Pacific Biosciences Of California, Inc. Q2 FY2022 Earnings Call

Welcome to PacBio’s Second Quarter Fiscal Year 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Mr. Todd Friedman, Director of Investor Relations. Please go ahead.

Good afternoon and welcome to PacBio’s second quarter 2022 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today’s call, a copy of which is available on the Investor’s section of our website. With me today are Christian Henry, President and Chief Executive Officer; and Susan Kim, Chief Financial Officer. Before we begin, I would like to remind you that on today’s call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, expectations, intentions, guidance, and others, including expectations with respect to collaborations, cash flow, and product and technology launches. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties and could cause actual outcomes and results to differ materially from currently anticipated results. These risks and uncertainties are more fully described in our press release earlier today and in our Form 8-K, Form 10-Q, Form 10-K and other filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures, taken in conjunction with U.S. GAAP financial measures, provide useful information to compare our performance relative to forecasts and strategic plans and to benchmark our performance externally against competitors. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. In addition, please note that today’s call is being recorded and will be available for audio replay on the Investor’s section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today’s call may differ or change materially after the completion of the live call. I will now turn the call over to Christian.

Good afternoon, everybody. I appreciate you joining us today. On today’s call, I’ll provide an update on our 2022 revenue outlook, highlight our results for the second quarter of 2022, discuss some recent business and commercial successes and then will ask Susan to get into our financial results and guidance in more detail. September will mark my two-year anniversary at PacBio, and in that time, we have undergone a remarkable transformation. First, we’ve been able to build a talented and experienced team to lead the company and execute a strategy that will leverage our technology and commercial scale to serve our customers around the globe and drive growth. We also acquired Omniome and Circulomics adding core products and technologies to our portfolio. As a result of these acquisitions and through our aggressive product development investments, we expect to be the first company to commercialize both highly accurate long read and short read technologies, providing our customers with the right product for their application of interest and, as a result, serving the entire genomic sequencing landscape. Additionally, we believe that our portfolio will create significant value for our customers as we provide them with the capabilities required to discover novel biology with unprecedented detail at compelling scale and economics. We have not only invested in developing new technologies, we’ve also continued to improve our highly accurate Sequel IIe platform to provide even more customer value. For example, just this past quarter, we launched the ability for our customers to look at epigenetic markers with each sequencing run at no additional cost. Compared to various short read sequencing technologies, this feature dramatically simplifies the ability to see epigenetic markers because the workflow doesn’t require multiple sequencing runs with different sample preparations to capture all the data. We’ve also collaborated with leading organizations to show how highly accurate long reads can transform clinical research. I think you’ll agree that PacBio today looks a lot different than it did two years ago. There is no question, though, that we’re operating in an uncertain macroeconomic environment. These macro issues do not change our, nor our customers’ enthusiasm for PacBio sequencing. However, we are finding that these factors broadly play a role in customer purchasing patterns and their ability to operate at scale, especially as our business is currently dependent on large capital purchases. As a result, we have reevaluated our current outlook for the year to take these macroeconomic factors into account. Specifically, we expect EMEA to be lower than our original forecast as we see the region to be most affected by longer purchasing cycles. In addition, foreign exchange headwinds and increased competition are expected to have a greater impact there than in other parts of the world. We’re also seeing that some of our larger customers in the region are ramping their utilization to pre-Omicron levels at a slower-than-anticipated pace, due to staffing shortages, among other things. We believe this has and will continue to have an impact on our consumables revenue for the remainder of the year. In China, the second quarter was impacted by more than we expected from COVID lockdowns, and we expect it to take longer for our customers to ramp back to pre-lockdown levels in addition to the ongoing risk of localized lockdowns that could be reintroduced. For example, lockdowns at certain customer locations prevented us from installing newly acquired Sequel IIe systems, which had an impact on consumable revenue in China. Excluding China, we are quite pleased with the performance of our business, especially in Japan where commercial investments made in 2021 are driving significant opportunities and growth for the region. As China returns to a more normal operating environment, we believe our strength in the commercial team will be able to drive diversified growth throughout APAC. In the Americas, recession fears, volatile capital markets, and a growing number of sequencing entrants are slowing purchasing patterns as well. However, the region remains mostly resilient as it posted record revenue and grew over 50% compared to the second quarter of last year, as we’re growing in multiple markets from human genome to gene editing, to microbiome. The strength and diversity of our customers in the U.S. market gives me confidence that other regional headwinds are only temporary and we will re-accelerate going into next year and beyond. Considering these broader issues, we have re-examined our full year forecast, and we are now expecting 2022 revenue to be in the range of $138 million to $145 million or about 8% year-over-year growth at the midpoint. We expect an improving environment through the balance of the year with both third and fourth quarter growing sequentially, both in total revenue and instruments placed. In fact, consumable shipments are off to a strong start for the quarter with July being the strongest month in any quarter this year. While lower than previously forecasted, I want to reiterate that we believe this is primarily due to macroeconomic factors, particularly outside of the United States, which we do believe will be transitory. Our market opportunity has not changed, and we remain committed to our strategy to become a multi-platform company, enabling the most complete and accurate view of the genome. I am confident in our strategy and I am excited about our progress in developing revolutionary long and short read platforms, which we believe will be key drivers of our growth. Also, our balance sheet remains strong. At quarter end we had $899 million in cash and investments. And today I’m reaffirming our belief that even despite the short-term macroeconomic challenges we’ve seen, we have the capital required on our balance sheet to execute on our current development and commercialization plans, which we believe will enable us to reach positive cash flow. This is a top priority for the company. Susan will expand further on the guidance a little later. But first, I’d like to highlight the results of our second quarter. We reported $35.5 million in revenue in the second quarter, representing 16% year-over-year growth, which was in line with our guidance for sequential growth. Q2 was the sixth consecutive quarter of double digit year-over-year growth. And as I previously mentioned, our Americas region posted record revenue. In Q2, we were pleased to see that about one third of our Sequel IIe placements were brand-new PacBio instrument customers across all of our target markets. This demonstrates that we continue to grow even amidst higher comps, a maturing product cycle and broader macroeconomic factors. We’ve continued to see momentum in human applications as well with over 40% of our revenue in the first half coming from customers working on human genomics compared to just over a third of our revenue in 2021. This includes applications in genetic disease research where highly accurate long reads can help better understand complex genomic variation. For example, another top-tier children’s hospital in the United States received its first Sequel IIe in the second quarter to accelerate studies into genetic disease. Notably, the customer cited our newly released methylation detection capability as a key differentiator in deciding to purchase these systems. Additionally, we shipped Sequel IIes to multiple genome centers in the second quarter in support of whole genome research initiatives in the United States. And in Japan, we provided Sequel IIes to a large-scale service provider in support of ongoing and upcoming cancer research initiatives in the country. Our customers continue demonstrating the power of PacBio HiFi sequencing through numerous publications and preprints. Notably, the Human Pan Genome Reference Consortium or the HPRC posted several preprints describing the first human pan genome reference this past quarter. HiFi directly assembled this reference from 47 genetically diverse individuals. The transition from the single linear reference commonly used today to a pan genome reference represents a paradigm shift in human genetics. It improves variant calling and resolution of complex regions such as tandem repeats, segmental duplications, and is more representative of a diverse population. Before building this reference, researchers first benchmarked the best sequencing approaches and determined that highly accurate long reads were the best suited technology. Furthermore, this is a shift in the sequencing paradigm towards a fully phased six-gigabase genome versus a commonly used three-gigabase genome, which the HPRC shows HiFi is uniquely suited to assemble. In plant and animal genomics, studies show a sustained use case for HiFi as accurate long reads are best suited for assembling highly complex genomes. In a preprint last month, researchers from Utah State and other universities compared long-read technologies and showed that ”HiFi reads consistently outperform all other data types for both plants and animals, and may represent a particularly valuable tool for assembling complex plant genomes.” Moving to microbiology, Biopark, a service provider in Korea, purchased a Sequel IIe in the second quarter to advance human microbiome and drug resistance microbial research with funding from a Korean government agency. Other emerging applications like AAV gene vector sequencing with our latest protocol on instrument workflow continue to drive placements as we delivered multiple Sequel IIe to customers working on vector validation and research. In the second quarter, we’ve progressed our product development to enable more applications, better data, and higher levels of automation and standardization. All while making great progress towards future product launches. We’ve released custom targeted enrichment capabilities as part of our collaboration with Twist Bioscience; these panels can provide customers a cost-effective and high throughput way to sequence particular genes of interest, delivering comprehensive detection of single nucleotide variants, structural variants, and indels for any genomic interval, including difficult-to-sequence or difficult-to-map regions of the genome. We also reformatted and relaunched our Nanobind extraction technology from our Circulomics acquisition to be integrated with HiFi allowing for a more seamless sequencing workflow. As it was only launched a few years ago, most of our instrument customers have not yet used the Circulomics Nanobind extraction. This integration opens up the opportunity to get the differentiated product into more customers’ hands and fully recognize the synergies between the two technologies. Also on the workflow side, we’ve partnered with iLAC and the Robotic Biology instrument to develop fully automated end-to-end workflows for PacBio Sequel II and Sequel IIe HiFi long-read sequencing systems by employing advanced robotics. And in the backdrop of these enhancements, our field performance of smart cells continues to improve as part of our most recent chemistry and software release earlier this year. In fact, the average yield per smart cell is hitting records with over 30% more gigabases of output per cell than we saw in 2021. This on-market improvement enables customers to do more sequencing with Sequel II than ever before. We made excellent progress towards the launch of new products, such as our Kitted MAS-Iso-Seq solution, which remains on track for commercial release in the fourth quarter. Early access customer sites have been identified and will begin using the product later this year. The commercialized kit is expected to have higher and more robust throughput than the original MAS-Iso-Seq method outlined in a preprint last year, with reduced library preparation time and reagent use. The solution will come with a smart link workflow to produce isoform level single-cell data compatible with tertiary analysis tools and will enable the size and scope of experiments that have driven the breakout growth we’ve seen in single-cell genomics. Meanwhile, early adopters of the MAS-Iso-Seq method, particularly in the oncology and neuro disease research space tell us that they can now see critical, full-length isoform information missing from their short-read single-cell data. If we move to our sequencing by binding platform development, we shared some exciting data at AGBT around SBDs, exquisite accuracy in variant calling performance. After speaking with customers, we left the conference feeling even more invigorated about how SBD's unparalleled accuracy can accelerate genomic discoveries. Our team remains on track for commercial launch in the first half of next year. We’re in active discussions with potential beta sites and we anticipate beginning our full beta program in the next few months. We are also engaging with potential partners across the ecosystem to ensure the system is user-friendly and compatible at launch. Meanwhile, our in-house systems continue to sequence incredibly well, achieving accuracy scores with over 90% of the bases at or above Q40. And the system has demonstrated both single-end 200 base pair read lengths and 2/150 paired-end read lengths. And lastly, I’m pleased that we reached an agreement with Invitae in June that provides a roadmap and incentives for them to accelerate their sequencing on PacBio HiFi and still leverages their expertise in our development of ultra-high-throughput sequencers. I believe these new technologies will be even more important in Invitae's refocused business as they aim to deliver the most comprehensive genomes. Turning to other organizational updates. Today, we unveiled our first ESG highlights report. The report showcases our approach to environmental sustainability, social justice, and responsible governance and outlines our progress in these areas. Over the coming years, we expect to continue to invest in our ESG program as a key component of our long-term business strategy. And finally, we look forward to welcoming our new Chief Commercial Officer, Jeff Eidel later this month. I’ve personally worked with Jeff for over a decade and his knowledge and experience in genomics will drive significant value across PacBio. Now, with that, I’ll hand the call over to Susan to talk about our financial results in more detail. Susan?

Thank you, Christian. As discussed, we reported $35.5 million in product and service revenue in the second quarter of 2022, which represented an increase of 16% from $30.6 million in the second quarter of 2021, and 7% sequential growth compared to $33.2 million in the first quarter of 2022. Instrument revenue in the second quarter was $15.6 million, an increase of 9% from $14.3 million in the second quarter of 2021. In the second quarter, we modified our agreement with Invitae and recognized $3.7 million in instrument revenue related to Sequel IIe delivered to Invitae in the quarter. We delivered a total of 36 Sequel II and Sequel IIe systems during Q2, growing the install base to 460 systems as of June 30, 2022. Turning to consumables, revenue of $14.6 million in the second quarter grew 19% from $12.2 million in the second quarter of last year. Sequel II and Sequel IIe consumables represented approximately 86% of total consumable revenue in the second quarter, with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and Sequel IIe installed base in the second quarter was approximately $120,000. Headwinds from pandemic-related lockdowns in China continued through most of the second quarter. Additionally, new customers have been taking longer to get up to full speed as supply chain constraints have affected other inputs in customers’ workflow, such as servers and automation equipment. Finally, service and other revenue grew to $5.3 million in the second quarter compared to $4.1 million in the second quarter of 2021, reflecting our growing installed base. From a regional perspective, Americas had a record quarter with revenue of $21.7 million and grew 51% compared to the second quarter of 2021. We shipped Sequel IIes to a growing and diverse set of customers in the quarter including AnimalBiome, which is implementing PacBio HiFi and has plans to leverage concatenation for 16S sequencing in their industry-leading direct-to-consumer pet microbiome tests. Human germline applications, though, were the primary driver with nearly half the region’s instruments delivered to customers in this focus area. Asia-Pacific revenue of $8.0 million reflected an 18% decline over the prior year period primarily due to China, which was 30% lower compared to the second quarter of 2021. We were pleased to see that revenue growth in other APAC countries help to offset some of the lower revenue in China. Finally, EMEA revenue of $5.8 million was 12% lower compared to the prior year period and was impacted by broader macro dynamics, which slowed customers’ capital purchases. In addition, the region had an FX headwind of approximately 7% when compared to Q2 2021. Moving down to P&L, GAAP gross profit of $16.2 million in the second quarter of 2022 represented a gross margin of 45.7%. Excluding amortization of intangible assets, second quarter 2022 non-GAAP gross profit of $16.4 million represented a gross margin of 46.2%, compared to a GAAP and non-GAAP gross profit of $13.8 million or 44.9% in the second quarter of last year. The increase compared to the second quarter of last year was partially driven by a multi-instrument order at higher ASPs, as well as greater consumable and service revenue volume due to a growing installed base of Sequel II/IIe in Q2 2022. GAAP operating expenses were $84.2 million in the second quarter of 2022; excluding change in fair value of contingent consideration of $5.4 million, non-GAAP operating expenses were $89.6 million. This represents a 74% increase from non-GAAP operating expenses of $51.3 million in the second quarter of last year, reflecting growth in headcount, operating expenses related to the acquisition of Omniome, increased R&D spend, and increased travel as we transition out of the pandemic remote environment. In terms of headcount, we ended the quarter with 782 employees compared to 728 at the end of 2021. GAAP and non-GAAP operating expenses in the second quarter included total non-cash stock-based compensation of $18 million, compared to $13.9 million in the second quarter of last year. GAAP net loss in the second quarter of 2022 was $71.4 million, or $0.32 per share. Excluding amortization of acquired intangibles and change in fair value of contingent consideration, non-GAAP net loss was $76.6 million representing $0.34 per share compared to a GAAP and non-GAAP net loss of $41 million or $0.21 per share in the second quarter of 2021. Now, turning to our balance sheet. We ended the second quarter with $899 million in unrestricted cash and investments, compared with $963 million at the end of the first quarter of 2022. Inventory balances increased in the second quarter to $36.1 million, representing 2.3 inventory turns, compared with $29.6 million at the end of the first quarter of 2022, representing 2.8 inventory turns. Similar to last quarter, the decline in inventory turns reflects our strategy of increasing safety stock levels to manage global supply chain risk to continue to ensure we have the necessary materials on hand to meet our customer demand. Accounts receivable decreased in the second quarter to $27.1 million, reflecting a DSO of 70 days, compared with $27.9 million at the end of the first quarter of 2022, reflecting a DSO of 71 days. Long-term deferred revenue declined approximately $23 million and current deferred revenue increased approximately $21 million for a net change of approximately $2 million in Q2, primarily as a result of a multi-instrument order from Invitae in the quarter as well as future credits awarded to Invitae via the amendment to the co-development agreement. Moving to guidance. We are updating our expectation for full year 2022 revenue to be approximately $138 million to $145 million, or 8% growth at the mid-point. While we continue to see increasing customer enthusiasm for our technology and products, broader macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, and lockdown restrictions associated with COVID-19 have lengthened customer sales cycles particularly for capital purchases. Therefore, we expect to ship fewer instruments this year than we originally expected. With respect to consumable revenue, lockdowns in China have led to lower than previously anticipated consumable revenue in the region as customers have difficulty accessing labs as well as lower sample volume from which to sequence. In addition, placing instruments with more new customers has lowered our average consumable pull through, and a lower than previously forecasted installed base has lowered consumable revenue estimates for the year. On a quarterly basis, we expect the third quarter revenue to be slightly higher sequentially as we expect higher Sequel IIe placements and pull through to be partially offset with lower ASPs. We expect non-GAAP gross margin to be 44% to 45%, slightly lower than our previous guidance range, reflecting lower revenue volume and increasing costs associated with ongoing global supply chain constraints and rising inflation. For OpEx, we have significantly reduced the pace of hiring in the second half of the year relative to our previous forecasts. However, we continue to make excellent progress on our next generation platforms and will continue to prioritize these investments. As such, we now expect non-GAAP operating expenses to be between $350 million and $360 million. We expect that slowing our pace of hiring will translate into a lower run rate of operating expenses entering 2023 while still giving us flexibility to make the appropriate investments in R&D and commercial to fuel our growth in 2023 and beyond. Interest and other expenses are unchanged and expected to be approximately $15 million for the full year, reflecting interest expense and amortization of debt issuance costs for our convertible notes issued in 2021. We expect the weighted average share count for purposes of EPS for the full year to be approximately 225 million shares. With that, I will turn the call back to Christian. Christian?

Thank you, Susan. I hope your takeaway from our prepared remarks today is that PacBio remains extremely well capitalized and well positioned to execute on our strategy despite the short-term volatility and uncertainty we see in the market. We sit in front of a huge multi-billion-dollar market opportunity with multiple technologies that we believe will uniquely position us to provide customers with products capable of delivering genomic insights unimaginable with the current status quo of sequencing. We look forward to engaging with our customers at ASHG in late October. And with investors, we hope to connect at the many conferences lined up in Q3 and we’re hosting our first Analyst Day in November, which we will be sharing details about next month. Now, with that, I’d like to turn it back to the operator so that we can begin the Q&A.

Thank you. We’ll now begin the question-and-answer session. Our first question comes from Ross Osborn with Cantor Fitzgerald. Please go ahead. It appears Ms. Osborn has disconnected. So our next question comes from Kyle Mikson with Canaccord. Please go ahead.

All right. Great. Thanks guys for the questions. I hope you’re doing well. So just want to talk about the guidance, not a huge surprise. I thought a lot of the factors that you called out Christian make sense. But maybe could you just break down the guidance assumptions, maybe like quantitatively, when you think about the macro factors, like China lockdown, FX inflation, supply chain? Just want to understand how you’re thinking about that maybe in the near term here. And then also, maybe for Susan, like the product breakdown, you didn’t really quantify that instruments can end up pull through. How could that really trend in the second half of the year as well? Thanks.

Sure, Kyle. I’m not going to break down the delta and guidance based on specific macroeconomic factors. But qualitatively, what we’re seeing is that the Americas is actually doing extremely well. However, we did lose some opportunities in the first half of the year due to COVID impacting consumable pull through, which had been lower than what they’ve been historically. But overall, the Americas has done extremely well and compensated, and will continue to compensate, primarily for the weakness in Europe. That’s the area where we’ve had the most impact. It’s a combination of different factors; the currency headwind is significant with over $0.5 million of currency impact in the quarter, principally driven in EMEA. Additionally, COVID is still impacting EMEA, and inflation fears, recession concerns, and the situation in Ukraine have slowed down the purchasing process. Nonetheless, our demand and our funnel looks very encouraging. Overall, I’m happy with how the company is doing, but Europe is likely to remain challenged for the rest of this year. China remains a bit choppy; we saw some improvement in the quarter, and although lockdowns may start to subside, the recovery is still uneven. For instance, lockdowns prevented us from installing some systems shipped to customers in China, which has had an effect on consumable revenue. Now that those instruments are installed, we expect back half improvement, but we felt it prudent to adjust our outlook for the rest of the year. Hopefully that helps, Kyle.

Yes, I mean, that was a great, Christian. Susan, do you want to talk about instruments and pull through maybe how that could trend? Or if not, it’s fine, we can just move on.

Oh, no. Happy to, Kyle. I was trying to unmute. So just to give you an idea: we talked a lot about the fact that there’s a lot of enthusiasm by our customers for our technology, which is great. Our pipelines continue to be strong. Due to the macroeconomic dynamics we discussed, sales cycles have lengthened. Some orders that we forecasted in Q2 are pushing into Q3. Additionally, we expect higher placements in Q3 due to the government fiscal year end, which will help on the back end. So, we see Q3 sequentially higher placements compared to Q2, and we expect Q4 to be higher than Q2 as well. In terms of consumable shipments, we’re off to a strong start in July. While consumable pull through might not return to 2021 levels, I believe the second half pull through will be higher than what we've seen in the first half based on trackable trends for July, although still lower than previous years.

Okay. That was great. Thanks so much guys. And I guess, I guess Christian, I’m just thinking about like the issue that could be maybe internal or like specific to PacBio. You didn’t really mention anything there, which was obviously positive, but some of your peers in this sector have had some leadership changes on the commercial team in recent quarters, which have led to inconsistent execution in some cases. Your execution’s been pretty good recently, but I’m just kind of wondering what gives you confidence that you can smoothly transition with Jeff as the new Chief Commercial Officer. And is there any structure or strategy change with the new commercial leadership now that he’s been appointed?

That’s a great question, Kyle. I have a lot of confidence as I know Jeff well, and we have a long history of working together. Our team is relatively small, so we’re all involved in key aspects of the business. Furthermore, the other executives in our team have also been involved in commercial leadership. We’ve created a scaled commercial organization capable of operating globally; we’ve grown significantly in several regions including Korea and Japan. So, we’re confident in our position against emerging competition because we have existing strong products along with exciting new developments. Jeff is a respected executive who has worked with our regional general managers, making him well suited to evaluate our organization. Hence, I believe this transition will be seamless.

That was great. I almost forgot Christian, your background: so he has two great sequencing CCOs to learn from. I’ll ask a final one here, just kind of lumping two thoughts in at the end here. So first being, you mentioned Christian, there's a growing number of new sequencing entrants that pressured the Americas results. From what I understand, there’s no like pure-play long read companies that are going to market anytime soon. Could you just talk about that a bit? Is that more on the short read side, I guess? And then secondly, ASP was obviously pretty high this quarter; in the past, public labs trade-in programs dragged down ASP. What should we expect going forward?

Yes, those are good questions. Regardless of whether the entrants are long or short reads, the excitement around sequencing is encouraging. Emerging entrants stimulate discussions about solving complex problems, which strengthens our position. I believe we have the best long-read platform and our short-read technology, coming next year, will show major advantages over competitors. We’ve been having active sales discussions where customers are interested in a combined offering of long and short-read technologies to achieve accurate results. Our ASPs in the quarter were strong, primarily due to customer mix; selling to commercial customers typically results in higher ASPs and may fluctuate from quarter to quarter. It's crucial for us to build our install base, and we currently have 460 units out there. I look forward to breaking the 500 threshold soon.

Yep. Perfect. Thanks, Christian. Thanks, Susan.

Thank you. Your next question comes from Julia Quinn with JP Morgan, please go ahead.

Hi, thank you for taking a question. This is Amy calling on Julia. So I have a couple of questions. The first one is related to the guidance. I want to go back to the China market. Do you guys have any idea, like what’s the outlook for the China market? Do you have any signs of when the market will bounce back?

Well, Julia, I don’t think we have a crystal ball and therefore we’re taking a conservative view on China as it has historically been significant for our revenues. We see lots of opportunity in the second half of the year and into next year, but we can’t predict timing due to potential lockdowns and other macroeconomic factors. We’ve taken a cautious approach; however, as APAC shows improvements in Japan and the rest of the region, there’s potential for accelerated growth as well. Our product continues to improve as we see 30% increases in output from our Sequel platform, which provides customers with more value. While we recognize the uncertainties, we remain optimistic about our strategy and outlook.

Okay. Yeah. That’s very helpful. Thank you very much. My next question is relating to the pipeline. So, first it’s concerning those new high-throughput platforms — what updates can we expect and when? And how should we think about those updates? The second is regarding the short-read platform, the Omniome platform. The specifications look impressive, especially concerning accuracy. What’s the customer’s willingness to pay a premium for this higher accuracy in their daily operations?

Okay. I’ll start with the short-read platform. We were enthusiastic about the response at AGBT, where customers showed a lot of interest in joining our beta programs and seeing the data themselves. Accuracy matters greatly, and with significantly better accuracy compared to the incumbents, our pricing can reflect that efficiency. We are expecting updates in the beta development programs in the coming months. As for long-read developments, we are focusing on delivering improved throughput, which is essential for customer operations across larger scale projects. We will discuss these updates in due course. For now, we’re committed to building on the existing capabilities of the Sequel IIe platform, which continues be effective in the market.

Okay. Yes, that’s very helpful. Thank you very much.

Thank you. Your next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey guys. Good evening. Question, just following up on your remarks about the product pipeline. While I know you don’t want to commit to specific timelines just yet, do you believe there’s an interim instrument that needs to be launched before you aim for that sub-one-K price point? Or do you feel confident that you can get there with the next version of the Sequel?

Yes, I do think that our existing technology is capable of achieving the $1,000 genome without needing incremental steps. Our strategy includes developing a portfolio that provides a range of choices, meeting diverse customer needs while achieving economical solutions in genomics. The focus will remain on the Sequel IIe, which has made significant improvements, but we will eventually share next-generation plans timeframes when appropriate.

Got it. Super helpful. And then on the instrument and consumable side, Susan, quick point of clarification: the $3.7 million you mentioned regarding Invitae, was that for instruments placed in this quarter, or was that for instruments from past quarters? And then Christian, regarding consumable expectations on higher throughput applications coming as we release the new version of the Sequel, are you expecting to reach back to that $175K plus pull-through range by the second half of 2023, or is that contingent upon the new box being launched and gaining traction?

Just to clarify, the $3.7 million for Invitae relates to a handful of Sequel IIe that they purchased in Q2, which they received in that quarter.

Yes, Susan covered the first question well. As for pull-through expectations, it’s not appropriate for me to project that just yet. However, with platforms that have greater throughput, customers can run more samples yearly, hence an increase in pull-through potential. The Sequel IIe is seeing gradual improvements, especially from instruments shipped in the past six months that are starting to ramp up. While there are significant staffing challenges being addressed, the outlook remains optimistic. However, as we broaden our customer base, not every customer might run sequencers 24/7, which might temper expectations a bit. I believe that pull-through will improve in the second half compared to the first half, but not back to last year’s levels right away.

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

Thank you. Your next question comes from Dan Brennan with Cowen. Please go ahead.

Great. Thank you. Thanks for taking the questions. I had one on Europe and China, and then one on the pipeline. Maybe Christian, just to start on Europe and China. So on Europe, could you unpack a little bit more of what the issues are there? You talked about several factors like staffing, competition, macro utilization, and so forth. Could you provide a sense of the biggest issues? I know you said these issues are transitory but also mentioned that utilization might be pressured for the year. For China, could you also elaborate? It seems the inability to get into labs for installations has been a concern. Has there been any recovery or how have things progressed in July?

With respect to EMEA, in Q2, we had instruments in our near-term funnel that were in what we call our commit bucket but didn’t get across the finish line in June due to extended purchasing cycles. The deals didn’t go away; they just took longer to close. We also faced significant turnover in some flagship accounts, causing lower sequencing operations, impacting our consumables. In other regions, purchasing agents have taken longer than expected and are experiencing uncertainty regarding costs due to currency fluctuations. These factors have impacted EMEA. I do believe these aren’t systemic long-term issues, rather they stem from the environment we’re operating within. Customer activity is beginning to improve, as seen in July when some of these customers resumed operations. For China, while the lockdowns were indeed a major factor, our customers have experienced challenges acquiring samples since much of our business relies on service providers. The cumulative effect of these lockdowns limited access to labs, sales efforts, and sample acquisition, but we are pushing towards recovery. We’ve seen some improvements in July and hope for continued upward trends.

Yes, that’s very helpful. Maybe this one on the pipeline, obviously we’ll hear more about it next year. In terms of getting below a $1,000 on a long-read genome, how do we think about price cuts on the short-read side? We’ll see what happens this fall with Illumina. As that gap widens, will even an $800 or $900 long-read genome be enough?

I believe strongly that it won’t matter. Not only is the price per genome different on our platform versus a short-read platform, but also the throughput on long reads is generally lower. While we will narrow both pricing and throughput gaps, we expect to see accelerated adoption of long-read technology because large projects require it. The change in the reference genome is leading to recognition that short reads are insufficient for genome sequencing. As the economics and throughput improve, this will transform industry paradigms. I believe our ongoing R&D is proving long reads can deliver valuable data and positions us for success as we market these advancements.

Got it. Thanks Christian.

Yes.

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

Thank you. As a reminder, a replay of this call will be available in the Investors section of our website. Thank you all for joining us today. This now concludes our call and we look forward to updating you on our progress in the third quarter.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a great day.