Pacific Biosciences of California, Inc.

Good day and welcome to the PACBio second 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 zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PACBio's second quarter 2024 earnings conference call. Earlier today, we issued a press release outlining the financial results we'll 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. A copy of our earnings presentation is also available on the Investor section of our website. 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, among other statements, regarding predictions, estimates, expectations, and 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 from those projected or discussed. Please review our SEC filings, including our most recent forms 10Q and 10K, and our press releases to better understand the risks and uncertainties that could cause 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, which 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. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in our earnings release, which is available on the investor section of our website. For future periods, we're unable to reconcile 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. A recording of today's call will be available shortly after the live call in the investor section of our website. Those electing to use the replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call. I'll now hand it over to Christian.

Thank you, Todd, and thank you for joining us today. The first half of 2024 has been challenging for PacFile. However, early in Q2, we successfully initiated a significant restructuring, which we expect will reduce our non-GAAP operating expenses by more than $75 million on an annualized basis and significantly reduce our quarterly cash burn. Even with this restructuring, we are making significant progress in our product development pipeline and serving our customers with best-in-class support. There were several bright spots in many areas of our business in the quarter, including several customers adopting Revio in a clinical setting. And we are now seeing signs that lead us to believe that we will see sequential growth throughout the remainder of the year. I want to thank all of our employees for their dedication and support as we pursue our mission of enabling the promise of genomics to better human health. On our last call, I outlined the following four strategic priorities for the remainder of the year. Number one, improving our commercial execution to drive adoption of both Revio and Onset. Number two, continuing the development of new platforms that are expected to broaden our product offering and drive revenue growth. Number three, improving our gross margin and driving manufacturing efficiencies. And number four, reducing annualized non-GAAP run rate operating expenses. In my remarks today, I will comment on the progress we are making against the top two priorities, specifically focusing on our end markets and related commercial execution. Susan will then spend some time focused on our third and fourth priorities and outlining our financial results. But first, let's do a quick overview of our second quarter results and our updated guidance. Total revenue in Q2 was $36 million, which was below our expectations. Our revenue reflects a shortfall in instrument placements, which we believe is due to the ongoing impact of the difficult macro backdrop and elongated customer purchasing cycles. Second quarter revenue included 24 Ravio systems, representing four systems below our expectations. Although we shipped fewer Ravios than anticipated, the average selling price of Ravio increased during the quarter. We continue to see elongated instrument purchasing cycles in each of our regions during the quarter, which we believe is due to a number of factors. Several companies and organizations are awaiting funding for their systems, and we're seeing that funding is increasingly delayed. Number two, we continue to experience unanticipated delays in the procurement process, which include tenders in Europe and APAC, where they're taking longer than expected. And number three, sample volumes are not materializing as fast as we expected for some potential new Revio customers, causing them to delay their purchases. On the consumable side of our business, we delivered revenue of $17 million, growing 24% year-over-year and 7% sequentially as customers continue to ramp up their Revio usage. We saw strength in EMEA, with consumable revenue growing 42% year-over-year and 50% quarter-over-quarter, hitting an all-time high. The growth in consumable revenue in EMEA was driven by new customers scaling long-read sequencing during the second quarter. Notable customers include the University of Tartu sequencing for the Estonian Biobank and BioSentia, a leading global provider of clinical laboratory testing services in Germany, which is scaling its testing offerings. We are further encouraged by the growing excitement for long reads in the region. Novagene, for instance, has implemented Revio in its brand-new lab in Munich, Germany, to serve customers across the European scientific community. Despite the total growth in consumables, revenue was slightly below our expectations, which we believe was primarily due to a large research project in the United States losing funding and weakness in the Asia Pacific region, notably in China. Looking ahead for the full year, we now believe revenue will be around the low end of our previously guided range of $170 to $200 million, which we believe is primarily due to the continuation of the headwinds we experienced in the first half of the year and the expectation that organizations will continue to operate in a capital-constrained environment for the rest of 2024. Indeed, external challenges are affecting PacBio and others in the industry, particularly with respect to capital equipment purchases. In order to drive instrument placements, we have implemented a number of programs to make hi-fi long-read sequencing more accessible than ever before. including promotions designed to ease customers' upfront capital expenditure requirements while maintaining PacBio's overall economic value. In the second quarter, we shipped several instruments to customers utilizing some of these promotions and are actively working to close several more deals in the second half of this year. Additionally, we announced last week that our leasing partner, Mitsubishi Capital, is is offering one of the most attractive deals on a Revio instrument through a two-year rental agreement for eligible customers in the United States. With this offer, Mitsubishi will purchase the Revio directly from PacBio and then rent the system to customers with an option for the customer to buy the Revio at the end of the lease term. This program does not require a consumable purchase commitment, which is appealing to research customers that are primarily project-based. We expect this new promotion to make HiFi sequencing even more accessible to a broader range of customers. As for Onso, we launched a promotion for the system in late May to make it what we believe is the most attractive mid-throughput short read instrument on the market. As a result, customers can trade in any NGS system and acquire an Onso for $99,000, with sequencing costs as low as $4 per gigabit. This promotion has already garnered customer interest and increased the order opportunities in our sales pipeline. Consequently, we anticipate a substantial ramp up for the platform in the second half of the year. In order to continue building our sales funnel, we helped several major marketing events throughout the world during the quarter. These PRISM marketing events were an overwhelming success. The six events attracted approximately 800 attendees and helped drive dozens of new Revio opportunities, some of which have already closed, and others that were actively working on closing in the second half of this year. On the consumable side, we are seeing indications that give us confidence that consumables will continue growing in the second half of the year. For example, we are now seeing several large projects, such as the University of Karthus sequencing for the Estonian Biobank, the Singapore PRECISE project and the Greger Consortium project, all scaling up. In addition, we continue to see positive book-to-bill ratios for consumables as customers are placing longer-term purchase orders for their smart cells and reagents, a potential leading indicator for quarterly growth. While we remain cautious about the outlook in China for the remainder of the year, customer utilization trends have started to improve in the past couple of months, and July marks the highest utilization month for the region this year. On our last call last quarter, we introduced a histogram chart of our Revio install base by utilization rate. As a reminder, we can monitor the utilization of the majority of our Revio fleet. As one might expect, newer customers take longer to ramp utilization levels, and we continue to see this in Q2. However, what was encouraging is that compared to last quarter, We saw more instruments move from the low utilization bucket into the medium or high utilization buckets, and we saw increased pull-through from both medium and high utilization customers. Our focus will be to continue simplifying our workflows and helping our customers get up to their planned utilization rate as fast as possible in order to maximize our consumable revenue opportunity. Now let's take a look at a few of the other commercial highlights during the quarter. We continue to be encouraged by the growth in sequencing data as data produced from the Revio platform grew quarter over quarter, and total data output from PacBio sequencers grew 2.2 times from the second quarter of last year. Revio continues to be the fastest-growing instrument in our history, in part through its ability to gain market share via new customers. In the first half of 2024, new customers accounted for nearly half of total shipments. highlighting the growing value proposition of HiFi sequencing and the expanding range of applications that Revio addresses. At the same time, we see significant opportunities to drive adoption among the remaining 180-plus SQL 2 customers who have not yet ordered a Revio. Further encouraging are the results from our annual customer survey, which shows an NPS score of 56 among those surveyed. In addition, 9 out of 10 respondents reported being satisfied or very satisfied with their Revio system. We are pleased by the diversity of customer types that are adopting Revio. In the second quarter, we delivered multiple Revios to a range of customers, including research institutes, core labs, service providers, diagnostics and LDT labs, children's hospitals, human genetic research organizations, and pharmaceutical companies. This customer diversity is expected to lead to more application and greater penetration into our end markets. Additionally, we expect adoption by diagnostic and LDT labs can potentially establish a long-term revenue stream as these companies expand their testing menus. Notably, we delivered multiple Revios to Quest Diagnostics to support the company's development of tests for neurological disorders. leveraging the advantages of our recently launched PureTarget repeat expansion panel. Chulalongkorn University Faculty of Medicine in Thailand has adopted its second REVIO system to scale its HiFi sequencing capability. The organization plans to sequence 1,000 human genomes annually over the next five years to improve health outcomes. Health Encode, a leading company in genetic diagnostics, is bringing the first Revio system to Spain, becoming PacBio's first service provider in Southern Europe. This system is expected to enable large-scale, high-fi, long reads to improve the detection of variants in complex regions for customers throughout the region. We're continuing to see the adoption of transcriptomics and single-cell RNA sequencing with our Connects kits. which launched last December. And Q2, Connex already surpassed $1 million in quarterly revenue and helped drive Revio placements, including a Revio system at a prominent cancer research center in Texas. In second quarter, we also started to see some early customers ramp up their use of Onsa. The Hospital de Especialidades in Ecuador, for example, has sequenced 700 patient samples as part of a 2,000-sample oncology project and is looking to expand into other projects. In the second quarter, we also made significant progress in research and development. For example, we are in the late stages of developing a new Revio consumables, which we expect will meaningfully increase the system's throughput without the need for additional capital investments. The new consumables are also expected to significantly decrease input, DNA input requirements, and add additional methylation calling capabilities. We believe these improvements will unlock more samples and increase Revio's capacity, providing our customers with more value than ever before. We look forward to sharing more about this consumable upgrade later this year. Additionally, we're continuing to make progress in our work to develop a low-throughput long-read platform and a high throughput short read system. Finally, we're supporting our customers and R&D pipeline while reducing our costs in cash flow. As we discussed last quarter, we initiated a restructuring plan to reduce our non-GAAP operating expenses and expect to exit this year with annualized rent rate savings exceeding our previous non-GAAP target of $50 to $75 million. As a result of this restructuring, we believe our cash burn will continue to decline sequentially in the third quarter and the fourth quarter of this year. With that, I'll hand the call to Susan to discuss the financials in some more detail. Susan?