Pacific Biosciences of California, Inc.

Good day and welcome to the PACBio third 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 your telephone keypad. 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 third 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 in 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 be making forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, and guidance. You should not place undue reliance on forward-looking statements because they are subject to risks and uncertainties that could cause actual results to differ materially from those projected or discussed. Please refer to 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 US GAAP. Reconciliations between historical US GAAP and non-GAAP results are presented in our press release, which is available in the investor section of our website. For future periods, we are 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 board-looking statements may differ or change materially after the completion of the live call. I'll now hand the call over to Christian.

Thank you, Todd, and thank you for joining us today. We are excited to broadcast today's to you from Denver, Colorado, at the American Society of Human Genetics annual meeting. This week, we unveiled several new and exciting products to thousands of researchers and scientists in the human genetics community. I look forward to sharing those and other updates on today's call. Our goal is to leave you with the following takeaways. First, PacBio is delivering on its strategy to create a suite of platforms with turnkey end-to-end solutions. enabling our customers to access some of the most advanced sequencing technologies available. Our latest launches significantly expand our addressable market in ways that PacBio has never seen before. Second, although we continue to operate in a difficult macro environment where customer capital expenditure budgets have been challenged and sales cycles prolonged, we have seen several positive signs that our business is returning to growth. Third, Revio continues to drive new customers to long-read sequencing and open up new demand. This is evident not only in the continued adoption by new PacBio customers, but also in the diversity of customers implementing PacBio and the adoption of HiFi sequencing by large population scale programs and diagnostic and LDT labs. Finally, we are hyper-focused on building a sustainable, cash flow positive business and have made meaningful progress this year on driving the production costs of our products down, reducing expenses, lowering our cash burn, and strengthening our balance sheet by reducing our total debt while balancing dilution through our recently announced note exchange with SoftBank. We remain committed to our goal of being cash flow positive by the end of 2026. Now, let's discuss our product launches. Last week, we announced a significant upgrade to our Revio platform with a new chemistry we call SPRQ, or SPARC. This new chemistry leverages the power of our existing 25M smart cell, increasing the data output per smart cell by 33% from a target of 90 gigabases to 120 gigabases. This increase enables the Revio system to sequence up to 2,500 complete phased HiFi genomes a year at a cost below $500 a genome, offering what we believe is the most complete and economical genome on the market. Like any hi-fi genome, methylation data is included with every run. This chemistry update, along with our software upgrades, improves the accuracy of existing 5-methyl-C capabilities by 10 percentage points and adds additional methylation calling abilities with 6-methyl-A for the fibroseq assay. giving customers an even more in-depth view of the genome. Importantly, SPARC significantly lowers DNA input requirements for whole genome sequencing by fourfold to just 500 nanograms. In fact, we have now reduced sample input requirements by 30-fold since I joined PacBio four years ago. Many customers say this is perhaps the most intriguing update because it unlocks even more sample types, like saliva or tumor, to be sequenced with HiFi. Building on this, we've expanded our Nanobind Pan-DNA Kit capabilities for high molecular weight DNA extraction of saliva samples, allowing us to offer sample-to-answer workflows for one of the most common biological sample types. We've received fantastic feedback from Early Access customers. We expect SPARC to ship globally next month, helping to enable the next wave of sample migration to long read sequencing. Notably, we expect to deliver this throughput increase and cost reduction through innovation and manufacturing improvements, passing these benefits to our customers and, at the same time, improving REVIO's consumable gross margin profile. While we expect Spark Chemistry to advance more large HiFi sequencing projects, we realize that some researchers do not have the capital budget to purchase a Revio, but they still need the extraordinary accuracy and completeness that Revio offers. So last night, we were thrilled to unveil our latest sequencing platform, Vega. Priced at $169,000, Vega is a revolutionary new benchtop sequencer designed to make accurate long-read sequencing accessible to any laboratory, and introduces a new sequencing paradigm in which customers don't have to sacrifice data quality for low capital investment. With a runtime of just 24 hours, users can sequence up to 60 gigabases of HiFi data and utilize onboard analysis with Google Deep Consensus, 5-methyl C-calling, and demultiplexing. all at a cost of $1,100 per run. Vega was developed with the customer in mind. It offers the same high-fi data quality customers expect from PacBio. In experiments comparing data from Vega and Revio, we see a correlation of 0.996, demonstrating nearly identical data between the two platforms and giving customers confidence in the consistent high-quality data no matter what high-fly platform they use for their project. With only two simplified consumables, Vega gives users the flexibility and confidence to sequence almost anything, from RNA sequencing with our Connex kits and targeted analysis with PureTarget, to small-scale whole genome sequencing projects and microbial genomics. Vega has the potential to attract thousands of customers to PacBio HiFi sequencing. I'm happy to report that platform development is in its final stages and we expect to commence shipping in the first quarter of 2025 and scaling manufacturing throughout next year. Tying our platforms together for a seamless user experience, is critical to broader adoption, and we're pleased to announce our plans to launch our SmartLink cloud solution in early 2025. With this, customers can access, store, and analyze their HiFi data without local hardware, making it easier for new and existing customers to ramp up their PacBio sequencing. Additionally, D&H Stack, a PacBio compatible partner, has expanded its offerings with its latest software launch, Instruments. This cloud solution is expected to integrate directly with Revio and Vega to automatically detect new samples and offer users best practice informatics pipelines. We believe that seamless and intuitive informatics tools like these can help build a thriving customer ecosystem around our growing install base and solidify our position as a leading sequencing provider. Now, let's turn back to third quarter results. I'll give a quick update on our performance and discuss our commercial activity. Total revenue was $40 million, up 11% from the second quarter of 2024, with sequential growth in instrument, consumable, and service revenue. Total long read sequencing systems grew quarter over quarter, as Q3 revenue included 22 Revio systems and five SQL 2E systems. Interestingly, we continue to see some demand for the SQL 2E system, which is an encouraging sign that some customers are seeking a lower throughput platform like Vega, especially in areas like microbial genomics and gene therapy. The 22 Revio systems were delivered to 22 different customers, and year-to-date, approximately 45% of Revio shipped were to new-to-PAC bio-instrument customers. This was the second quarter in a row with a Revio unit book-to-bill of one or greater. Additionally, we had a record quarter for the ONSO system, with the most systems shipped since the platform launched last year. Consumable revenue of $18.5 million grew 10% year-over-year and 8% from the second quarter of 2024. Annualized pull-through on the REVIO platform was approximately $255,000, also in line with the past couple of quarters, with stable utilization and a similar pull-through distribution of what we experienced in the first half of this year. The output from PacBio long-read sequencers continues to grow, with PETA-based sequences increasing 1.6-fold from Q3 of 2023. Stable unit book-to-bill and pull-through, new customer adoption, consumable growth, and increased data output are all encouraging signs that lead us to believe that we're past the trough we experienced in the first half of 2024. With the imminent launch of Vega and a more powerful Revio platform with Spark Chemistry, we expect a return to growth in 2025 and beyond. Vega product development is ahead of our previously anticipated schedule, and while we don't expect Vega to cannibalize Revio meaningfully, we are mindful that there may be some cases where potential customers may take a little more time to assess our new offerings, which may prolong some sales cycles. As a result, We expect fourth quarter revenue will be lower than previously anticipated and be slightly up compared to third quarter of 2024, with review system placements and pull-through looking similar to that of Q2 and Q3 of this year. Susan will touch more on our guidance later. Looking back at the third quarter, I'm encouraged by the team's commercial successes, even as we continue to operate in this difficult capital environment. Building on our success last quarter, we continue to see adoption from diagnostic and LDT labs and clinical research. For example, using the Revio platform, Azenta Life Sciences recently launched a long read whole genome sequencing test for clinical applications. This test will enable precise detection of a range of complex genomic alterations undetectable by traditional sequencing approaches. Myriad Genetics acquired its first Revio system in the third quarter. This leading genetic testing and precision medicine company plans to use PacBio's PureTarget kit to develop a high-throughput automated targeted sequencing panel and consolidate current methods such as PCR and capillary electrophoresis for a subset of genes in their carrier screening test. Genius Genomics is utilizing Revio in a Phase II clinical trial with Duke Health and Temple Health to attest and further develop its bioinformatics platform, which provides comprehensive genomic profile and stratification of ALS patients for individualized treatments. The improved cost and throughput, coupled with the completeness of a HIFI genome, is driving government-sponsored precision health and research projects to increasingly utilize long-read sequencing to gain a deeper understanding of the genetic diversity of their respective populations. In September, the National Institute of Health of Korea announced that it plans to create a next-generation human reference pangenome based on the Korean population to further research into undiagnosed diseases and difficult-to-sequence genes related to drug metabolism and strengthen its precision medicine capabilities. The program aims to sequence over 1,000 individuals using long reads and PacBio is proud to be part of the pilot phase starting this year. Earlier this year, we announced that Singapore's National Precision Medicine Program, PRECISE, selected PacBio as a key sequencing provider. Today, we are excited to share that we've expanded this collaboration to include our Connex full-length RNA kit into the program. By incorporating full-length isoform data, researchers will have access to multi-omic data which can lead to important discoveries about the social, environmental, lifestyle, and genetic factors influencing public health and prevalent diseases in Singapore. Meanwhile, publications and evidence continue to demonstrate the utility of a highly accurate long read sequencing. In genetic testing, researchers from RADBUD and other institutions published a preprint with results concluding that long read sequencing can be implemented as a first-tier diagnostic workflow for germline testing, potentially encouraging its increased use as a test for diagnosing individuals with rare diseases. Similarly, in a pre-print, researchers at Boston Children's Hospital study in pediatric sensorineural hearing loss, where diagnostic rates have remained static for over a decade at around 40%, used HiFi to solve over 20% of a cohort of previously unsolved cases that had used exome and short-read whole genome sequencing. In microbial and metagenomics, researchers from the Salk Institute and others studied head-to-head comparisons of PacBio, Nanopore, SBS, and synthetic long reads on generating complete metagenome-assembled genomes, or MAGs, from longitudinal pediatric microbiome samples. They found that, quote, Long read approaches generated 51 to 72-fold more complete mags per gigabase pairs than legacy short read approaches, while PacBio generated the most accurate complete CMAGs at the lowest cost, end quote. We've always believed that long reads to be the best-suited sequencing method for microbial genomics, and with low-cost platforms like Vega on the heels of validating studies like this, We are highly encouraged that PacBio can penetrate deeper into this market. Let's shift gears to Onso and the short read portfolio. It was a record quarter for PacBio as we shipped the most Onso systems yet, two-thirds of which were to new PacBio customers. We also welcome the Translational Genomics Research Institute, or TGen, as the first official service provider for SBB sequencing. helping our short-read SBB technology reach a broader clinical customer base. We also expanded the breadth of applications SBB can address by joining 10X Genomics' compatible partner program. Integrating ONSO into 10X's workflows will help extend the platform's ability to address the fast-growing single-cell and spatial biology applications. Finally, we were encouraged to see a peer-reviewed publication validating the accuracy of SBB chemistry and its ability to examine rare variants with extraordinary results. The study showed that SBB sequencing chemistry detected target SNPs down to 0.01% at 100,000-fold depth and 0.1% at 20,000-fold depth without any error correction methods. It was noted that traditional SBS sequencing is unable to achieve this accuracy without the use of sophisticated error correction tools. I'll wrap it up in a bit with some closing remarks, but before I pass the call to Susan, I wanted to share that Susan will be leaving PacBio in December to pursue another opportunity outside of life sciences. Susan has been a trusted partner over the past four years, and I want to thank her for her contributions and wish her every success. we plan to immediately begin searching for Susan's full-time replacement. I'll now pass the call to Susan to review our financials in a little bit more detail. Susan?

Thank you, Christian. I'm incredibly proud of what we've accomplished over the past four years, and I'm excited for PacBio's future. I am confident that under Christian's leadership, the team will continue to make tremendous strides in its mission to better human health through the promise of genomics. With that, I'll now dive into the quarterly results. I will be discussing non-GAAP results, which include non-cash stock-based compensation expense. I encourage you to review a reconciliation of GAAP to non-GAAP financial measures in our earnings press release. As discussed, we reported $40.0 million in product, service, and other revenue in the third quarter of 2024 compared to $55.7 million in the third quarter of 2023. Insurance revenue in the third quarter was $16.8 million a decrease of 52% from $34.7 million in the third quarter of 2023 due to lower Revio unit shipments. We ended the quarter with 247 cumulative Revio system shipments. Turning to consumables, revenue of $18.5 million in the third quarter increased 10% from $16.9 million in the third quarter of last year. Approximately 77% of consumable revenue came from Revio systems, and the remainder from other systems and other consumables. Finally, service and other revenue was $4.7 million in the third quarter of 2024 compared to $4.1 million in the third quarter of 2023. We continue to expect modest sequential increases in service and other revenue as the commencement of Revio service contracts is expected to more than offset the decrease in service contract revenue resulting from SQL 2 and 2E decommissions. From a regional perspective, America's revenue of $20.1 million decreased 31% compared to the third quarter of 2023, with a decline in revenue systems partially offset by record consumables in the third quarter. For Asia Pacific, revenue of $10.8 million decreased 32% compared to the third quarter of 2023. The region, however, exceeded our expectations, and while we remained cautious on China, it was encouraging to see sequential quarterly growth for the country, as well as sequential quarterly improvement of REVIO instrument utilization. Finally, AMIA revenue of $9.1 million decreased 17% compared to the third quarter of 2023, with year-over-year growth in consumables partially offsetting the year-over-year decline in instrument revenue. It was encouraging to see REBIO utilization in the region hit an all-time high in the third quarter, primarily driven by momentum and population scale programs. Moving down the P&L. Third quarter 2024 non-GAAP gross profit of $13.0 million represented a non-GAAP gross margin of 33% compared to a non-GAAP gross profit of $18.1 million or 32% in the third quarter of last year. Sequential decline in non-GAAP gross margin from the second quarter of 2024 was primarily due to record ONSO placements in the third quarter, which carry a lower gross margin with our promotional price offered in the third quarter, equal 2E systems sold in the quarter at lower ASPs, and lower REVIO ASPs in the quarter. Non-GAAP operating expenses were $62.4 million in the third quarter of 2024, representing a 31% decrease from non-GAAP operating expenses of $90.9 million in the third quarter of 2023. Non-GAAP operating expenses also declined 12% sequentially compared to the second quarter of 2024 as we continue to realize cost savings related to our restructuring plan initiated earlier this year. And again, it represented our lowest non-GAAP operating expenses quarter since Q3 of 2021. Regarding headcount, we ended the quarter with 575 employees, compared to 796 at the end of 2023, and 844 at the end of the third quarter of 2023. Operating expenses in the third quarter included non-cash share-based compensation of $17.0 million, compared to $18.6 million in the third quarter of last year. Non-GAAP net loss was $46.0 million, representing 17 cents per share in the third quarter of 2024, compared to a non-GAAP net loss of $67.9 million, representing 27 cents per share in the third quarter of 2023. Turning to our balance sheet items, we ended the third quarter with $471 million in unrestricted cash and investments, compared with $631.4 million on December 31, 2023. Inventory balances decreased in the third quarter to 65.7 million, representing 1.6 inventory turns, compared with 68.6 million at June 30, 2024, also representing 1.6 inventory turns. Accounts receivable decreased in the third quarter to 29.4 million, compared with 32.4 million at June 30, 2024. Before I discuss guidance, I wanted to share the details of our note exchange with SoftBank. As more fully disclosed in our 8K that we filed today, we signed an agreement to exchange the $459 million aggregate principal amount of the PAC-BIO 1.5% convertible senior notes due 2028 for $200 million principal amount of newly issued 1.5% convertible senior notes due August of 2029, approximately 20.5 million shares of common stock, which represents dilution of less than 7%, and $50 million of cash. We are pleased to announce the transaction, which once closed, is expected to reduce the total notes outstanding by $259 million, as well as extend the duration by another 18 months giving us tremendous operational flexibility going forward and is expected to close on or about November 21, 2024. Now, turning to guidance, as Christian mentioned earlier, we expect the fourth quarter revenue will be flat to slightly up compared to the third quarter of 2024, with full-year revenue lower than our previous estimate of approximately $170 million. Additionally, we expect Revio system placements and pull through similar to Q2 and Q3 of this year. We expect the full year non-GAAP gross margin to be between 34% and 35%. We continue to improve our per unit cost of Revio instruments and consumables significantly. We expect to end the year with Revio instrument standard COGS over 10% lower than when we launched the platform platform and consumable unit costs over 20% lower. These costs and operational improvements are expected to continue beyond 2024, driving quarterly gross margin expansion in 2025 and beyond, as some of our recent cost improvements are expected to be realized in 2025. We now expect full-year 2024 non-GAAP operating expenses to be $285 million to $290 million. This assumes a modest step up in the fourth quarter of 2024, primarily due to a one-time benefit in Q3 related to our bonus accrual that we do not expect to occur in Q4. We continue to expect full-year non-GAAP operating expenses to decline in 2025 compared to 2024. We expect full-year interest and other income to be approximately $10 million. We expect our ending cash, cash equivalents and investments to be approximately $385 million, reflecting the expected $50 million cash payment and other fees related to the note exchange with SoftBank. Excluding this payment, our updated guidance is at the low end of our previous $435 million to $450 million range. We expect $276 million in weighted average shares outstanding for the full year 2024, reflecting additional shares to be issued related to the note exchange with SoftBank. Finally, we remain committed to our plan of turning the business cash flow positive by the end of 26 under various revenue scenarios, which include revenue growth in 25 and beyond with new products and growing consumables off an increasing Revio install base. expanding gross margins with reduced manufacturing per unit cost and a continued mixed shift to consumables, and lower non-GAAP operating expenses in 2025 compared to 2024 with minimal growth expected thereafter. We will provide more details behind our assumptions and our updated long-term guidance at a later date and more details about our 2025 guidance early next year. I'll hand it back to Christian for some final remarks.

Thank you, Susan. In closing, I'd like to discuss our progress on the four strategic priorities we outlined earlier this year. The first was to improve our commercial execution to drive the adoption of both Revio and Onso. As I discussed, I believe we're past the trough our business experienced in the first half, with several green shoots in our business that support our belief that revenue will grow in 2025. Onso notched a record quarter, approximately 45% of Revio placements this year to new customers, and clinical customers in large-scale research programs continue to adopt long-read sequencing at a pace we've never seen before. Second was continuing the development of new platforms that are expected to broaden our portfolio and drive revenue growth. As discussed with our launches of Spark and Vega and SmartLink Cloud, we've strengthened the value proposition of Revio, opening up HiFi sequencing to more customers than ever, and developed a cloud environment for any user to scale their PacBio projects. And this is just the beginning. We continue to develop our high-throughput short-read platform and ultra-high-throughput long-read platform with the goal of addressing customers with both long- and short-read systems across a full spectrum of throughput. Third, we are focused on improving gross margin and driving manufacturing efficiencies. As we discussed, we've lowered our per-unit costs on Revio systems and consumables with the roadmap for further reduction in 2025. Additionally, we developed Vega with gross margin in mind and expect it to be accretive to the company's gross margin as we scale the platform next year. And finally, reduce non-GAAP operating expenses. As Susan mentioned, we've lowered our full-year non-GAAP operating expense guidance by an additional $10 million to $10 to $15 million in Our operating cash burn continues to decline each quarter this year, and we expect a further decline in non-GAAP operating expenses in 2025. Building a cash flow positive business remains the front and center in our minds, and we're committed to our plan of turning cash flow positive by the end of 2026. Further, we signed an agreement with SoftBank to meaningfully reduce and extend the duration of our long-term debt while balancing shareholder dilution and impact on our cash. This exchange underscores our commitment to our shareholders and customers to optimize our capital structure and build a long-term sustainable business around our industry-leading technologies. With the earliest debt maturities now due in August of 2029, this strengthens our financial position and gives us even greater flexibility. So with that, I'd like to open it up for questions. Operator? Why don't we start the Q&A section?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good evening and appreciate the time here. Maybe, Christian, I'll start with one on the Spark side of things. You know, it's unlocking that $500 per genome price point for you. That's pretty darn close to, you know, the $200 per genome that the Short Tree side of things offers. What has been the feedback from customers on the cost tradeoff versus the additional resolution that Long Read offers. Of course, there's a difference. I think it's about an eight-fold difference on throughput as well. So just curious as to what the feedback has been from the field since launch. And on that point you made earlier on the lowering of the DNA input requirement, can you just help us dimension how much of an opportunity that unlocks for you?

Yeah, Tejas, thank you for the question. You know, I think... The feedback on SPARC has been remarkable, quite frankly, and I think the $500 list price is really a big deal and it catalyzes more projects to get started, quite frankly. You think about this, you only have to run two genomes to get $500 a genome. I can't think of any other technologies that have that kind of pricing. And when you start to think about if you're running large-scale programs, you're likely going to get a discount off the $500. And so, in reality, you're going to be paying a lot less than the $500 for a large-scale project, and you're going to get all of the, you know, benefits of single-molecule native long-read sequencing. And I think that The customers really have reacted positively and are starting to plan. I've had several meetings here at ASHG talking about larger projects that are enabled by the $500 price. But, you know, perhaps just as important is the lowering V&A input. At 500 nanograms now, we can – at 500 nanograms, you know, there hasn't been a single customer – that I've spoken to that says, wow, this doesn't unlock a tremendous amount of new demand. And I really do think it could be on the order of, you know, potentially millions of samples over time. When you think about, you know, what we've heard from our customers historically is that a significant proportion of their samples that they're trying to get onto a Revio are there isn't enough DNA coming through the sample process in order, high molecular weight DNA being extracted to get through the sample prep process and get onto the sequencer. With 500 nanograms, that completely changes everything. So the combination of the pricing and, you know, associated with the increased throughput and the price, as well as the lowering of the DNA input amount, really does open a lot of doors that perhaps we couldn't reach before.

Got it. That's helpful. And then switching to the Vega launch here, just a couple of quick cleanups, actually. In terms of just the max theoretical pull-through, Christian, we started thinking of it as $1,100 per run into 52 weeks gets you to about, you know, approaching about $300K. Is that the right sort of ballpark math? And second, you know, the people question here is that You know, the review is already at most large service providers out there. The smaller labs generally outsource to these providers today for their long read needs. So paint us a picture for the appetite among this decentralized setting to access long read in-house for presumably, you know, a higher price point versus sending the samples to the larger labs.

Yeah, you know what? It's a real interesting dynamic, right, with respect to what does – What does Vega do for some of those service providers? And I think what it will do is, you know, first of all, it will likely open up more demand to the service providers over time because more and more people will get their hands on Hi-Fi because Vega exists, which will open up, you know, more projects over time. And you'll see that. But there will be, you know, initially probably some tension between the service providers and new Vega users because, you know, historically the service providers, you know, they haven't really reduced their prices as fast as we've been able to reduce our prices. And I think that Vega will put some pressure on them to, you know, reduce prices, which will enable more, you know, more samples to hit the service provider. And, you know, as Vega makes sequencing more ubiquitous, that will also help. So in the long run, I think it will help pretty significantly. Your question on Vega pull-through, you know, Vega pull-through is probably, you know, theoretical max is more around 250K, give or take, when you think about it. I don't think, you know, I don't think that people should be thinking about, you know, 250K pull-through, of course. We are not going to make any comments today with respect to pull-through. We want to see what the demand for the system will be first and then see which customers and what projects kind of go on to it. But, you know, certainly it will be pull-through at high margin, which will be creative to our total gross margin.

Got it. Appreciate the call, guys. Thank you.

Yeah.

The next question comes from Kyle Nixon with Canaccord. Please go ahead.

Hey, guys. Thanks for taking the questions. Congrats on the Vega launch. Congrats to you this season. You know, good luck to you. Really good work with you the past, you know, four years or so. Bummer to see you go, but I'm sure great things lie ahead. So two questions I want to ask up front, one about the overlap between Vega and Revio, the other about the debt, which was good to see. On the overlap, any early examples or conversations that have kind of refined your thoughts on potential cannibalization between the two platforms and how long that could take to lapse and how, you know, the funnel will evolve and will you bundle, will orders convert to data, things like that? And on the dead, you know, the stock is down over 10% after hours. Seems like investors aren't really appreciating that refi and the maturity extension there. Could you, Akershan, just speak to, like, why now is the right time for you and SoftBank to do this and why that provides you with some cushion and flexibility and just to kind of operate with that freedom, you know, keeping a healthier balance sheet? Thanks.

Yeah, thanks, Kyle. Two very different questions, but I think I can handle both of them. You know, first of all, with respect to the overlap and potential cannibalization, what's been really interesting in the conversations that I've had with customers that have seen Vega now and that are existing Revio users or potential Revio users, people that want to run any scale, quite frankly, don't see really any overlap at all. They do see bundling opportunities because they see Vega as a potential walk-up in the lab, you know, kind of for top-ups and other kind of, It's so easy to use that it can just be put in the lab and then people just walk up and use it. But when you think about it, it's 60 gigabases, you know, which is basically, you know, less than – that's basically one-eighth the output of a Revio run. So there's a very large difference in the run in terms of the throughput. The economics, you know, for Revio, although the capital is a lot more expensive – The consumables are, you know, under $500 a genome now. Of course, launching Spark and Vega, it's not a coincidence that we're launching them at the same time because we're demonstrating that we're adding value to Revio and that we'll continue to do that as part of our strategy to build a portfolio of sequencers of, you know, benchtop, mid- to high-throughput, and then ultra-high-throughput, And there's enough separation there, both in economics and in throughput, that I don't expect to see a lot of cannibalization for people that have scaled projects. But what I do see is that customers that are looking to get into HiFi have an easier avenue to get in and, over time, scale up their sequencing into Revio from Vega. And I think, you know, this is a really important step. story that we've seen play out in the sequencing market time and time again where customers, you know, kind of move up the value chain, so to speak, with respect to sequencers as their experience with the sequencing technology increases. And so that's part of the important part of the strategy here. And, you know, the good news on Vega, we had someone in the booth come up and actually – put down a credit card, and we accepted the credit card. So we already have, you know, that's the kind of excitement we're seeing. We already have POs. So, you know, it's been a fun 24 hours here post-launch. We had over 200 people, 200 different potential customers, demoing Vega last night at our launch event. So I do think there's a lot of excitement around the product, and I'm excited to see how that unfolds into demand over time. With respect, you know, moving to the debt, you know, we've always had a strategy to manage this debt burden over time. And that was evidenced as what we did last year with the note exchange and for the first half of the debt and pushing that out to 2030. And we had a real opportunity this time to work with SoftBank to set up an arrangement to, you know, basically reduce our debt burden by $259 million for $50 million of cash and $50 million of stock. We have basically the same terms as what we had before. So we have 1.5% coupon. And so we have positive carry on that amount right now. And we have the duration pushed out to August 20 and 29. And for those of you that are concerned about dilution, one of the features of the notes is that they have full flexible settlement. And so that means that we can settle the notes either in equity or cash. And as we get closer and closer to being cash flow positive and as we turn cash flow positive, the ability to settle some or all of the notes in cash becomes a real possibility. And so we'll see how that goes over time. With respect to the exact timing of doing it today versus doing it next year or sometime out in the future, we feel that our business right now is at a point where we do think we're going to return to growth. But as we've all seen, the market has been uncertain. The stock market has been uncertain. The market for capital equipment has been uncertain. And when we weighed this opportunity to take such a meaningful portion of the debt down, we felt that this was a trade that really strengthened the company, gave us a lot more flexibility, and quite frankly, So many of our investors have been – this has been one of the top questions that they've been asking us, and so we were listening to some investor feedback as well.

I'll just add, so another reason also, Kyle, for why now is it is $259 million of a reduction in our debt, which is almost 30% of the total debt we had outstanding. and we paid the $50 million of cash at closing and then 7% dilution, we believe that we would not have been able to reduce the debt by as much if we waited until later. To pay the same amount in terms of cash and equity, we wouldn't have been able to reduce the debt by as much if we waited in the future. Also, keep in mind, because of the lower principal, if you look out over the next three years, the interest payments that we are making now, it's about $12 million less than we would have been making if we just kept the debt outstanding.

Great. Really helpful answers on both sides. Thanks, Kyle. Thanks, guys.

The next question comes from Mason Carrico with Stevens. Please go ahead.

Hey, guys. Maybe just a few clarifications here on Vega. You've talked about scaling manufacturing next year, so is the right way to think about the adoption ramp more similar to Onzo? Is there any dynamic of pent-up demand we should be taking into consideration?

Well, you know, I hope we will have that conversation as we get to quarter end. We just announced the system last night. We have received some purchase orders, so we'll see what the demand, you know, the demand curve will look like with actual orders as we go into year end. But I would actually think about the manufacturing ramp closer to what happened in Revio, where we were able to scale manufacturing over time. The product itself is in its very late stages of development and basically verification now. And so, you know, we should be able to start shipping it early in Q1 as opposed to the end of Q1. But that depends on how well the verification goes. And we will ramp manufacturing accordingly. And so, you know, part of us highlighting that to investors is to say that we believe that we will have a sequential growth in units of Vega over the course of next year as we see what the demand curve looks like and we scale our manufacturing, if that helps.

Got it. No, that's helpful. And then on the comment around building it to be accretive to gross margin. Could you just clarify whether that's from launch or once you scale?

You know, it's really over the course of next year. The first units we ship in Q1 and perhaps some in Q2 will be a bit lower gross margin because they will be the units that were manufactured at the very end of the development process and become saleable units. And when you're in the late stages of development, those units actually cost a lot more to produce. The full routine production, those earlier units are actually made on a different manufacturing line, and therefore they're more expensive. When you transfer that to the regular production line, that's when you see the benefits of cost reduction, and then the margins will go up. And so when you look out over the course of next year, we do expect them to be accretive to gross margin for the whole year, but it might be dilutive in the first quarter or so and then, you know, improve from there.

That's exactly right. And then on the consumable side, it should be accretive from a consumables perspective. On day one. On day one, exactly.

That's right. Perfect. That's helpful. Thanks, guys.

The next question comes from Dan Brennan with TD Cohen. Please go ahead.

Great. Thank you. Thanks for the questions. Congrats on all the good momentum here. Maybe just first of all, just on the kind of fourth quarter, outlook and kind of what to pretend. So I think you said what pulled through the same, you know, Christian in the prepared remarks, you talked about a lot of good momentum in terms of kind of what you're seeing in the market. So could you just give us a sense on kind of consumables being flat sequentially? Is that conservative kind of from what you're seeing or just, you know, maybe put that in the context of kind of your commentary about the demand environment? And then, you know, using that as a jumping off point, I know you talked about we'll grow in 2025. The street right now I think is about 25% top line growth. I know it's early, but maybe you can just characterize a little bit about what grow means.

Yeah. Well, we'll start with Q4 consumables. We do think Q4 consumables will be sequentially up over Q3. So we are, you know, seeing utilization, you know, levels, particularly in Europe. Europe has a lot of, you know, the Estonia project and MBRU. There's a lot of large-scale programs where even Sanger, you know, these customers are using their instruments differently. at a pretty good clip. So I would expect to see pretty good utilization in Europe in Q4. But I think in totality, you're going to see consumables grow sequentially over Q3 levels. When we start to talk about Q4, I promised Todd I wouldn't talk about Q4 guidance yet, or Q25 guidance. Yeah, sorry. That's what I meant. But, you know, I do think there are all the signs point to growth. We have a new product cycle with Spark, with both Spark and with Vega. We have, you know, we have increasing installed base driving consumables. Even if the consumables stay at the same pull-through per unit, you know, that will result in growth year over year. And, you know, and then I do think Although it's difficult to see in the first half how the macro environment really looks, you know, I'm an optimist and I believe that the macro environment will improve somewhat over the course of 2025. And so when you put all those factors together, you know, I do think even if the macro environment kind of stays the same, we're poised for growth. And if we see any improvement in the macro environment, that gives us the ability to grow beyond that. Today I'm not going to talk about what does it mean in terms of percentages or where the street is now. What I want to see is how we do in Q4, what the interest is in Vega, and so that way when we unfold our guidance formally in 2025, we can have a lot of confidence around it.

Got it. Okay. And then maybe just on the path to cash flow breakeven, both on margins and OPEX, I know you talked about a lot already in terms of the benefits of these new platforms on gross margins. But maybe you can dispel out a little bit, just you're not going to quantify it, but just maybe characterize gross margins in terms of the new programs, in terms of the other COGS initiatives you have ongoing. And then on the OPEX cut program you have in place, which is making good progress, Just kind of how are you managing that in terms of taking those costs out while still being able to invest for growth?

Yeah, it's a great question, Dan. And I think with respect to gross margins, I'll start with radio. And I'll actually talk a little bit about radio consumables because we see a lot of innovation that's happening inside the company that will continue to drive drive the production costs or the value of the kits in terms of cost of producing consumable kits down. And that will, you know, a combination of increasing throughput of Revio plus driving the production costs down will end up probably passing some of those benefits on to the customer, but starting to keep some of them to expand our gross margin. And so that will give us some real opportunity in 25 to see consumable gross margin expansion. We also, as we continue now, as smart cell production grows, we'll get more economies of scale with respect to smart cell production, and therefore that will help the consumables as well. And so that's just an area in particular where we expect to see gross margins improve in 25 and likely again in 26. And I think that that's a real strong opportunity. With respect to OpEx, you know, I think the team has done an amazing job of making the hard decisions and staying focused so that we could reduce the, do the hard work of reducing the cost this year. And we'll get the full year benefit of it next year, of course. But also I see there's more opportunity for us to even stay more focused focusing on the most important R&D activities that will drive short-term growth and drive the margin expansion, and then continuing to build a more effective commercial organization. I do think that there's opportunities there to get more leverage out of the commercial organizations. So although you may not cut expenses there, if you can generate more revenue per dollar of commercial spend, you know, that's, quite frankly, that's the best of all worlds. And so I do think that there are opportunities there. And when we start to roll out 2025, I think we'll be able to talk about some of those different kinds of things.

Great. All right, I'll get back in the queue. Thanks a lot.

Thanks, Dan.

The next question comes from Jack Mann with Nefron Research. Please go ahead.

Hey, thank you. Good afternoon. Christian, I was wondering if you could talk about another announcement you had last night, which was the RevioList price, I guess now $599,000. What was, I guess, the thought process that went behind bringing that down? And I don't know if there's any interplay with the Vega launch there, but we'd love to get color on that.

Yeah, it's a good question. And I'm glad you highlight $599,000 because this is a milestone for us. to be able to offer the system at 599K, we've taken, you know, we're sharing some of the productivity improvements that we've made with our customers there. But if you look at our actual ASPs, this isn't, you know, this isn't very different than our actual ASPs. And our expectation is that, you know, we'll have a little bit more ASP discipline around the 599. So we don't really expect you know, dramatic changes in dollars realized for Revio going into next year. But it was apparent to us that customers wouldn't even inquire about, you know, going to long reads because they heard the instrument was $779,000, which, as you guys know, the ASPs have been much lower than that. And so what we wanted to do is establish a new list price because the reality is we've taken so much cost out of the system that we can afford to do that and drive further demand. So that's the real driver behind the change. We do expect ASPs to remain reasonably consistent with where they are kind of right now over the course of 2025. So from a financial perspective, I don't think, it's really going to, you know, hurt us from an ASP perspective, but it's a huge opportunity to drive more demand and drive the message that PacBio HiFi sequencing is the most advanced sequencing technology, and now it's very affordable with all the advancements we've made.

Excellent. When you give a mouse a cookie, you've got to ask for milk when it comes to new products. I was wondering if there was any color you could share around just timing for high throughput short reads? Thank you.

Give an inch, they'll take a mile. I think that, you know, I think today the program continues to go well inside of our R&D program. It's in its scale-up phase right now, and it keeps moving on. We are routinely sequencing with billions of reads at high quality. There are some technical hurdles that we still have to overcome to get that product to market. Today I'm not going to game out a launch date. I think today we're really focused on driving the Spark chemistry and the Vega launch and making that successful. But we still have the resources we need to develop a very high-quality, high-throughput system today. And as that project matures a little bit more, I will share more with everyone. Thanks, Jack.

The next question comes from Ross Osborne with Cantor Fitzgerald. Please go ahead.

Hey, guys. This is Matthew Park on for Ross today. Thanks for squeezing us in. Just one question from us. It was good to see sequential improvement in China. I was wondering if you guys can speak on the general appetite for Revio in China as we move into 2025 and how you foresee the launch of Vega driving incremental adoption in the region. Thanks.

Yeah, it's a great question, and thanks, Matthew, for the question. You know, I do think We are seeing expansion of sample demand in China, which will drive revenue demand, particularly with the big service providers that are really the core of our customer base there. What will be interesting to see is we've already heard a tremendous amount of excitement around Vega. In fact, we had one of our early access partners in our lab a Chinese customer in our lab testing Vega, what was that, last week, I guess, or two weeks ago before the earnings. And they were over the moon such that, you know, I suspect they could be a major customer of Vega. And, you know, the profile of Vega fits the Chinese market really well at 169K, very high accuracy, great, you know, ability to do epigenetics, structural variation, phased genomes, and I think it's an opportunity for us to penetrate deeper than just the service providers we have. So it'll be interesting to see how our team in China really, you know, drives that opportunity for us, and it has the potential to drive, you know, potentially hundreds of instruments over time, and we'll see how we do.

Thanks, Matt.

The next question comes from Subbu Nami with Guggenheim Securities. Please go ahead.

Thank you for taking my question. Vega opens up more of the market pyramid for you. That said, as you go deeper into the market pyramid, it gets wider, which typically means going into higher number of accounts. So then how do you balance the desire to go after this opportunity with the typical need to increase commercial investment to go into that new segment of the market?

Boy, that is such a great question, and my field service team has been asking me that question for about a year now. And so you're exactly right. As we widen our customer base, which is fundamental to what we're trying to achieve as a company, by the way, is we have to be thoughtful about the support burden and how do you build a commercial infrastructure to support that. And the way you start is, is you start by designing a product from the ground up that is as simple to use and is focused on this new customer base. Vega has only two consumables, and they are – and the way Vega is set up, it's set up that it's very difficult to make mistakes as you're loading the system. The cartridges have been completely reimagined, so you have everything you need to sequence – right there. One of the breakthroughs we've had is we've been able to develop capabilities in the system that allow us to almost always deliver 60 gigabases of data, even for new users. And that consistency will give the newer users more and more confidence. And so kind of what you're hearing is that a lot of the innovation was geared towards simplicity miniaturization, ease of use, and then, of course, we added SmartLink in the cloud. And SmartLink in the cloud gives users, you know, much deeper access into where they put their data so that they could, you know, they could stream their data directly up to the cloud and then to a secondary or tertiary analysis software program. Because the support burden is actually much more than just thinking about the Are the instruments working? It's about helping the customers get the answers they need so that they can continue to run their next experiments. And as we build out our install base with Vega, simplifying the automatics pipelines, we've done a lot of that over the last year to develop these pipelines, continuing to integrate it through the cloud. These are all steps that we're taking that will help balance the commercial investment with customer success And with the end game of Vega customers having such a great experience, they want to move up to Revio as their science dictates.

We also see an opportunity for SQL 2 customers that are still using their instrument that haven't yet been ready to upgrade to Revio that gives us an opportunity to also upgrade them to Vega before they ever upgrade to Revio. And so that's our existing customer base. And then we're trying to be very thoughtful about expanding the commercial organization as we see the momentum with new customers. So that's going to be another aspect. And then, of course, in certain regions, selling through distributors also gives us increased leverage from that perspective.

Thank you for that, guys.

Our next question comes from Doug Shankle with Wolf Research. Please go ahead.

Hi, this is Madeline Moulman. I'm for Doug. I just wanted to touch on Revio placements, which came in, I think, a little bit below R in street expectations. I know last quarter you mentioned some placements that were supposed to close in Q2 got pushed out due to timing and customer funding. Just wondering if those orders did close in Q3, if they've been pushed out again, or if you're seeing any cancellations.

Yeah, we have not seen any cancellations, which is great. Some of the orders from Q2 did come in in Q3. Some did not, and they're still in the funnel, hopefully to close in Q4, or, you know, that's kind of where I need to look at each one to know exactly. But the other thing that happened in Q3 specifically, there were some tenders in Europe that got delayed at the 11th hour, and so, you know, delayed in late September, and therefore they didn't close. We expect some of those to close in Q4, and then perhaps another one of them to close in Q1. And so, yes, the instruments were a little short of our expectations, really driven by those tenders that I'm talking about. That said, from quarter to quarter, you do have things moving in and out. You know, part of our challenge has been really these prolonged sales cycles really, you know, creating certainty on when the deals will close and also expanding the total funnel. I think Spark will draw, you know, the new Spark chemistry will drive an expansion of the funnel, which will enable us to, you know, get back to more historical order levels as we move in 2025. Great. Thank you.

Yeah. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.

Well, thank you, everybody, for joining us on the call today. We're going to be at several investor events this quarter, so hope to connect with several of you there. And have a good one. Take care.

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