Pacific Biosciences of California, Inc.

Have a good day and welcome to the PACBIO 4th 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. And to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of Finance and Investor Relations. Please go ahead.

Good afternoon and welcome to PACBIO's 4th 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 .pacb.com or furnished on form AK available on the Securities and Exchange Commission website at .scc.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 Michelle Farmer, Chief Accounting Officer. On today's call, we will make forward-looking statements including, among others, statements regarding predictions, estimates, expectations, guidance, and the amount of the preliminary estimated non-cash impairment charges. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause their actual results to differ materially from those projected or discussed. Please review our ICC filings including our most recent forms 10Q and 10K and our press release 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 are unable to reconcile 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. 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 cautious that forward-looking statements may differ or change materially after the completion of the live call. I will now hand the call over to Christian.

Christian Thank you for joining us today. I'll begin by reviewing our fourth quarter and full-year 2024 performance, highlighting key commercial achievements, and providing insights into our outlook. Then, our Chief Accounting Officer, Michelle Farmer, will walk through the financials in more depth, and then I'll close with our guidance and outlook for the year. In the fourth quarter, we reported $39.2 million in revenue, driven by the shipment of 23 Revio systems. Additionally, we successfully commenced shipment of our Vega Benchtar platform, delivering 7 units ahead of schedule. For the full year, revenue totaled $154 million, reflecting 97 Revio shipments. Our customer base continues to expand significantly, with the Revio platform installed at nearly 200 customers at December 31. Notably, in 2024, approximately 45% of all Revio shipments went to new PacBio instrument customers, demonstrating strong momentum in attracting users transitioning from other sequencing technology. Meanwhile, there remains a meaningful upgrade opportunity with approximately 125 active SQL2 and 2E users in the field, many of whom could transition to Revio for Vega in the coming years. The adoption of PacBio HiFi long read sequencing continues to accelerate. Total growth in genomic data output accelerated on our platforms, with an 81% increase in 2024, up from 68% growth in 2023, highlighting broader utilization of our technology. Since 2020, total sequencing output has expanded more than 12 fold, demonstrating a remarkable increase in HiFi sequencing activity. Correspondingly, consumable revenue grew 11% year over year in 2024 to 70.4 million, representing a 23% compound annual growth rate since 2020. Looking ahead to 2025, we anticipate that customers will continue to navigate an uncertain funding environment, much like in 2024. Macroeconomic pressures are expected to persist, extending sales cycles, particularly for higher CAPEX life science instrumentations like Revio. Additionally, the recent announcements regarding NIH funding involving a cap on the Institute's direct funding rates have increased the uncertainty in the academic environment, particularly in the United States. Considering these factors, we expect 2025 revenue to range between $155 million and $170 million, representing 6% year over year growth at the midpoint and roughly in line with external growth estimates for the next generation sequencing market in 2025. While product launches and macro factors have caused our revenue growth to fluctuate over the past few years, it's worth noting that our revenue guidance at the midpoint still reflects a 16% compound annual growth rate since 2020 and significantly outpaces the overall NGS market growth, which again demonstrates the growing adoption of our technology. I'll discuss our full 2025 financial guidance in more detail later in this call. Over the medium term, and as the macroeconomic environment improves, we believe that we can achieve sustained double-digit revenue growth as long-reach sequencing continues to expand into new genomic applications. Our key priorities for driving growth include expanding the adoption of high-fi sequencing by accelerating the uptake of the Vega Benchtop platform and enhancing the value and usability of Revio with Spark chemistry, leveraging recent innovations to substantially increase sequencing throughput while reducing costs. These advances have the potential to bring long-reach sequencing closer to price parity with short-reach technologies, delivering -to-end solutions focusing on clinical applications and where pack-bio high-fi technology provides unique advantages like connects for RNA sequencing and peer target, a targeted approach for sequencing difficult to sequence genes. Notably in 2024, application and extraction kit revenue grew 56% year over year. Our strategy also includes providing turnkey bioinformatics solutions so our customers can go from sample to answer without running complex data analysis pipelines. Lastly, as a result of the continued and recent macroeconomic uncertainty, as well as the recent NIH announcements, we now anticipate turning cash flow positive exiting 2027. We remain focused on lowering our cash burden and believe our approximately $390 million in cash and investments at the end of 2024 will bridge us to becoming cash flow positive based on our current assumptions. Notably, after our note exchange in the fourth quarter, this time frame still positions cash flow, a pack-bio to turn cash flow positive well before our first debt maturity in August of 2029. While we face challenges in 2024, it was a pivotal year in strengthening our business and advancing our product portfolio. We successfully launched two significant innovations, the Vega Bench Stop platform and Spark chemistry for Revio. With the launch of Vega, PackBio offers a suite of long-range sequencing systems tailored to different customer needs, a first in the company's history. Vega features a smaller footprint, lower capital cost, and reduced throughput compared to Revio, making it an accessible and versatile solution for a broad range of customers. Some of these customers include smaller academic labs focused on a range of applications that require less throughput, including RNA sequencing in smaller genomes, core laboratories investigating transcriptomics and RNA biology, and larger clinically focused labs utilizing Hi-Fi sequencing for targeted panels. Early customer feedback has been strongly positive. Berry Genomics, one of our first Vega customers, reported that the platform delivers results identical to previous PackBio systems while offering notable improvements in Hi-Fi re-heals, quality values, reduced run times, greater data processing efficiency, and less hands-on time. As a result, Berry Genomics plans to purchase 50 Vega units over the coming years to support its Dallostemia and Fragile X-Athens, underscoring the platform's value in clinical applications. Beyond clinical markets, Vega's versatility extends into biodiversity and environmental genomics. At the recent Plant and Animal Genomics Conference, one researcher highlighted how Vega offers a lower entry point cost, increased portability, and a throughput so well-suited for sequencing biodiversity in remote locations. And it also noted how it will facilitate best practices in sequencing unique or difficult to access fauna in the field. Another customer from the John Hopkins University and Cold Spring Harbor Laboratory shared how he looks forward to using the platform for many projects spanning the entire tree of life, from identifying numerous factors in human disease to diversifying and enriching the food supply with new crop species to understanding the microbial world beneath our very own feet. Our funnel and sales opportunities continue to grow for the Vega platform, especially with potential new customers, as nearly three-quarters of the customers in our sales funnel have never bought a packed biosequencer before. This demonstrates the potential reach of the platform. While Vega delivers versatility, the Revio system is our most powerful and scalable platform. In the fourth quarter, we enhanced the platform even further as we started shipping our Spark chemistry. With Spark, the Revio system can sequence up to 2,500 complete-phase, Hi-Fi human genomes a year at a cost below $500 per genome, while significantly lowering DNA input requirements for whole-genome sequencing to just 500 nanograms. This represents a 75% reduction. This helps drive new customer adoption in Q4, like the J. Craig Venter Institute, which plans to use Revio to sequence thousands of full diploid-phase genomes over the next several years to find missing heritability, resulting from years of SNP studies and short-read sequencing fragments as part of the Institute's overall goal to advance genetic testing for women's health and genetically diverse populations. Last month, at the J.P. Morgan Healthcare Conference, we shared a little bit more about our technology roadmap, which is focused on improving our on-market platforms and developing future platforms to expand margins and increase throughput. These programs include developing higher-density smart cells, which reduce the cost and increase throughput. We expect our next generation of smart cells to yield multiple times the output of today's 25M Revio smart cells. Integrating new smart cell formats that make automating our technology even easier for customers. Migrating to more advanced semiconductor inputs, such as the 300-millimeter wafer instead of 200-millimeter, and this can drive the cost of the smart cell down, enabling us to lower our cost to customers and expand our gross margins. Innovating on our smart cell and reagent technologies to allow customers to sequence in a smart cell more than once. Utilizing faster chemistries, which are expected to enable faster run times and more throughput. And finally, leveraging our computational biology team and collaborations to offer more informatics capabilities across the -to-end solutions to broaden customers' access to advanced bioinformatics pipelines. We've been thrilled with how Vega and Revio have changed the paradigm of highly accurate long-read sequencing, and we're inspired by the development pathway to scale this technology even further. Over the coming years, we look forward to unveiling these technologies to the research community, which is already accelerating its pace of discovery with Hi-Fi. In fact, PacBio technology was cited in over 1,000 publications and preprints in 2024. In particular, we are encouraged by recent publications that substantiate Hi-Fi's ability to further our understanding of genetic and rare diseases, like Radford University Medical Center's study analyzing 100 challenging patient cases where short-read sequencing failed to identify a genetic cause. In this study, researchers used Revio and detected 93% of pathogenic variants, including complex structural variants and DNA methylation abnormality. The key takeaway here is not just Hi-Fi's ability to improve solve rates, but its potential to replace multiple testing modalities. As a result, Radford is expanding its sequencing effort to 5,000 additional samples, further demonstrating the clinical impact of Hi-Fi sequencing in rare disease diagnostics. A unique aspect of PacBio Hi-Fi sequencing is its multiomic capability. That is, it interrogates RNA and epigenetics in addition to DNA. This multiomic approach was used in a recent study to diagnose a -month-old patient with an undiagnosed rare genetic condition. Hi-Fi sequencing uncovered a balanced translocation between chromosomes X and 13, disrupting four key genes through distinct mechanisms, findings that were missed by short-read sequencing. We believe these studies highlight how PacBio's advanced sequencing technology enables groundbreaking genetic discoveries, providing new hope for rare disease patients worldwide. In 2024, we began to see larger-scale genomic testing labs, hospitals, and medical centers adopt Hi-Fi, with several implementing our peer-target library prep kit to develop and improve carrier screening and other genetic tests. We previously disclosed labs like Myriad and Quest in the U.S., which are developing tests on the Revio system. In Europe, Biosentia uses Hi-Fi for routine testing for certain sensory disorders. As previously mentioned, Radford University Medical Center has committed to sequencing 5,000 Hi-Fi genomes in a clinical setting focused on rare disease. With the SQL2, Barry Genomics is in the final stages of obtaining NMPA approval for its Alzheimer's Carrier Screening test in China. This is an important test that the prevalence of carriers of this disease represents over 10% of the population in parts of the country. With Vega, Barry plans to expand its carrier screening test to other indications. 2024 was a pivotal year in our clinical path, with nearly 15% of our revenues coming from or children's hospitals, and we had even higher clinical exposure when factoring translational work at research institutes around the world. Looking back on 2024, we also took decisive actions to improve efficiency, reduce costs, and lower cash burn, which we believe will position us to continue to improve our financial profile on delivering our commercial and R&D initiatives. We reduced annualized non-GAAP operating expenses by more than $75 million. Aligning spending with our strategic priorities. As a result, we lowered adjusted cash burn each quarter in 2024. We also made progress in taking costs out of our per unit instrument and consumable manufacturing with Revio systems and consumable COGS 16 and 22% lower, respectively, than where we started the year, and we see a pathway to further reduce per unit COGS in 2025. We successfully executed on a convertible note exchange, reducing our debt by $259 million and extending the maturity of our 2028 notes by 18 months to August 2029, strengthening our financial flexibility. Finally, we're pleased to announce that Dave Ruggiero has joined as Global Head of Sales and Service. David brings deep experience in sales leadership across technology and life sciences, and his expertise will be instrumental as we expand our global reach and scale our sequencing solutions. We're also delighted to share that Chris Smith has joined our board of directors. As CEO of Neogenomics, Chris brings extensive expertise in the diagnostics and laboratory testing markets, and we look forward to his insights as we advance our clinical strategy. We thank Deb in the line for his service on our board as he steps down and wishes the best in his future endeavors. We are also continuing our search for a new Chief Financial Officer. We're focused on identifying a leader who will help drive our next phase of growth and champion operational efficiency throughout the organization. Now I'll pass the call on to Michelle Farmer to discuss our financials. Michelle?

Thank you, Christian. I will be discussing non-GAP results, which include non-cash stock-based compensation expense. I encourage you to review the reconciliation of GAP to non-GAP financial measures in our earnings press release. As discussed, we reported $39.2 million in products, service, and other revenue in the fourth quarter of 2024, which represented a decrease of 33% from $58.4 million in the fourth quarter of 2023. Instrument revenue in the fourth quarter was $15.3 million, a 56% decrease from $35.1 million in the fourth quarter of 2023, primarily driven by lower Revio system shipment. We ended the quarter with 270 cumulative Revio system shipments. Turning to consumables, revenue of $18.8 million in the fourth quarter was roughly flat to $18.9 million in the fourth quarter of last year, with annualized Revio pull-through per system at approximately $240,000. Finally, service and other revenue was $5.1 million in the fourth quarter compared to $4.4 million in the fourth quarter of 2023, driven by an increase in service contract revenue related to Revio. From a regional perspective, America's revenue of $20.2 million decreased by 41% compared to the fourth quarter of 2023, as the region is most affected by academic and NIH funding uncertainty. For Asia Pacific, revenue of approximately $8.9 million decreased 33% over the prior year, with sequential growth in consumables offset by lower Revio placement. Similar to the U.S., several countries in the region also faced government funding headwinds with respect to capital expenditures. Finally, EMEA revenue of $10.1 million decreased 9% over the prior year period. The region saw record consumables revenue in the fourth quarter, with growing Revio utilization as key projects like Estonia Biobank, RadBud, and Dubai's population sequencing programs continue to sequence at scale. Moving down the P&L, fourth quarter of 2024, non-GAP gross profit of $12.3 million represented a non-GAP gross margin of 31% compared to a non-GAP gross profit of $11.1 million, or 19% in the fourth quarter of last year. Non-GAP gross margin increased year over year due in part to change charges for scrap inventory in the fourth quarter of 2023. Compared to the third quarter of 2024, gross margin decline by approximately 120 basis points, primarily due to scrap inventory in the quarter related to a temporary decline in smart cell manufacturing yields and lower ASPs on Revio due to certain strategic deals in the quarter, partially offset by per-unit costs decreases in Revio instrument and consumables. Non-GAP operating expenses were $68.6 million in the fourth quarter of 2024 compared to $88.4 million in the fourth quarter of 2023. The decrease primarily reflects a reduction in R&D and SG&A related to our restructuring initiated in the second quarter of 2024. Regarding headcount, we ended the quarter with 575 employees, which was flat to Q3 2024 and 28% lower than the 796 employees at the end of the fourth quarter of 2023. Operating expenses in the fourth quarter included non-cash share-based compensation of $14.8 million compared to $15.4 million in the fourth quarter of last year. Non-GAP net loss was $55.3 million, representing $0.20 per share in the fourth quarter of 2024 compared to a non-GAP net loss of $72.5 million, representing $0.27 per share in the fourth quarter of 2023. We ended the fourth quarter with $389.9 million in unrestricted cash and investments compared to $471.1 million at the end of the third quarter of 2024. Cash outflow in the quarter included approximately $54 million in debt repayment and associated fees related to the convertible note exchange with ThoughtBank. During the quarter, we conducted an interim Goodwill and Intangible Output impairment test following a sustained decline in our stock price and market capitalization. Based on the preliminary results of this analysis, we recorded non-cash impairment charges totaling $90 million, which includes approximately $55 million related to Goodwill and approximately $35 million associated with an in-process research and development asset. The impairment was driven by macroeconomic headwinds and a revised outlook on future cash flows and is excluded from our previously discussed non-GAP results. It is important to note that these impairment charges are non-cash accounting adjustments and do not impact our liquidity, operations, or ability to execute on our long-term strategy. I'll now return the call to Christian to discuss guidance and provide the closing remarks.

As discussed earlier, we expect full year 2025 revenue to between $155 million and $170 million. At the midpoint, this represents a growth rate of approximately 6% compared to 2024. At the midpoint of our guidance range, we expect instrument revenue to grow modestly, with growth in Vegas shipments offsetting a -over-year decline in Revu system shipments, with annualized pull-through per Revu system in the low to mid 200,000 range. As a reminder, our guidance anticipates that customers will continue to navigate an uncertain funding landscape, much like in 2024, and the macroeconomic environment is consistent with what we've experienced over the past few quarters. When looking at guidance from a regional perspective, the change in administration has added further uncertainty to the funding environment in the Americas. In the near term, based on our initial conversations with customers, recently announced federal funding freezes, particularly with NIH intramural spending, have added significant uncertainty in the broader academic research community. Our guidance considers to this uncertainty, especially in the near term. On a more positive note, accelerating activity in the clinical market is anticipated to offset some of those potential headwinds. For Asia Pacific, while we anticipate growth in the region in 2025, the funding dynamics in several countries continue to affect capital purchasing timelines for the Revu platform. Additionally, our guidance does not consider the impact of tariffs or other activity that would impact our ability to export products to the region. We expect EMEA to be the fastest growing region in 2025 as population sequencing programs scale, whole genome sequencing and the clinical setting grows, and we expand our customer base with Vega. Looking at Q1, specifically, we anticipate typical seasonality, and as a result, we expect revenue in the first quarter of 2025 to lower than the fourth quarter of 2024, with Revu systems and consumables revenue partially offset by increased Vega system revenue. Moving down the P&L, we expect the 2025 non-GAAP gross margin to be between 35 and 40%, representing over 400 basis point improvement compared to 2024, and we expect to exit the year above 40%. We expect to continue removing costs from the Revu system and consumables, and the Vega cost of goods sold per unit is expected to improve as the platform moves from pilot manufacturing line to the full production line. We expect non-GAAP operating expenses to decline three to seven percent compared to 2024 and be in the range of 270 to 280 million, reflecting in large part the annualization of our restructuring in the second quarter of 2024. We expect interest and other income to be between five and seven million in 2025, and the weighted average share count for EPS for the full year to be approximately 299 million. We expect to end the year with cash and investments balance of approximately 260 million, implying a 130 million dollar cash burn in 2025, or an improvement of 57 million in adjusted cash burn compared to 2024. Finally, as discussed with our current expectation for 2025 revenue growth, we now anticipate turning cash flow positive exiting 2027 as a result of the continued and recent macroeconomic uncertainty, as well as the recent NIH announcements. We remain diligent in lowering annual cash burn and believe our approximately 390 million in cash and investments will bridge us to becoming cash flow positive. Importantly, after our node exchange in the fourth quarter, this time frame still positioned us, PacBio, to turn cash flow positive with meaningful time before our first step maturity in August of 2029. Looking ahead, I want to reiterate that our primary objective in 2025 is to grow revenue and expand gross margins through four main activities. First is enabling the full scale release of Vega, which we expect will broaden the reach of our technology in the market and bring more new customers to Hi-Fi sequencing. Second, we aim to accelerate the number of samples on the Revio platform through the launch of the Spark chemistry and application kit. Revio has the potential to drive further growth in long-rate data. Third, we will continue to invest in future product launches to both amplify and diversify our offerings. I mentioned several of the exciting initiatives that we're currently working on earlier in this call. And finally, to progress our clinical strategy to improve outcomes and create durability. With these activities, we believe we can drive growth and market expansion in 2025 while continuing to improve our financial profile. I look forward to connecting with many of you this quarter at the annual AGVT meeting and investor conferences. We will now open up the call to questions.

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If your question has already been addressed and you'd like to remove yourself from queue, please press star then two. Once again, that's star then one if you have a question. Today's first question comes from Tycho Peterson with Jeffreys. Please go ahead.

Hey, thanks. Kristen, I think you talked about an uncertain funding environment much like 2024. I'm going to take the other side and say it's a lot different right now. So what specifically have you baked in for NIH disruption in the near term? It sounds like you baked some of it in. Did you bake down kind of the full freeze on the 15% overhead?

Well, I think that so thanks Tycho for the question. Of course, the funding environment is very dynamic in the United States right now. There's no question about that. But we fully contemplated, you know, some pretty significant headwinds, particularly in the first half of the year. And, you know, you saw we said in our guidance, typical, a bit of typical seasonality, but we expect revenues to be down in Q1 versus Q4, partially because of that uncertainty, partially because of, you know, kind of typical seasonality. And so I do think we have to the best of our ability kind of baked in what could be a real challenging time into our guidance. One thing we've done, of course, since the 15% came out over the last week is we looked at every single opportunity. I went, I actually personally went to each member of the American sales team that has an opportunity closing this quarter to try to get an assessment of each, you know, each instrument opportunity in particular. And, you know, the feedback was there's still some uncertainty, a lot of positivity about getting the deals done that we, you know, that we forecasted, but we still have to get them done. I think, Tyco, one area where you, you know, one area where you may look where we've been really thoughtful here is we've lowered kind of the pull through expectations. You know, so we did 240k or so in Q4. We gave a pretty mid 200s. And that's an area where, you know, you could see some funding freezes or pauses, you know, slow activity. And so we're monitoring the situation. We think we've given a responsible guidance here. The other thing on the positive side, I'd say, is we have, we're seeing, you know, very exciting growth in Europe that is offsetting, you know, that is offsetting some of the risk in America. And we're also seeing a pretty significant expansion in the clinical side of our business, which isn't funded by NIH sources. And then finally, you know, we also see Vega really, you know, the sales funnel for Vega, as we've talked about, we talked about this at JPM, continues to grow. The quality, the opportunities are strong. And I think that that is, you know, that is the right product in a situation where the capital, you know, the capital environment is tough. So hopefully that helps a little bit.

And it does. And on Vega, I think at JPM, you mentioned you'd only ship seven units, because that's all you had available. Can you maybe just talk on, you know, anything you can say on backlog and when do you expect to kind of scale up shipments more meaningfully?

Yeah, so we, I mean, we certainly have some backlog. And we will, you know, we will ship over the course of the quarter. We're scaling up. And really what we're doing is the first half of the year, we're producing on the R&D, so to speak, pilot production line. And then in the second half of the year, we'll be on the full production line. So, you know, the inventory situation or ability to deliver will improve each quarter here. And by the time we get into the back half of the year, I suspect we should be able to fulfill, you know, the majority of the demand.

Okay.

Last one.

Last one, you just, you pushed out cash flow break even by a year. I just want to make sure, I mean, I know you're guiding below consensus here, just over 20 million, but are there other levers you could pull if you need to pull that forward?

There certainly are. You know, look, if we, obviously, if we can, our focus is on driving growth and gross margin expansion. Those are the obvious key levers. But we certainly are focused on making sure that we're diligent with how we utilize our resources, saving wherever we can. And so there are other opportunities, if necessary, to, you know, further reduce burn.

All right. Thank you.

Yeah.

Thank you. And our next question today comes from Kyle Nixon with Kinecord. Please go ahead.

Hey, guys. Thanks for the questions. Just to kind of follow up on the guidance, why are Revio shipments expected to decline this year if 24 placements were already about half of that of 23? Like, you know, why is that product fading? Is that MAC-related, market-related, or is cannibalization from Pembego so far? And, you know, is there further downside to the guidance? I know you baked in the challenge of disaster durability, but could you just try, like, quantifying what's in there for NIH? Is it, like, 5 million or so? Is it 10 million or so? Just, would be helpful to kind of quantify that.

Thanks. Yeah. So, first of all, I would argue that, you know, that Vega is not significantly cannibalizing Revio at all. And I would also argue that Revio is not fading at all. We are really in a, you know, one of the most unprecedented macroeconomic times, at least in my career, and in this, at least in this space. And so, you know, when we think about the challenges we're having with respect to Revio and accelerating shipment volume, it really is driven by funding concerns. We're seeing all over the world customers, you know, publishing more and more using Hi-Fi, needing more scale. We're seeing customers, you know, extol the virtues of Hi-Fi specifically as a long-read platform. We're, you know, we're winning projects like we won last year in Estonia, et cetera. But the reality is that the macroeconomic environment is really tough, and that continues to be an important driver for expensive, more expensive capital equipment. And so, you know, when we put our guidance out for 2025, we are considering that it's going to continue to be just as tough a macroeconomic environment, maybe even tougher. And so that, I would argue that, you know, we said we expected Revio shipments to be modestly down from 2024 level. You know, they could easily, they could easily turn the other way if some of the, if the macroeconomic headwinds aren't as bad as we think. So that's how I would comment on Revio and Vega. With respect to, you know, the funding itself and is there further downside to the I think what we've done is we've really taken our best look at the funding environment, our sales funnels, our opportunities, and tried to put together guidance that we felt was very, very responsible. One of the things that's working in our favor, Kyle, as I talked about before, is that Europe is actually growing really strong and is expected to grow really strong this year, and that will drive, you know, that will help our growth. Asia Pacific, while it does have, we do have country-specific challenges. Vega is a very strong platform for that part of the world, and we expect to see a strong demand there for Vega. And then, you know, we talked about some of our clinical customers like Myriad and Quest and others, they are scaling up and, you know, they're building on other assays, and as those become routine, those are completely additive to growth. And so I think we have a lot of positive areas where we can grow, but of course we have this significant headwind, I think, that pretty much everyone in our industry has been talking about at some level. Thanks, Kyle. Next question,

Rocco.

Absolutely. Our next question comes from Dan Brennan and TD Cowan. Please go ahead.

Great. Thanks. Thanks for the questions. Maybe just to start off, just one more on NIH, if you don't mind. So your exposure to what question? Is it around 28% or somewhere in that zip code? I'm just trying to get a sense of like the kind of what's baked in. Is it like a 15% cut on 28% to like a four-point headwind? Is there something greater than that? I'm just kind of wondering like the magnitude of kind of what you've assumed.

Well, I think our total NIH revenue is roughly 20% of revenues, historically. And I do think it's difficult to game out down to a dollar. I know you're looking for, well, it's X million dollars exactly of a risk, but the reality is that it's a lot more complex than that. And I think some of our peers, we're helping to try to explain that to the street. I think from our perspective, what we're seeing is it's really a deal by deal, institution by institution. Some institutions have, you know, fund their instrumentation out of different pools of money. Other institutions, you know, have the significant overrate that they're going to absolutely apply. And I think it's too early to really game out by dollar. So what we've done is we've taken a look at our sales funnel and taken a look at our opportunity set, particularly in the Americas, and evaluated that in its totality to try to come up with guidance for what we thought, here's what America's going to do, here's what Europe's going to do, and here's what Asia's going to do. And that's why this year we gave a little more color region by region in our guidance so that you could get, you know, some perspective that, yes, it's an important part of our business, but it's not our whole business. Thanks,

Dan. Next question, Rocco. Absolutely.

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

Hey, good afternoon, guys. I have, let me just throw out, I think it's two or three quick questions. Actually, I'll keep it to two. One is on gross margin, you are targeting an exit rate above 40% this year. We were above consensus, and your exit rate is actually higher than our estimates. So there's some sunshine on a rainy day. Can you talk about the progress you are making on gross margin, and how much gross margin can you get to this year, you know, if you say, revenue comes in closer to where consensus was versus, you know, where you're targeting as we start the year? So that's the first topic. And then the second is, you know, acknowledging there's a lot of things happening outside your control. In terms of what you can control, are there things that you are moving forward with as we sit here today to reduce friction to adoption of your instruments, you know, maybe more things like reagent rental type things or other initiatives that could make it easier for customers to bring in instruments in what could be a tougher environment for capital demand? Thank you.

Yeah, thank you, Doug. Those are great questions. And I appreciate the sentiment on gross margin, because I do think it is an area where we're going to see significant opportunity this year. When, when we, what's really happening, you know, is in gross margins. In Q4, we had some field issues on which drove, you know, which drove some impact to our GM. Those have been largely resolved and we're on our, you know, on our way back. We continue to make progress in terms of lowering the per unit cost of both the chips, you know, our smart cells, as well as the instruments themselves. We've insourced a lot more of our instrument manufacturing, which is driving pretty substantial savings. And as those instruments go into inventory and then get sold through, we'll start to see the benefit of that as well. So there, you know, we do have a very strong path to exiting, you know, over, over 40 and actually nicely over 40. Your point about relative to prior, you know, prior consensus is actually an interesting one, because you're right, it's likely that gross margins would be higher if we were, you know, the more revenue we do, the more likely the gross margins are going to be higher. And the reason for that is because you're going to see a greater push of consumables, which care, generally carry higher gross margin. And as that makeshift occurs, you get a substantial benefit from that. And so, you know, one of the things we were pretty, we were pretty thoughtful about how we thought about consumable revenues, which, you know, on the one side, being if they're lower on your revenue guidance, that hurts your gross margin. But if you end up doing a little bit better, that will help your gross margins. So those are, those are the steps and stuff to kind of give you some color on how to think about how we, how we're going to move through the year with gross margin and exit the year, quite frankly, you know, in a, you know, what we believe will be a really strong position moving into 2026. The last, the other part of your question, you know, there is a lot of stuff that we can do that, you know, try to combat the, combat the macroeconomic environment. And, and we do have programs in place. We have what we call a run revio program where you can put very little money down and, and bake it in, bake the cost of the instrument into the reagents and consumables. We have a similar program that we launched for Vega. Although most customers so far have been pretty, pretty happy with the price of Vega. And I do expect ASPs to be pretty strong for Vega here in the, particularly in the, you know, particularly in 2025. We'll see how 26 goes, but I think we're off to a strong start there with respect to ASP. We're also, you know, another area where, if you're thinking about how do we accelerate our business is accelerate consumable usage. And the way we're doing that is by increasing our bioinformatics investments and capabilities. You know, I've had the benefit of being at our sales meeting this week. So I've had a chance to talk to all of our sales reps and listen to several customer talks. And each of the customers, you know, really are driving home the point that informatics matters a lot and that our informatics capabilities were dramatically improved in 2024. And it's really accelerating the activities. So it is a combination of financial, you know, financial deals that you can do that enable the customer to get into the technology. But it's also activities like improving the velocity of consumable usage by improving informatics, which then drives more requirements for capacity and ultimately more sales. Hopefully that

helps. One thing to add on your gross margin cadence question, Doug, we talked about Vega in the second half of the year moving into the production line. And so that, you know, over the course of the year, you'll see an improvement in gross margin as that gets off the development units into the full production manufacturing mode.

Yeah. And that's,

thank you Todd. That's a substantial

improvement in gross margin. So. Thanks, Doug. We have next question, Raka.

Yes, sir. Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey guys, good evening and thanks for the time here. Christian, I just want to get a sense for how you're incorporating some of the customer concentration risk into your 25 guide. You flagged the mayor momentum a couple of times, but it sounds like it's Estonia, Rajput and Dubai that are, certainly important there. And you've got the Berry partnership that's that sort of a flagship customer for you in China. And then as a second part of my question, just sticking on the China theme, are you seeing any concerns from your customers in the region in light of, you know, Illumina's addition to that unreliable entity list? Or does the fact that there just aren't any great sort of local long read alternatives mean no impact on that count for you guys?

Yeah, Tejas, those are great questions. I'll start with China first and go backwards. We are, you know, we've had lots of conversations with our Chinese customers and, you know, interestingly, there are no alternatives to what we do in China, which certainly decreases our risk of any of any flow back from what's going on with our competitors. And so, you know, we don't see that as a big exposure. Now, what we can't control or predict is on the export side, if the administration decides, you know, to make some changes there, that could be an exposure that we would have. And quite frankly, I'm not sure we would have a lot of mitigation to that or some retaliation, you know, from China itself. But from what we see at this moment, our customers don't see any issue and are continuing to run. And I do think there is a lot of, I do think there's an interesting opportunity for Vega inside of China this year, too, and we'll see how that unfolds. With respect to customer concentration risk, right, it's a good news, bad news story in a sense that, yes, we do have some customers that are running, you know, large-scale programs, but when you sit and talk to these customers, like Estonia, they're running at full tilt and they plan to keep running at full tilt and the program is going exceptionally well. In fact, we had the leader of the biobank here at our sales meeting this week and she gave us a great talk and I think that's a great update of what's going on there. One thing, you know, the way that risk is going to get mitigated is that we do see more customers moving into that large customer category, particularly at some of the diagnostic customers will, you know, hopefully in 2025, advance their app days into full production. And as that happens, they'll be running revios at full tilt, which will be, you know, very durable revenue in the clinical setting and that's really what we're trying to go after so that we can balance the research population scale with clinical revenue that is, you know, quite durable and consistent. And also on top of that, hey, we're seeing customers like the Sanger Institute accelerate their usage of revio both on the Tree of Life program, which they've been, you know, we've been long time customers, or they've been a long time customer, but now we've been able to penetrate into the human genetic side and we're doing a really interesting collaboration with them in RNA sequencing, which will drive some significant sequencing that's here. So, you know, the best way to alleviate customer concentration is to find more big customers and I think that's what's happening right now. Thanks, Teja. Next, please, Rockwell.

Absolutely. Our next question comes from Jack Meehan with Neffron Research. Please go ahead.

Thank you. Good afternoon. I'm hoping to get a little bit more color on Vega. The seven units that you shipped in the fourth quarter, can you talk about just what the initial revenue was there? And then as you look to 2025, how does the order book look and kind of what are you assuming in terms of placements? Thank you.

Yeah, so we haven't disclosed, you know, kind of the ending orders for 2024, but we have talked in, you know, in terms of that we've developed, you know, at this point, hundreds of opportunities, over 70% of them are new customers. We, you know, we would expect to scale manufacturing over the course of the first half of the year and it's likely that we'll be more manufacturing limited than order limited with respect to revenue and we'll see how that unfolds. But in the revenue in the fourth quarter, you know, you could imagine, yeah, it's seven units that's basically a little bit more than, or around this price. So, yeah. The finance team's looking

at me saying, yes, that's right. Seven units in the 160, in the 160k. Yeah.

So we haven't done any, we haven't really done any discounting on the, on the Vega system. When you see the ASPs, you know, kind of at the end of Q1, what you'll likely see is we do sell to some distributors and those distributors will get, you know, a distributor discount because they end up paying for the service and installation and that's typical, but that would be effectively the distributor list price. And so I think the ASP, I think we set the price right to drive, to drive demand. And so far we haven't had a lot of objections to the price. And so we'll see how we do. Thanks, Jack.

Thank you. And our next question comes from Sabu Nandi with Guggenheim. Please go ahead.

Hey guys. Thank you for taking my question. I'm curious if you're running into Roche and any of their potential beta sites and how do you think about the possibility of another long read market entrance? And then I have a follow up.

Yeah. So we haven't really run into Roche to my knowledge at all yet. And we haven't had any, any deals stalled because of Roche. I don't think that that is a, that is a thing. It will be interesting to see what, what their technology is when they, when they launch it. It's my understanding it's a short read focused technology, but the reality is that we don't know. And so we will see when, you know, when, when they come out. But, but, and I'm sure there'll be a lot more, we'll all learn a lot more about it at AGPT in a couple of weeks. And so I'm looking forward to that. But here's, here's what I can tell you. We have built a portfolio now of sequencers and an -to-end solution that the company has never had in its history. And that is driving more excitement, more discovery, more demand than ever before. We, it is unfortunate that we've been in this macroeconomic environment because I do think that that's had an impact, of course. But when you look at the, the discoveries that are being made, the clinical adoption, the increased improvement in solve rates in rare disease, the population scale programs like Precise and Histonia that we are winning and are expanding, you know, we've, we've really, we, we really are making a lot of progress as a leader in long-rate sequencing technology. And so I feel very confident in our portfolio. And we will certainly be watching like everyone else does when, when the products come out and we'll evaluate it after.

Thank you for that question. Thank you for that question. I'm sure in the current environment, you're attempting to really de-risk guidance. On the flip side, if you were to rank order the top three things that could actually drive upside to your guidance, what would they be? I'm basically thinking that you pull through Vega placements or growth outside the academic market.

Yeah, I think like if you had to put a top three for, for things that would actually drive guidance to the upside, I'd say the first would be there are several pop gen projects that we are, you know, working with groups and, and, and, you know, potentially may, may, we may end up being able to get those press releases out and start the sequencing. Those would drive strong radio demand because they would be at scale. So, you know, if the pop gen programs would drive increased radio demand, increased radio demand would certainly drive, drive the guidance up to the higher end. The second would be, you know, the timing of clinical adoption and broader clinical adoption. So we saw, you know, we saw Radboud commit to 5,000 more genomes in rare disease. We have, there's similar kinds of projects going on in Sweden, for example, as they, as they continue to scale, that will, that will be another source of potential upside. And then, you know, and then I mean, the last one that's perhaps the most obvious, right, is that if the macro environment approves even a little bit and we have more certainty around NIH funding, perhaps that drives, that would certainly drive our guidance in a more positive direction. So those are my top three, I would say. Thanks, Ubu. Next question.

Next we have Sung-Gi Nam with Social Bank. Please go ahead.

Hi, thanks for taking the question. Christian, I was just, I was just wondering the 15% revenue coming from clinical, do you have a sense of where that could go over the next few years? And was wondering if the kind of the growth outlook is pretty broad-based, you know, geographically and in terms of the, you know, the types of applications, are they pretty similar, you know, in terms of what the demand you're seeing in the US versus ex-US? Thank you.

Yeah, that's a really great question. And, you know, I don't have a perfect crystal ball there, but I do believe that, you know, if that revenue from clinical, say over the next three years, could actually represent, it could easily double from where we are now, 15 to 30 plus percent of our total revenue. And it's going to come from, you know, it's going to come from several different areas. It's going to come from, you know, rare disease, whole genome sequencing in a rare disease context as a frontline test as we expand further into children's hospitals in the United States and into national programs around the world, perhaps like the Netherlands. It's going to come in panel testing our peer target. Our peer target panel has really inspired the large clinical testing labs because with peer target, they can eliminate their legacy test and operate at much higher multiplex, much more, with much better and easier answers to get, and therefore save money and help more patients. And so, you know, peer target, and that will be things like carrier testing, looking at a taxis, anything where you have, you know, complex germline-driven disease. And then the last area will be, you know, will be in oncology, both, you know, on the on the laundry side, you know, looking at, being able to look at methylation profiles, being able to look at both appetites and start to understand more about a tumor, you know, that will be, it's in clinical research right now, but over time, say in this three-year window, I do think there's going to be opportunities for us to penetrate parts of that market and grow our revenue. So, you know, all in, I think it will be one of the fastest growing areas of our business, and it perhaps could be, you know, at least double what we're doing now in terms of percentage of the total. Thanks, Eugenie.

Thank you. And our next question comes from, yes sir, our next question comes from Matthew Sykes at Goldman Sachs. Please go ahead.

Hi, this is Evian for Matt. Thanks for taking my questions. So my first one is what trends are you seeing in the reagent rental models placement versus like what percent of insurance you're seeing through capex placements?

Yeah, you know, the reality is we still see the majority of our sales as straight capex placements. We do a few reagent rentals or, you know, unique financing type deals each quarter. We do have a very, we do have a very strong leasing partner that will do, you know, that will do leases, and typically we get a few of those leases done every quarter as well. It really depends on the situation, but the reality is the vast majority are still capex purchases. That's right.

Okay, great. And can you talk through the margin contribution from Revio versus Vega? I understand this might improve throughout the years you move to production manufacturing, but any numbers you could put around that would be great.

I'm sorry, you're looking for the comparative margins of Revio and Vega? Yeah, the contribution

margin.

It's a little too early to disclose, you know, that on Vega yet. We need to get through at least the full border of production to start, you know, start really understanding that, but the fact that the Revio has been in production, we've been able to in-source a lot of it, and we have taken a substantial amount of the compute cost through down and out through innovation makes the, you know, the Revio gross margin higher at first here. The challenge on the Revio side, of course, is managing the ASP, and so making sure, you know, making sure the ASP stays in a range. On the Vega side, you know, we've positioned it to be a nice gross margin product for us, particularly as we exit, you know, as we kind of get to the back gap of 25 and beyond. In the front half, it will be lower. In the back half, it will start to, you know, approach or perhaps even exceed the margin on Revio.

So we'll see how that goes, yeah. We're already, you know, looking at 26 and beyond how we could even take further costs out of Vega. So, you know, beyond this year moving into production, there's a pathway beyond that to reduce costs even further for the platform.

Yeah, I think this is one thing that maybe people don't appreciate as much because most instrumentation companies don't take so much cost out of their instruments after they get on market, but because our technology, you know, is so much of our technology is compute driven, and when you think about the cost of the instrument, we've been, as we improve our algorithms, as we improve our smart cells, we're able to take substantial amounts of cost out of the instrumentation, and that will apply whether it's Revio or Vega. One of the things we did with Vega is, of course, we designed it for higher gross margins. We miniaturized things. We, you know, we innovated in some of the areas where there's core expense, so it adds the opportunity to be a very strong gross margin product, but before we start putting a bunch of numbers around it, I want to see us get a few quarters under our belt of production to see how we really do at scale. Thanks for the question, D.V.

And our next question comes from Mason Caracho with the Stevens. Please go ahead.

Hey, guys. Thanks for fitting me in here. I'll keep it to one. On the cash flow break even timeline change, could you just provide some additional detail around what assumptions did change? Any color on the run rate for revenue or margins that are required to get there?

Well, I think it, sure, and thank you for the question. I mean, I think realistically, right, we certainly didn't perform as expected in 2024, which lowered our revenue trajectory, and in 2025, given the uncertainty in the guidance we gave, we wanted to make sure that we were responsible in thinking through the whole equation, the whole equation to get the cash flow break even. And so, you know, the core assumptions you think about are kind of thinking about the midpoint of our guidance right now, both on the revenue growth and the gross margin, and then starting to think about, you know, modest growth up from there in 26 and 27, so that by the time we're getting, you know, out of 27, we are exiting, you know, cash flow positive, basically as we were thinking with 2026. And so, the key is you're going to see, we do believe you're going to see gross margins expand over the course of the year, so that we exit in the 40s. We still believe we can get into the 50s and beyond in gross margin, and as we continue to scale our business, drive, consume, consumers become a greater proportion of the total revenue. You start to see that uplift, and the combination of those things, along with disciplined expense management, gets you to cash flow break even. Thanks, Mason.

Thank you. And our final question today comes from Luke Sergot with Berkley's. Please go ahead.

This is Salem-Wan for Luke. Thanks for squeezing me in here. Just on Revio pull through, it took a small step down in 4Q. How much of that came from maybe an air pocket from Spark and or Vega? And then just, you know, looking ahead at the new guide, low to 200,000 pull through, what does that kind of imply from an instrument capacity utilization perspective now that, you know, Spark enters the equation? And I know you're embedding some of the NIH risk in there, but the pull through, is that reflective of, you know, the lower sequencing cost, not offsetting the demand this year? I'll leave it there.

Yeah, so with respect to, you know, was there an air pocket in Q4? I mean, we did, anytime you announce a change in reagents, you are going to have customers using their existing inventory before shipping, you know, shipping more product. And so we didn't start shipping the Spark reagents until basically the what, two weeks of the quarter. We also ended up with some, we also did have some backorder for some of our application kits. And that backorder, you know, that was a pretty, pretty reasonable amount of backorder. And so that hurt us as well. And so yeah, there was a bit, there was certainly a bit of that. You're right, it was 240 versus what, 253 or 254 last quarter. So, you know, I think Todd was at JPM, he was saying, you know, that's like half a run. And so there was certainly some of that. When you think about the guidance for the, you know, low to mid 200s, you know, we certainly are, our first priority is thinking through NIH exposure, any potential funding freezes that we see with intramural. Even the perception of that, you know, certainly creates anxiety with our customer base. And so we're, you know, we're monitoring, you know, we're monitoring that. But I don't think it's, I don't really think the Spark reagents, in other words, the increase in throughput because of the reagent creates that air pocket. In fact, most customers that we've spoken to so far, they're excited about implementing Spark. And they're not, you know, they're not doing, they're typically not doing more multiplex onto the same runs, particularly in human, whole human genome applications. And so, you know, I think they're just, they're getting the benefit of more data. And so I don't think it's going to have a big impact, you know, from that perspective, kind of that elasticity equation that you, you know, you kind of talked about. So yeah, I think that it's really, we're being thoughtful about the funding environment and the timing of when studies get started. Thanks, Alan.

Thank you. This concludes the question and answer session. I'd like to turn the conference back over to Todd Friedman for closing remarks.

Awesome. Thank you, Rocco. And thank you for everybody joining today. Thank you all for the questions and staying a few minutes late with us. As Christian mentioned, we look forward to connecting with a lot of you at AGDT and other investor conferences throughout the quarter. Take care.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.