacific, revenue of $15.7 million grew 64% over the prior year. China recorded year-over-year growth, but was lower from the second quarter as customers in the region slowed their CapEx purchases. so we were encouraged to see sequential consumables as customers ramp up their Revio usage in the country with healthy levels of utilization. Finally, AMIA revenue of $11 million grew 83% over the prior year period, driven by both instrument and consumable growth as customers like MBRU ramped up its large-scale genome project and the Wellcome Singer Institute reached this milestone of 1,000 species sequenced as part of the Darwin Tree of Life project. Moving down the P&L, gap gross profit of $17.9 million in the third quarter of 2023 represented a gross margin of 32% compared to a gap gross profit of $13.5 million in the third quarter of 2022, which represented a gross margin of 42%. Third quarter 2023 non-GAAP gross profit of $18.1 million represented a non-GAAP gross margin of 32% compared to a non-GAAP gross profit of $13.7 million or 42% in the third quarter of last year. The year-over-year decrease in gross margin was due to product mix as insurance revenue accounted for a higher proportion of overall revenue in the third quarter of 2023 compared to the third quarter of 2022, and due to instrument mix, as Revio instruments sold in the third quarter of 2023 had a lower gross margin than SQL 2E systems sold in the third quarter of last year. Additionally, we realized inventory scrap and reserve charges, as well as additional warranty-related material expenses on the Revio platform in the third quarter of 2023. GAAP operating expenses were $140 $0.4 million in the third quarter of 2023 compared to $88.2 million in the third quarter of 2022. Non-GAAP operating expenses were $90.9 million in the third quarter of 2023, representing an 8% increase from non-GAAP operating expenses of $83.8 million in the third quarter of 2022 and excluded merger-related expenses of approximately $9 million related to our acquisition of Apton in the third quarter of 2023. The increase in operating expenses primarily reflects expenses related to the Apton acquisition in the third quarter of 2023 and increased sales and marketing expenses primarily related to increased investment in the commercial organization partially offset by lower engineering and lab-related expenses resulting from the transition of Revio from development to commercialization. Regarding headcount, we ended the quarter with 844 employees compared to 818 at the end of Q2 2023 and 771 at the end of the third quarter of 2022. Operating expenses in the third quarter included non-cash share-based compensation of $18.6 million compared to $18.0 million in the third quarter of last year. Gap net loss in the third quarter of 2023 was $66.9 million, or $0.26 per share, compared to gap net loss of $77.0 million in the third quarter of 2022, or $0.34 per share. In Q3, we booked a discrete income tax benefit related to the acquisition of APTAN. The acquisition was considered a business combination for tax purposes, and therefore the acquired intangibles are disallowed for book tax purposes, which resulted in a one-time discrete non-cash income tax benefit on the GAAP P&L of $10.7 million in the quarter. Non-GAAP net loss was $67.9 million, representing $0.27 per share in the third quarter of 2023, compared to a non-GAAP net loss of $72.5 million, representing $0.32 per share in the third quarter of 2022. On to our balance sheet. We ended the third quarter with $767.8 million in unrestricted cash and investments compared with $829.9 million at the end of the second quarter of 2023. The ending cash balance on September 30 does not reflect the milestone payment to the Omnium shareholders, including approximately $96.2 million in cash and 9.0 million shares of common stock, which was paid and distributed on or about October 4, 2023. Inventory balances increased in the third quarter to 68.3 million, representing 2.2 inventory turns, compared with 67.6 million at the end of the second quarter of 2023, representing 2.0 inventory turns. Accounts receivable increased in the third quarter to 30.5 million, compared with 24.0 million at the end of the second quarter of 2023. To expand a bit on our guidance, as Krishna indicated, our strong performance in the third quarter leads us to believe that revenue for the year will be $195 million to $200 million, representing a growth rate of approximately 52% to 56% compared to 2022. This represents an increase of $10 million over our guidance last quarter, and we have now raised our guidance every quarter this year. Around the midpoint, our guidance assumes fourth quarter revenue is approximately flat sequentially compared to the third quarter, with the $5 million range reflecting macro factors that are lengthening sales cycles for our customers globally and affecting the timing of customer CapEx purchases. Moving down the P&L, we expect the 2023 non-GAAP gross margin to be around the low end of the previously guided 32% to 34% range, due to higher than expected inventory scrap and reserves in the third quarter and higher warranty costs associated with the Revio instrument. We continue to expect margin expansion beyond 2023 as Revio placements will help drive a mixed shift toward higher margin consumables and higher volume and optimization drive lower manufacturing unit costs. Specifically, we've made good progress this year in reducing costs by lowering the manufacturing labor time for the Revio system production, which we expect to continue into 2024. And we have now commenced consolidating our San Diego manufacturing operations into Menlo Park, which will give us the benefit of running our manufacturing operations more efficiently. We now also expect non-GAAP operating expenses to grow by 2% to 3% compared to 2022. This is lower than our previously guided growth rate as PacBio continues to focus on spending discipline. We expect interest income to more than offset interest expense for the remainder of the year and the weighted average share count for EPS for the full year to be approximately $254 million due to the timing of the issuance of the Omnium Milestone shares. I'll hand it back to Christian for some final remarks. Christian?

Thank you, Susan. With a couple of months left, 2023 is on track to be the most successful year in PacBio's history. And when looking back, I believe it can mark an inflection point on our strategic journey. For the year, PacBio is on track to ship more systems than any other point in its history. What is perhaps more encouraging is that we now expect to achieve record consumable revenue, in spite of the fact that 2023 has been a product transition year. I believe that this is an indication of the fundamental demand for long-read sequencing in the market. and that highly accurate, high-throughput systems such as Revio are enabling that demand. Our projected revenue growth for this year is well above our 40 to 50 percent compound annual growth target established at our investor day last year. When I look back and compare where we are now versus our internal expectations 12 months ago, what really stands out is the pace of Revio adoption, as it is well above where we had envisioned it last November. However, as we look toward 2024, we see an economic backdrop that is substantially more challenging than a year ago. On that topic, I wanted to zoom out a bit and provide some high-level commentary on 2024. While we're not providing specific 2024 guidance today, I wanted to give you a rough framework of how we're thinking about the year as we build out our 2024 budget. We continue to focus our R&D efforts on the creation of a multi-product, multi-platform portfolio that includes both leading long and short read sequencing systems. We are deep into the development of several new sequencing platforms, which we believe will enable us to reach more of the sequencing market and drive long-term revenue growth. But even with this focus in R&D, we still believe that total expenses in 2024 will be within the range of the long-term guidance that we provided at Investor Day. Additionally, our sales funnel for Revio continues to be robust as potential NUPAC bio customers remain enthusiastic about implementing the power of native long reads into their research, and existing customers are eager to upgrade their SQL 2 fleets. However, due to broader global macroeconomic issues, customers have lengthened their capital purchasing timelines, which will likely have some impact on our growth trajectory in 2024. So while we still expect to achieve significant revenue growth in 2024, the current challenges in the global macroeconomic environment are likely to have an impact on our growth rate. As we complete our 2024 forecast and continue to monitor market conditions, we plan to provide more detailed guidance on our Q4 earnings call in early 2024. As we close the call, I want to reiterate how pleased I am with the team's execution since we announced the Revio and Onso platforms just over one year ago, especially in this environment where we've seen prolonged inflation and worsening macroeconomic conditions. Thank you for your time today. Operator, let's start the Q&A session.

Ladies and gentlemen, at this time, we'll begin the question and answer session. Once again, to ask a question, you may press star and 1. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your question, you may press star and 2. Once again, that is star and then 1 to join the question queue. Our first question today comes from from Morgan Stanley. Please go ahead with your question.

Hey, guys. Good evening, and thanks for the time here. Christian, a couple of questions for you here. First, I mean, in terms of the backlog growth, has order backlog essentially trended in line with your expectations? And as you think about, you know, juxtaposing your placements for next year, I know you mentioned some moderation for the macro impact, but how should we think about sort of backlog, how that's trended over the last four weeks or so, in the context of 24 placements. And then my second part of the question was on consumables. Any way for you to parse out how much of the strength that you're seeing here is related to new customers talking versus that first cohort of Revio adopters ramping usage? I mean, if you can just break out or circumscribe the trends you see in that early adopter cohort, that would be super helpful. Thank you.

Sure. I'm just writing down the question. So, first of all, I'm not going to comment specifically on backlog, but we are continuing to ship more and more every quarter, and we see it's certainly meeting my expectations. When I think about next year, I do think that we have You know, we have the technology and capabilities and the enthusiasm in the market to continue growing and growing, you know, growing with respect to Revio. But, of course, right now in this near-term window, you know, we are seeing some macroeconomic challenges like others. But as I said in my prepared remarks, you know, we expect to significantly grow our revenue in 2024. I'm not going to be any more specific than that because, quite frankly, this isn't a 2024 guidance call. With respect to consumables, we looked carefully at the Q3 numbers, and there really wasn't a lot of stocking going on relative to what we had in Q2. And what we're seeing is our customers are fundamentally starting to really use their Revio systems, and that's why we had such a strong performance in consumables. And I do think that that was certainly one of the highlights of the quarter, and certainly my expectation going forward is that you're going to continue to see very strong consumable performance. You know, we went through more than 9,000 smart cells in the third quarter. People are using the systems, and they're generating great data. So that is very, very encouraging for me. you know, we're still really early in this product cycle. And to see us, number one, in 2023 have a product transition year and yet still grow total consumables is really a pretty significant milestone for the company. And number two, now you're starting to see, you know, Revios completely overtake the SQL platform. Those are both very encouraging signs that, you know, that I think are going to persist into 2024.

Next question, Jamie. Our next question comes from Kyle Mixon from Canaccord. Please go ahead with your question.

Hey, guys. Thanks for taking the questions. Congrats on the great quarter. First, on the fourth quarter kind of, I guess, guidance or outlook, so flat sequential revenue, Due to the macro environment, lengthening sales cycles, timing of Caddox purchases, like not a surprise, but where is that happening? Is that only China or is that occurring in Western Europe, Russia, North America, et cetera? And since revenue is going to be flat in the fourth quarter, could that happen again in one Q as well in 24? I just wanted to understand maybe like early 24 commentary. And then just quickly on ANSO, like Kirsten, you just talked about the sales funnel and backlog, how that's progressing and maybe the composition of customer types. and how that rollout could progress next year. You didn't mention that it's like a 24 growth driver, but, you know, it's all kind of inorganic revenue growth as well. So that could be good to hear. Thanks.

Yeah. Okay. We'll start with, you know, we'll start generally with Q4. And, you know, we did guide and increase the range of guidance, you know, which means we've actually increased our guidance in every quarter this year, which is great news. We are, you know, having – we do have a reasonably conservative outlook going into the fourth quarter, and that's really driven by the fact that there are several macroeconomic factors at play, and we've heard a lot of our peers reporting that too recently. And so, you know, we're definitely sitting more on the conservative side of the fence. The other thing is that the fourth quarter is typically, it can be a very strong order quarter, but it's also a short shipping quarter with holidays and other things to think about. And so those are some of the factors that we just put into our modeling as we kind of think about heading towards year end and into next year. Now, when you think about next year, I'm not going to comment today on Q1 or any thoughts, so I'm going to skip that one, Kyle, for today. But when you think about the economic challenges, it's interesting. We're at a point where each region has its own unique challenges. So you have, you know, you have in China several factors that are impacting, you know, impacting revenue. And as I said last quarter and I continue to say, we've been a little more insulated than our peers in China because our customer base is small and concentrated. In fact, what's interesting is we were doing some analysis and believe it or not, our service providers in China have bigger sales forces than our entire sales force. So even though we're small and concentrated, our reach has actually been pretty good. And so that's pretty darn encouraging. But there are some macro and economic issues in China. that I'm sure have some impact on our business. The rest of Asia, if you make a comment there, I think the strong dollar and inflation have had some impacts and we think have some impacts. Europe, higher energy costs as well as the continuing conflicts generally create uncertainty. But we are seeing signs of larger projects being talked about across the across the continent, not just one project or two, but several. And then the United States, you know, one thing that was interesting is that the third quarter, we really didn't see a significant end of year money, end of year push, so to speak, end of government year push. And I think some of that's probably attributed to the fact that there was a lot of angst about potential government shutdowns, and there continues to be that. And so I think that You know, we're trying to think about and trying to be thoughtful about how we guide and thinking about those things. If I move to ONSO, you know, the sales funnel has been quite strong, actually, and we continue to see bundled orders. We continue to see individual orders. We're not giving specifics because, you know, principally for competitive reasons, to be honest. You know, it is a very competitive market. We are scaling up our manufacturing and that will be, you know, manufacturing scaling is probably more of a rate limiter than demand right now. And I suspect that will work its way through the system in the early part, by the early part of next year. And so we, you know, we should end with a decent backlog in going into 2024 of the ONSO system. We'll continue to scale manufacturing and What's exciting is that our customers are using the product and doing some amazing science already, some of which will likely be discussed at ASHG.

Next question, Jamie? Our next question comes from Jack Meehan from Nephron Research. Please go ahead with your question.

Thank you. Good afternoon. I wanted to ask about the Revio consumables. Could you comment on that? the range of utilization you're seeing on instruments in the field? And I understand there's caution on capital equipment, but just any color on the rate at which you think the REBIO consumables can kind of grow from here?

Well, I think, Jack, sure. The absolute consumable revenue we expect to keep growing and growing at a pretty good clip. So I think that is a good sign. The consumable, you know, will the consumable pull through increase or stay the same or decrease? You know, it was 483K this past quarter, which kind of represents roughly 37% utilization, give or take, of the systems, which is a great number. My belief is you've got a few factors impacting us over the next few quarters. First of all, some of the highest throughput customers are really starting to go or get into production, which helps the utilization, which perhaps could help the pull-through number. Some of the newer customers, you know, are getting up to speed. And, you know, it was part of the reason why we wanted to accelerate shipments so much, and we shipped 52 systems in the quarter. You know, what we want to do is make sure that all of those customers can scale up and ramp. And so, you know, the fourth quarter pull-through might be lower than the third quarter because you ship so many systems that go into the denominator. But the opportunity to grow that into the first half of next year I think is quite significant. And so that's, you know, that's really what we're playing here for is to build – a consistently fast-growing consumables business, which will help buoy gross margins, drive absolute revenue growth, and also create the flywheel. And this is really important. More and more Revio data getting into the world will drive deeper insights into the biology, which will drive a flywheel to drive more demand. So very exciting what we saw happening in the third quarter and continuing to happen you know, quite frankly, you know, as far out as we can see right now.

Next question. Our next question comes from Eve Bernstein from Bernstein Research. Please go ahead with your question.

Hi there. Thanks a lot for the question. So going back to Revio instruments, you said that less than 30% of SQL 2 and 2E customers have ordered a Revio to date. Why do you think that is and what's holding them back? And maybe just on a broader note, looking at the review of placements as a whole, you said a month ago that you expect orders to go up every quarter through 2024, or excuse me, to go up every quarter through 23 and then into 24. Is that guidance or that color still in place given the changes in the macro, or should we assume that that's maybe no longer the case?

Yeah, Eve, thank you for the questions. And we'll start with the SQL 2 customers. You know, there's a lot of reasons why a customer won't upgrade straight away. I think the first right now is the time to get budgets in place in order to buy the system. So some, you know, the biggest customers are have a lot easier access to getting budgets than other customers. And so those are the first places you go. The second is that a lot of customers that bought in 2022 want to use their system for a while before they drive into the Revio platform. And then I think the third is really thinking about You know, what kinds of projects and applications am I working on? If I'm working on AAV or microbial genomics, perhaps I don't need that much throughput. And one of the things that I think will be helpful there is we just launched, you know, we're launching the Kinex kits that allow you to, you know, put more samples onto a Revio more economically, and that might drive, you know, some of that growth. some of those conversions more quickly than otherwise would. We'll see. I do believe that over time, the vast majority of those systems will convert to Revio. And over time, I believe very strongly that the install base for Revio will be significantly larger than the install base for the SQL 2 family at its peak. Moving on to your question about orders and Revio orders and what is the pace. You know, what I really want to focus on is on driving shipments from quarter to quarter. We're going to have, we are going to have variability in our orders. We're going to be trying to whittle backlog down at times and then, you know, at other times perhaps expanding backlog. But my belief is that you know, on balance, shipments are going to grow. In any given quarter, though, they may, in fact, be slightly lower or slightly above kind of trend line. But if you look out over many quarters, I think net-net, you're going to see us growing. So that's something, you know, that we are managing. The macro environment is making it tougher right now. And so, you know, perhaps... perhaps that changes the curve a little bit in the very near term. But I was just with a group of customers, a significant group of customers last week, and the number of applications, the excitement, the new ideas really was quite remarkable. We're super excited to be going to ASHG later this week to interact with our customers and share the energy associated with the platform and And, you know, ultimately that drives demand. So I think it's a good news story. There could be some variability, though, here in the near term with, you know, with the macroeconomic environment.

Next question, Jamie? Our next question comes from Matt Sykes from Goldman Sachs. Please go ahead with your question.

Hey, good afternoon. Thanks for taking my questions. Just two-parter. One, Just on the product pipeline, just given the macro issues that you've highlighted next year, how are you thinking about benchtop, high throughput, the overall product pipeline as you move into a more difficult macro environment? Have you reprioritized any of those projects? I know you talked about R&D spend or maintaining consistency, but I just wanted to find out if you've reprioritized any of those projects. And then secondly, Susan, just on the gross margins, understand the product, the mix shift in the products, but In terms of the inventory charges and scraps, like, how should we be thinking about that in terms of one-off or anything that could linger into next quarter or beyond? Thanks.

Great. Okay, I'll go first. So, you know, fundamentally, we set out on a course to build a multi-product, multi-platform company that I think is going to serve the genomics company or serve the genomics industry in in unique ways and create incredible value for all of our stakeholders. And I'm still absolutely convinced of that vision. And I think our customers are responding to it as we build out our business. Revio is just the beginning, clearly. And it's my belief that we need to continue accelerating getting platforms into the market to drive to continue driving long-term revenue growth, but also to drive the ability for us to have different relationships with customers than others. In other words, be able to meet the customers with asking questions rather than selling them technologies. And so we are still working hard on developing lower throughput and higher throughput long read systems. And with the acquisition of Apton, We've jump-started the project to work on a very, very high-throughput short-read sequencing system. The good news is that, you know, if I just spend a second on the Apton acquisition, we've already integrated that team. We shut down their Pleasonton offices and moved the entire team to Menlo Park. Their alpha sequencers are in our labs already sequencing. With SBB chemistry, we've got the industrial design going. And so, you know, that acquisition accelerated our ability to launch that product perhaps by years. You know, we'll see how we do. But my philosophy right now is, you know, to continue building out that portfolio while we continue to grow our revenues, but also be disciplined about how we manage our spend envelope. consistent with what we talked about, you know, at our analyst day last year. In fact, we look back to our analyst day, and here we are a year later, and we have met or exceeded, you know, the majority of our goals for 2023. So, Susan, you can talk about gross margins.

Great. Thank you, Matt, for the question. So, in terms of gross margins, in my prepared remarks, we talked about the fact that in Q3, you're right that we had some excess inventory scrap and reserve charges. This is related to previous generation products, but most notably the decline in the SQL 2 consumables demand drove some of those scrap charges that we took in the quarter. There were some also warranty-related expenses on the Revio platform. Your question about Q4, as we go through the budget for 2024, there may be some additional cleanup, but for the most part, the transition between SQL 2 to Revio, we are through that. And for 2024, I do expect our gross margins to continue to expand. We talked about this previously. As revenue continues to grow, you get the benefit of higher volumes, but you also get the benefit of higher consumable revenue, which of course is higher gross margins. And Christian alluded to it too, that we do have gross margin improvement initiatives that we have already started, and some of which we've shared on the prepared remarks, but also some of which are still that are underway that we haven't yet. share, but we'll continue to disclose that as we get closer to realizing those benefits.

Thanks, Matt. Next one, Jamie. Next question comes from Dan Brennan from TD Cowan. Please go ahead with your question.

Great. Thanks for taking the questions. Maybe two-parter, just on pull through the first one. I know, Christian, in the past, you've talked about maybe by the first quarter of next year, you'd be at a point at which you could talk about what seems like a durable pull through to kind of model off of. It sounds like you've had now last three quarters in the low four hundreds, you know, last two, four 50 and sounded like you were pretty constructive. Just wondering, you think it's fair to be thinking 400 plus at this point on pull through from here. And then secondly, you know, stocks traded off a little bit here despite a really good quarter. I think on the comments on 24, just wondering, could you just speak to a little bit about like the types of customers maybe where you're seeing you know, a little bit of elongated cycles? Is it in academia? Is it across a small mix in biopharma? I know you talked a little bit about China, just a little bit more color there. Thank you.

Sure. So, first of all, for next year, you know, we're not going to comment on the pull-through numbers yet. I'm still going to stand by the fact that it's still early in our launch. You know, the pull-through figures for Q3 were derived from the install base of, what was it, 77 units, in the denominator. We'll see how we get another quarter under our belt here in Q4 with 129 systems. But by the first quarter, you know, perhaps on the, you know, the call in April or May, I don't know, whenever it's late April, early May, you know, we should, I think, have a view at that point. It'll vary, but I do think the numbers are above You know, they're certainly above where my long-term model and thinking have been, and so that's encouraging, but I don't want to declare victory yet until we get a little more, you know, a little more under our belt. When you think about, you know, the commentary, I mean, the first thing I want to reemphasize is we believe we're going to significantly grow next year, period, end of story, you know, We are having a – so far this year, we've raised guidance every single quarter, and we've had a very strong result in Q3. Q4, we're looking to have another strong quarter in Q4. And so from my perspective, the business is operating on all cylinders and really from a revenue and customer perspective. But it would be remiss if I didn't, you know, acknowledge and recognize that the environment out there is certainly more challenging than it's been in the past, certainly more challenging than it was when we put together – when we had our investor day last year. But – and the impact, you know, the impact of customers are customers that are, you know, smaller, smaller one-to-two-Z type customers. Revio purchasers that would be in small biotech, for example. Some of the academic funding in the United States, you know, I think the funding hasn't gone away and is still there. But, you know, the anxiety with the government shutdown that we saw at the end of the quarter, the continued rhetoric that's going on, you know, does give us pause to be, you know, to be appropriately conservative. Outside the United States, I did spend a second or two talking about China in particular. China is actually, as we continue to grow, China is going to become less of a percentage of our revenues. And I think that's already starting to transpire. So on balance, that's good for us. Europe, we had several new customers and we have great opportunities in the funnel in Europe. But It is a tough, you know, with high inflation, it is a tough, tougher environment. And so, you know, what we're doing is we're just trying to take a responsible view here. And if we outperform, you know, we outperform.

Next question, Jamie.

Our next question comes from John Sauerbeer from UBS. Please go ahead with your question.

Hi. Thanks for taking the questions and congrats on the quarter. You know, maybe just a clarification here just on that extension of order cycles. I guess, you know, have you seen any increase in cancellations? And then, I guess, also, you know, you're not providing, you know, color on next year. But when you look at, I guess, the announcement with the PacBio capital last month, I guess, any just way to frame how you see maybe is there potentially more leasing next year versus capital purchases? How do you see kind of that shipment place out over 24? Sure.

Yeah, thank you for the congratulations. We're proud of the quarter, to be sure. You know, we haven't seen any cancellations. We haven't, you know, the competitive environment, we've been doing very, very well against our competitors, as evidenced by the shipments in the quarter. We continue to make progress there. So, we haven't seen cancellations. When we see this, we see orders push out across a quarter. or maybe perhaps three to six months, a quarter or two. And so we don't feel like the business is going away. We don't feel like the business is being taken by competitors, and we don't feel like there's any waning desire to do sequencing. So all of those things are very strong for us, but we do see the conversations are taking place. particularly where you see it is the early conversations are taking longer. So it may not have the most near-term impact, but you don't know, you know, when you're actually in the sale, you don't know are you going to get it done in the next six weeks or is it going to take 12 weeks. And it's really that's, you know, that's one way to think about it. PacBio, you know, I think there's still confusion with – investors perhaps about the PacBio Capital Program. We've always had leasing programs in place. We just rebranded this program, PacBio, and we have a new leasing partner, which we believe will give us more flexibility and more access. But when I look at revenue for next year, you know, it doesn't immediately strike me that we're going to do more leasing next year versus this year. And when we do the leasing, we still get all of the revenue up front. And that's a really important, you know, aspect of this is the way these leasing programs work is that we work with a financial partner that actually buys the system and then takes payment from the end customer. And we can work with that leasing partner to do to create incentive programs or other things if we so chose. But right now, you know, we don't see leasing as being, you know, any bigger than it was this year per se. It might naturally grow because our whole business is growing, but I don't think a greater proportion. But I also haven't done the math to know explicitly, to be clear.

Next question.

Our next question comes from Shunji Nam from Scotiabank. Please go ahead with your question.

Hi, thanks for taking the question, and congrats on the quarter. Christian, we'd love to get your thoughts on the long-reach sequencing market over the longer term, let's say the next five years. You laid out the key drivers at the NLSA, you know, and the growth potential there, but given the stronger-than-expected adoption of Revio so far, do you think the long-reach sequencing might – the market could have a bigger impact over the longer term?

Yeah, thank you. That's a great question. And, you know, when you look out over the next five years, I think what Revya was showing is that the thesis that germline-driven genomics needs the comprehensiveness of long reads. And if, you know, if we can create platforms that give you the economics and the throughput and all of the capabilities of the multi-OMS, like we talked about in the prepared remarks, you know, it really does plan to, it really will serve a large part of that market. I think our 2026 market estimates were somewhere in the range of the sequencing market being $12 to $14 billion. And, you know, realistically, probably half of that at least could be served by by long-read sequencing, if not more. And I think this year has proven that that's exactly on track. You know, another area where maybe people don't realize but is really important is that plant and animal genetics really benefit from long-read sequencing. Oftentimes those genomes are multiploid. They're not just diploid genomes. They have more chromosomes. They also have bigger genomes, some have smaller genomes. And having the ability to have highly accurate sequencing in that space is actually, we're significantly outperforming in 2023. And I think if you look out over five years, that's another area where you're going to see strong performance. It's not, we focus a lot, to be honest, on germline human genetics because those are very, very significant markets, but we can't leave the plant and animal world behind. That's a multi-hundred million dollar plus business as well. Jamie, how about our last question?

Our final question today comes from Luke Sergott from Barclays. Please go ahead with your question.

Great. Thanks for squeezing me in. On the 4Q implied guide, can you break out, like, the assumptions that you guys are having from consumables versus the instrument ramp that we should be getting to hit your guidance? And then as you guys continue to launch all these new applications, I mean, clearly all these questions are on consumables and how that's going to pace next year. But in the pushback we get for – not pushback, but commentary we get from your customers is that there will be even more adoption here if you bring down price per sample and if you increase the application. So how do you guys weigh that investment as you think about going forward the next couple years?

Yeah, thanks, Luke, and appreciate you for hanging in there too. So, you know, when I think about Q4, we didn't break out the specifics, but we do think consumable revenue will continue to grow from here a little bit And, you know, and I think that instruments, you know, we'll see how we do on the instruments. When you start to think about consumables, bringing down the price, I don't think I've ever heard a customer say that they wouldn't do more if the price was lower. So that's not a revelatory comment. But I do think that there is this elasticity in the market. We are just at the beginning of that elasticity. Revio gives us the ability to start testing that, and I think we started in a great spot this year. What you'll see from us is actually Revio will, over time, be able to deliver more throughput per smart cell, and as we do that, we'll have opportunities to either You know, we'll be able to effectively lower the price per base or per gig, per G, so to speak. And so you'll get to see that from that perspective. And then the applications are critical. Some of these things that we're launching right now, you know, we've had in the works for a while. And next year, you're going to continue to see in the first half of the year more applications being launched on the system. And all of this is geared towards driving more utilization of the systems. I spent a lot of time in my prepared remarks today talking about the end-to-end workflow and improving the sample preparation, talking about next year using Circulomics to improve our workflow as well. And so we're doing all of these things to drive that consumable pull-through. The sample prep revenue will grow. as well, but it's really all about driving that consumable pull through and then selling new systems. And so, you know, we're looking forward to, you know, talking about 2024 when we get there. We still have to, you know, wrap up 2023 strong. But, you know, right now, you know, we're very proud of what we've done in the first three quarters. We're looking towards growth that's above our long-term guidance. North of 50%, we're perhaps one of the fastest growing companies in our peer group, which is exciting. Competitively, the products are very competitive. We've been able to execute on delivering those products. And as we kind of, you know, move forward to close out this year strong, we're really looking forward to, you know, another great year for the company. So we appreciate everyone's support.

All right. That wraps it up. Thank you, everybody, for all the questions today, and thanks for joining us. We look forward to connecting with many of you this quarter at the various conferences and updating you as we move into 2024. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for joining today's presentation. You may now disconnect your lines.