Pacific Biosciences of California, Inc.

Hello and welcome to the PACBio fourth 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 telephone keypad, and to withdraw from the question queue, please press star then two. I would now like to hand the call to Todd Friedman, Senior Director, Investor Relations. Please go ahead.

Good afternoon and welcome to PACBio's fourth 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 make 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 guidance. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially than 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 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. 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 the 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 efforts due to the uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year, including future changes and fair value adjustments of contingent consideration and allocation of amortization expense attributable to certain acquired intangible assets. 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 completion of the live call. Finally, we will be hosting a question and answer section after our prepared remarks. we ask the analysts please limit themselves to one question only so that we can accommodate everybody in the queue. I will now turn the call over to Christian.

Thank you. Thanks, everyone, for joining our call today. I'll start by recapping our results for the year and the quarter. Then I'll discuss our commercial activity around Revio and Onso. Finally, I'll discuss our latest product launches that we believe will further create value and differentiation around PacBio sequencing. I'll then pass it to Susan to discuss financials and guidance in more detail. 2023 marked PacBio's most transformative and successful year in our history. Our team executed aggressive goals to ramp RevYo manufacturing and scale the install base, which enabled PacBio to grow revenue 56% in 2023 to $200.5 million, which was ahead of our expectations. For the quarter, revenue grew 113% year over year to 58.4 million, and we shipped 44 Revio instruments in the fourth quarter, bringing our install base as of December 31st, 2023 to 173 Revio systems. We also grew consumable revenue in the fourth quarter to 18.9 million, which included Revio consumables of approximately 12.4 million, and represented an annualized consumable pull-through of around 385,000. The demand for long read data continues to grow as total gigabase output on PAC biosequencers grew 68% in 2023 compared to 2022. We believe this momentum sets us up for another year of growth as we continue to see growing interest in HiFi for larger scale human genomics, and see it becoming more mainstream in genomic testing. The market clearly demonstrates a shift towards long read sequencing in a growing number of major applications. And I'll share some of the specific examples showing this shift today. With that, our initial view on 2024 is that revenue will be between 230 and 250 million, representing 15 to 25% growth compared to 2023. At the midpoint of this range, we expect Revio system shipments to be roughly flat to slightly up year over year. As we have previously communicated, customers have lengthened their capital purchasing timelines, which impacts the timing of instrument orders and the pace of Revio adoption. We do not anticipate these current macro trends to fundamentally impact customers' desire to sequence with HiFi long reads. Susan will touch more on our guidance later. Now, turning back to 2023, Revio, our flagship long read sequencer launched early last year, is making significant progress in transforming how researchers look at the genome, and we're still in the early adoption curve. We've been especially pleased with the number of new customers adopting Revio, as nearly 30% of Revio systems ordered in the fourth quarter were from new PacBio customers, and almost 40% of Revio systems ordered in 2023 were from new PacBio customers. New customers in the fourth quarter included Karolinska University Hospital in Sweden, a HiFiSolves consortium member planning to use Revio to address the limitations of short reads on structural variation, tandem repeats, and phasing to find more answers for genetic disease. The HiFi Solves Consortium was just announced last quarter, and by creating this collaboration of 15 leading genomics research institutions across 10 countries, we expect best practices sharing to accelerate the impact HiFi can have on human health. We're also making solid progress on converting existing PacBio customers over to Revio, as about one-third of our SQL 2 and 2e customers have now ordered a Revio. we are still in the early product transition cycle and expect most SQL 2 or 2E users to migrate over to Revio over time. Additionally, we expect customers who have adopted Revio in 2023 to continue to expand their fleets as they fill their Revios to capacity. We're already starting to see this with some customers ordering their second or third Revios in the fourth quarter, like Radboud University, which took its second revio, expanding its fleet to ramp up its efforts in rare disease research. Additionally, Children's Mercy Hospital of Kansas City ordered its third revio to continue its effort to consolidate tests for genetics and epigenetics, increase efficiency, and improve solve rates while accelerating turnaround time. These fleet expansions demonstrate the elasticity and the demand to move samples over to hi-fi long reads. 2023 was also a landmark year for PacBio as we launched Onso, our second major sequencing platform, just months after we started shipping Revio, enabling us to address a multibillion-dollar short-read sequencing market. With Onso, we've gradually ramped up manufacturing capacity and grew shipments sequentially in the fourth quarter. We have now received orders from a wide range of customers who plan to use it in applications ranging from oncology including research into fragmentomics and targeted cell-free DNA panels to exome sequencing and metagenomics. One Onso customer is TGen, which is taking advantage of the platform's accuracy to detect rare populations associated with disease in a high background of non-diseased material for applications like early cancer detection and infectious disease research. Last month, Researchers from the Institute presented data that shows ONSO is achieving well beyond its Q40 specification on customer liquid biopsy samples, with the majority of bases over Q50, or one error in 100,000 bases of sequencing. Since ONSO's launch, peers in the industry have been increasingly discussing the value of accuracy which we believe underscores accuracy as an unmet need that PacBio is differentially positioned to address with our sequencing by binding chemistry. Moving on, as we do every year, I wanted to share an update on our internal market segmentation from the previous year. Our customers use our products across a diverse set of sequencing applications. In 2023, human genomics was the largest portion of our business, accounting for approximately 40% of our revenue. This includes a wide range of customers like UC Irvine and the Greger Consortium, looking to run a multi-thousand sample project in rare disease, or BioCentia, who is now using HiFi for routine testing for certain sensory disorders. Plant, animal, and agro-genomics, again, was the second largest part of our customer base, making up approximately 25% of our revenue, as long reads have been well positioned to interrogate these often large and complex genomes. This includes agricultural companies that are adopting Revio to incorporate low-pass genome sequencing to improve their workflows and get better insights into crop development and production. Microbiology and infectious disease makes up about 20% of our business and include a wide array of customers across public health labs, research institutes, and academic labs across a dynamic range of applications from pathogen surveillance to biology of host pathogen dynamics, drug resistance, and more. Cancer genomics was roughly 10%, and this is really an application that we believe can be further addressed with ONSO's accuracy. For example, McGill University researchers used ONSO, and preliminary results presented at the Early Detection of Cancer Conference in October indicate that ONSO's ability to accurately sequence through homopolymer regions has the potential to increase the detection of microsatellite instability. The remaining approximately 5% of our revenue is from other and emerging markets, including biopharma, and in the fourth quarter, It included a new gene editing customer planning to implement Revio as part of its cardiovascular disease therapeutic development. Turning to product launches, last week at AGBT, we announced new library prep kits that eliminate bottlenecks in the high-fly workflow and make PacBio long-read library prep on par with that of short-read sequencing, making it easier for our customers to make the most of their Revio systems. Our HiFi Prep Kit and HiFi Plex Prep Kit 96 offers customers the potential for up to a 60% decrease in workflow time and up to a 40% reduction in costs and further lowers the DNA input requirements. It also allows customers to automate the sometimes tedious library prep process by integrating with the Hamilton NGS Star System with other automation platform partners to be announced in the future. In the fourth quarter, we launched our Connect kits for scalable, cost-effective RNA sequencing. We've been extremely pleased with our customer enthusiasm and uptake for these kits, and we now have orders from over 115 different customers. An early adopter at UCSD's Sanford Consortium commented on how demand for the full-length RNA sequencing is outpacing genomic DNA sequencing. And the customer shared that the Connex kit enables competitive pricing, high throughput, ease of use, and automation, and has provided for consistent sequencing yields across various samples. Connex can also help researchers glean more insights into RNA across various applications. For example, another early user from a leading pediatric hospital in Columbus, Ohio, used Connex to study somatic mosaic diseases like cancer and epilepsy, and with Connex, was able to pinpoint specific cell types harboring disease-causing genomic variants from single-cell data. The customer explained that Connex can help identify cell types harboring the mutation and then understand the mutation's influence on the transcriptome, which could lead to a better basic biological understanding of how the disease occurs, but can also give clues into the timing of disease occurrence and the onset in children. These are just a couple of examples, and we believe Connex will continue to accelerate long-read sequencing as the preferred method in several RNA-seq applications. Lastly, we rolled out our V13 software for Revio last quarter, and 93% of our Revio runs are using the new V13 software. As a result, customers are getting a better user experience, We've seen over a four-fold decline in overloading, and customers are starting to realize increased yields on their smart cells. Finally, to wrap it up, last week was the Annual Advances in Genome Biology and Technology Conference, or AGBT, and it was encouraging to see the impact that hi-fi long-read sequencing had on the research community and the desire for researchers to look deeper and assemble more information from the genome than ever before. Our team walked away from the conference feeling like an inflection point for hi-fi sequencing has truly just begun. And with that, I'll pass the call to Susan to discuss our financials. Susan?