Pacific Biosciences of California, Inc.

Hello and welcome to the PACBio First Quarter 2024 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 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad, and to withdraw from the question queue, please press star, then 2. As a reminder, this conference is being recorded. I would now like to hand the call to Todd Friedman, Senior Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PacBio's first quarter 2024 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com. or is furnished on Form 8K available on the Securities and Exchange Commission website at www.sec.gov. A copy of our earnings presentation is also available on the investor section of our website at www.pacb.com. 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, our commitment to create a sustainable, cashflow-positive company by the end of 2026, expectations with respect to certain customers being early in the ramp-up, and measures to increase their utilization. Gap and non-gap guidance and expected benefits of using PacBio products or technologies, and new product expectations. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially from those projected or discussed. We refer you to the documents that we file with the SEC, including our most recent forms, 10Q and 10K, and our recent press release to better understand 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 provides 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 not 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 uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year, including future changes in 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 on today's call may differ or change materially after the completion of the live call. Finally, we will be hosting a question-and-answer session after our prepared remarks. We ask that analysts please limit themselves to one question so we could accommodate everybody in the queue. I will now turn the call over to Christian.

Thank you, Todd, and thank you for joining our call today. In today's remarks, we will... discuss some of the factors that contributed to our previously announced revenue shortfall and revised full-year guidance. We'll also discuss the steps we're taking to return to revenue growth and why we are confident in the assumptions underlying our updated financial forecast. Finally, we will share our refocused priorities for 2024, which we believe will position us to build PacBio into a sustainable, cashflow-positive company with the ability to execute in any macro environment. While we forecast near-term growth to be lower than our original guidance for 2024, we have never been more confident in the value of our platforms, our long-term growth potential, and our ability to capture market share in the multi-billion dollar sequencing opportunity. But first, let's recap the first quarter. Consistent with our pre-announcement on April 16th, revenue of $38.38 million for the first quarter was below expectations due to an increasing number of customers delaying instrument purchases and softness in consumable shipments. Based on the first quarter results and our expectation that some of these external factors will likely persist throughout 2024, we expect full-year revenue to be in the range of $170 to $200 million. The instrument shortfall primarily resulted from elongated customer purchasing cycles as the median sales cycle for Revio instrument purchases increased more than we expected in the first quarter of 2024. More specifically, we believe that the sales cycle increased primarily because of uncertainty surrounding the timing of funding for new capital equipment, particularly in the United States and China, smaller SQL II and IIe customers who are planning to upgrade to a Revio are waiting for the samples to drive that upgrade, and An increasing proportion of the sales pipeline is comprised of new customers in the first quarter of 2024, which have proven to have longer sales cycles compared to those existing PacBio customers. While consumable revenue grew 15% year over year, it was also below our expectations. We believe this was primarily attributed to the slower-than-expected ramp-up in sequencing by our small and mid-sized customers, many of whom are new to PacBio. The time for new Revio customers and new projects to reach full capacity has been slower than we anticipated. Sample delays impacting sequencing volume in the quarter for certain large customers and some smaller service providers in China operating at lower utilization as a result of the challenging funding environment. In Q1, more customers than we expected utilized their Revio systems at less than 20% capacity. Many of these are newer customers, and the average age of the systems in this category was less than four months, which we believe indicates that these customers are still early in their ramp-up. The pace of the ramp is dependent on a number of factors, including the timing of sample availability, lab readiness, and funding, among other reasons. We are putting measures in place that we believe will help these customers ramp to their full utilization as timely as possible and help drive consumable growth going forward. Moving on, we're implementing several strategies aimed at accelerating instrument and consumable revenue. First is an intense focus on the customer to drive new sales opportunities, close existing deals, and accelerate consumable revenue ramp-up time. And among other activities, this involves launching our PRISM customer-focused roadshows. These events include discussions and workshops with PacBio users and key opinion leaders in genomics, where they'll engage and share the groundbreaking science that Revio is enabling. We're organizing events across six global cities with approximately 1,000 registered attendees representing over 500 organizations, many of whom we believe will become future Revio users. We're reducing the spans and layers in the commercial organization, which will allow leadership to get closer to and more involved in the sales process. We're also establishing Tiger teams to actively work with low-volume customers to accelerate their Revio ramp and collaborate with them to secure samples to feed their sequencer. And we're continuing to collaborate with customers to demonstrate the value of HiFi long-read sequencing to drive long-term, durable revenue.