Pacific Biosciences Of California, Inc. Q3 FY2022 Earnings Call

Hello, and welcome to the PacBio Third Quarter Fiscal Year 2022 Financial Results Conference 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 Third 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 in the Investor’s section of our website at www.pacb.com, or as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. 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 regarding our Revio Onso system in their commercialization timeframe. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially from those projected or discussed, including those inherent in developing and commercializing new products. We refer you to the documents that we file with the SEC, including our most recent forms 10-Q and 10-K in our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures, combined with U.S. GAAP financial measures, provide useful information to compare our performance relative to forecasts and strategic plans and 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 in the Investor’s section of our website shortly after the call. Finally, we will be hosting a question-and-answer session after our prepared remarks. We ask that analysts please limit themselves to one question and one follow-up question, so that we can accommodate everybody in the queue. I will now turn the call over to Christian.

Good afternoon, everybody. Thanks for joining us today as we discuss our third quarter results and business highlights. Before I begin with my prepared remarks, I'd like to remind everyone that we are hosting our first Investor Day in New York City on November 15. You can find out more about the event in the Investors section of our website. On today's call, we will first recap the product announcements we shared two weeks ago at the American Society for Human Genetics Conference in Los Angeles, then we will discuss our third quarter financial results, and then I'll provide some commentary on our commercial activity during the quarter. Then I'll hand it off to Susan to walk through our quarterly financials in more detail and, of course, as always, there will be plenty of time for Q&A. When I joined the company in September of 2020, I outlined two important aspects of our strategy for growth. First, we needed to develop a new long-read platform that offered our customers significantly higher throughput at much lower cost, and second, since we believe that understanding biology is becoming a more multiomic endeavor, we need to develop multiomic capabilities so that we could provide the right solution for our customers depending on the biological question that they are trying to answer. At ASHG on October 21st, with the announcements of Revio and Onso, two groundbreaking new sequencers, we demonstrated that we are well on our way to achieving these two critical aspects of our strategy. Let's start with Revio, our next-generation long-read sequencer. Revio is expected to provide 15 times more data output than our current flagship sequencer, the Sequel IIe. At the core of Revio is a completely redesigned smart cell, which has 25 million zero-mode waveguides more than three times as many as the Sequel IIe. Revio then utilizes up to four 25m smart cells in every run to enable the sequencing of up to 100 million single molecules of DNA simultaneously. As a result, the system provides up to 360 gigabases of highly accurate HiFi data, enabling researchers to not only see SMBs and indels, but also structural variation and important epigenetic data in every single run. Finally, the run time has been reduced by 20% to just 24 hours. Revio was designed with the customer in mind, including requiring fewer consumables and the ability to load the next run while an existing run is in progress. In addition, the tenfold increase in relative compute power leverages the latest NVIDIA GPUs and enhances face calling with Google DeepConsensus on board. This makes it easier for our customers to start interpreting the data directly from the instrument. We believe Revio is poised to transform the whole genome sequencing market. This platform enables customers to take on large-scale genome projects with the accuracy and completeness of HiFi. One Revio system can sequence up to 1,300 human genomes a year at less than $1,000 per genome at 30x GAAP coverage or approximately $11 per gigabase at list price. And at lower coverage, several thousands of genomes per year at just hundreds of dollars per genome. At ASHG, we hosted a packed booth over all three days and demoed the Revio over 150 times. Feedback from potential customers has been fantastic. On social media, we had more than 10 million impressions over the course of the conference, more than tenfold over other instrument providers. Some comments included, one researcher calling it, 'The most important genome sequencer to launch since the Illumina GA IIx.' And another customer who has already placed a multisystem order said, 'It will be a game changer in the medical genomics field.' We've already booked multiunit orders from several customers and are actively discussing system orders with dozens more. With excitement around Revio, several customers have asked about an upgrade path and we're pleased to have customer loyalty programs in place to support their transition from the Sequel IIe to Revio. It's clearly a seminal moment that we launched this paradigm-shifting sequencer as PacBio recently surpassed its 1,000th sequencer shipped since the launch of the RS platform in 2011. Over the past decade, PacBio long-reads have enabled approximately 400 instrument customers to accelerate their research by allowing them to view biology in ways others can't. From assembling telomere-to-telomere pan-genomes to sequencing some of the largest, most complex genomes on this planet, hundreds of publications over the past few years reinforce our belief that the combined accuracy and length of HiFi are unmatched. With the throughput, power and attractive price point of Revio, we are thrilled to usher in the next phase of PacBio. In addition to Revio, we announced Onso, a mid-throughput short-read sequencer based on the highly accurate sequencing by binding technology we acquired through Omniome last year. Onso is a highly differentiated sequencer due to the incredible accuracy of the SBB chemistry. Internally, we've consistently demonstrated accuracy at the Q40 levels, which we believe is more than 10 times more accurate than other recently announced chemistries. The beta program has commenced, and we've started shipping units to our beta partners. These partners include the Broad Institute, Weill Cornell, and Corteva Agriscience, who will be using their beta systems over the next few months. We look forward to these partners providing valuable feedback on Onso's performance in the field. Once the beta program is complete and we incorporate their feedback into the product, we will finalize the development and begin commercial scale-up activities. We expect to begin shipping Onso commercially in the first half of 2023. As a result of all these announcements, we've suspended our financial guidance so that we can understand the impact that Revio will have on the demand for Sequel IIe. However, at our Investor Day on November 15, we expect to share our longer-term financial targets and update you on market response to Revio and Onso. Let's move on to our Q3 results. We reported $32.3 million in revenue, representing a 7% year-over-year decline with changes in foreign exchange rates driving 2% of that decline. The decline was driven by lower Sequel IIe sales. We believe some customers deferred their instrument purchases in anticipation of a new product launch and that this impact was greater than we anticipated in the quarter, particularly in the Americas region. Other drivers of the instrument shortfall included customers deferring purchases due to lab space issues and funding delays. We expect many of the current and deferred opportunities to migrate to Revio. However, we anticipate sustained, albeit lower demand for Sequel IIe going into the fourth quarter and into 2023. Since Sequel II's launch nearly four years ago, we've advanced the platform with the IIe upgrade, significantly reduced the secondary analysis time and lower data storage needs by up to 90%. Additionally, we launched new kits that reduced DNA input requirements fivefold, seamlessly integrated methylation calling on every run, and released several application protocols and workflows for AAV, SARS-CoV-2 sequencing, and single-cell transcriptomics. As you can see, we've built a robust ecosystem around Sequel IIe. It remains an extremely reliable and powerful sequencer at an attractive entry price for customers looking to do lower throughput long-read sequencing. Although we shipped fewer instruments than we were forecasting, we continue to expand the Sequel IIe customer base with over 40% of our instrument shipments in the quarter to new PacBio customers. In the past four quarters, we have onboarded approximately 65 new instrument customers. Sequel IIe's success in attracting new users gives us confidence that the throughput, economic, and workflow improvements of Revio will even further catalyze the next wave of new customers to PacBio. In the third quarter, we were also pleased to report record consumables of $16.1 million, an increase of 10% year-over-year. We saw pull-through steadily increase sequentially as customers in China increased utilization and EMEA booked record consumable sales. Outside of new sequencing platforms, perhaps what our customers are most excited about is our recently launched MAS-Seq kit and its game-changing potential for transcriptomics and single-cell research. This new kit leverages 10x Genomics single-cell expression technology and allows customers to achieve a 16-fold throughput increase compared to regular single-cell Iso-Seq library. Despite being an important component in understanding genetic variation in disease, we still know so little about isoforms because of short-read limitations in sequencing them at their full length. With the combination of throughput and cost improvement provided by MAS-Seq, coupled with the 15-fold improvement with Revio, we believe HiFi will be the go-to technology in single-cell transcriptomics. In response to this launch, a principal investigator from a major university told us that he believes that, 'It is clear that in the next few years, long-read sequencing will become the de facto gold standard in transcriptomics research.' Over the past couple of years, we've been broadening our collaborations to deliver customers turnkey solutions for understanding biology. An example is the release of the off-the-shelf target enrichment panels for long-read HiFi sequencing in collaboration with Twist Bioscience. These panels include nearly 400 panels covering medically relevant genes in regions that are difficult to sequence using short-read methods, including genes tied to spinal muscular atrophy, Alzheimer's, and cardiovascular diseases. We are also offering another panel to capture 50 pharmacogenomic genes. By providing targeted panels in addition to whole genome workflows, we can address a broader set of customers across human genomics. Further, we also launched the tandem repeat genotyping tool, or TRGT, target to allow scientists to fully characterize the sequence and methylation status of tandem repeats across the genome. Genetic variation in tandem repeat regions has been linked to many neurological and intellectual disorders such as ALS, Huntington's disease, and Fragile X. Turning to commercial highlights. In our human germline applications, which again in Q3 represented over one-third of our product revenue, we delivered additional Sequel IIes to support multiple customers in their sequencing for a large population genome scale project in the United States. Additionally, we shipped multiple Sequel IIes in a competitive deal to a customer in the Middle East planning to launch a large population scale program. We expect this customer to transition to Revio over the next year to accelerate sample volume. As previously mentioned, we expect some customers to continue sequencing on their Sequel IIe platforms like DNA Link in Korea, who purchased a Sequel IIe to begin sequencing for the Korea disease control and prevention agency and plans to use HiFi viral to sequence 10,000 SARS-CoV-2 genomes. And Avero Diagnostics, a new PacBio customer who purchased a Sequel IIe in the third quarter to support its microbiome DTC test offering and could potentially scale the system to provide tens of thousands of tests per year. We also expect AAV sequencing applications to continue to use the Sequel IIe with the addition of Sequel IIes in the third quarter, shipped to several customers in this application area. Lastly, I'd like to welcome the members of the newly created Scientific Advisory Board. Dr. Euan Ashley and Dr. Jody Puglisi of Stanford University, and Dr. Jay Shendure from the University of Washington. These renowned leaders in biology and chemistry will provide critical feedback and direction to our product roadmap. We had our first meeting this past week, and I was delighted to hear the SAB's enthusiasm for PacBio's new platforms and what they believe can be accomplished in many diverse genomics applications. 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 $32.3 million in product and service revenue in the third quarter of 2022, which represented a decrease of 7% from $34.9 million in the third quarter of 2021. Entrant revenue in the third quarter was $11.4 million, a decrease of 28% from $15.9 million in the third quarter of 2021. We delivered 34 Sequel IIe systems during Q3, growing the installed base to 494 Sequel II and IIe systems as of September 30, 2022. Turning to consumables. Revenue of $16.1 million in the third quarter grew 10% from $14.6 million in the third quarter of last year and was a record for PacBio. Sequel II and IIe consumables represented approximately 90% of our total consumable revenue in the third quarter with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and IIe installed base in the third quarter was approximately $125,000. Consumable revenue in China continued to improve, partially offset by newer PacBio customers being slower to ramp and certain customers dealing with sample delays. Of note, global supply chain constraints related to auxiliary equipment have had an impact on new instrument ramp time, and one of the other reasons noted was a lack of nitrogen at the time of installation, which we're pleased to say will not be a requirement with our new Revio platform. Finally, service and other revenue grew to $4.8 million in the third quarter compared to $4.4 million in the third quarter of 2021, reflecting our growing installed base. From a regional perspective, Americas revenue of $16.7 million declined 14% compared to the third quarter of 2021, primarily driven by lower Sequel IIe placements as customers delayed purchases due to lab space limitations funding and deferred orders due to the anticipation of a potential new sequencer launch. The region also experienced lower utilization as certain customers dealt with sample shortages and as newer customers took longer to ramp. Asia-Pacific revenue of $9.6 million grew 4% over the prior year, primarily driven by a recovery in China post-lockdown. The region posted its highest consumable quarter in nearly five years, lower instrument ASPs partially offset the growth in consumables. Finally, EMEA revenue of $6.0 million was 6% lower compared to the prior year period, with currency fluctuations in the pound sterling driving a 10% headwind. The region was most affected by FX, which represented approximately a 10% headwind compared to Q3 2021. The region posted record consumables in the quarter, particularly as a large plant and animal sequencing project regained momentum. Moving down the P&L. GAAP gross profit of $13.5 million in the third quarter of 2022 represented a gross margin of 42%. Excluding the amortization of intangible assets, third quarter 2022 non-GAAP gross profit of $13.7 million represented a gross margin of 42%, compared to a non-GAAP gross profit of $15.7 million, or 45% in the third quarter of last year. The decrease compared to the third quarter of last year was partially driven by lower interim volumes and lower instrument ASPs, partially offset by higher consumable volumes. GAAP operating expenses were $88.2 million in the third quarter of 2022, excluding change in fair value of contingent consideration of $4.3 million and the amortization of the intangible assets, non-GAAP operating expenses were $83.8 million. This represents a 42% increase from non-GAAP operating expenses of $59.1 million in the third quarter of last year, reflecting a full quarter of operating expenses from Omniome and increased headcount. In terms of headcount, we ended the quarter with 771 employees compared to 728 at the end of 2021. Operating expenses in the third quarter included total non-cash stock-based compensation of $18.0 million, compared to $26.6 million in the third quarter of last year. Excluding merger-related expenses, non-GAAP operating expenses in the third quarter of 2021 included $15.1 million of non-cash stock-based compensation. GAAP net loss in the third quarter of 2022 was $77.0 million, or $0.34 per share. Excluding amortization of acquired intangibles and change in fair value of contingent consideration, non-GAAP net loss was $72.5 million, representing $0.32 per share, compared to a GAAP net income of $16.5 million and a non-GAAP net loss of $47.2 million, representing $0.23 per share. Now, turning to our balance sheet, we ended the third quarter with $834 million in unrestricted cash and investments compared with $899 million at the end of the second quarter of 2022. The inventory balances increased in the third quarter to $43.5 million, representing 1.9 inventory turns compared with $36.1 million at the end of the second quarter of 2022, representing 2.3 inventory turns. The increase in inventory primarily reflects purchases of revenue and on-fill inventory, coupled with lower-than-expected Sequel IIe shipments. Accounts receivable decreased in the third quarter to $22.8 million, reflecting a DSO of 71 days compared with $27.1 million at the end of the second quarter of 2022, reflecting a DSO of 70 days. Moving to guidance, as a result of our announcement of Revio, our latest high-throughput long-read sequencing system expected to ship in the first quarter of 2023, we withdrew all prior 2022 financial guidance. We look forward to connecting with you next week on November 15th at our Investor Day in New York, where we plan on providing additional details related to our longer-range financial outlook. With that, I will turn the call back to Christian.

Thank you, Susan. It's been an exciting time for PacBio in the field of genomics. We're months away from the first Revio shipments and from what we believe represents the biggest technological milestones in long-read sequencing. We hope to see you all next week as we dive deeper into our strategy, products, markets, and financial outlook at our inaugural Investor Day. I will now turn the call back to the operator to begin.

Thank you very much. We will now be in the question-and-answer session. Today's first question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey guys. Good evening. So, maybe a Christian one for you. Can you just share some early customer feedback on the relatively high price point for Revio? And just some perspective on how you see the degree of discounting and trade-in sort of play out here over the next 12 months, particularly in light of the macro and the worsening FX headwinds?

Sure, thanks, Tejas. I didn’t encounter much resistance regarding what you termed a high price point. People seem to recognize the significant value and opportunity presented by long-read sequencing at $10 or $11 per gigabase and even lower for large-scale genomes. There was hardly any pushback. However, as with any product transition, there are always customers who purchased at the end of the third quarter or during 2022. We considered this carefully and implemented customer loyalty discounts to support them, allowing them to transition to Revio while still benefiting from the Sequel IIe until Revio becomes widely accessible. What we did was establish that customers who purchased in 2022 would receive a larger loyalty discount compared to those who bought in 2021. We aimed to acknowledge the new system, and so far, we have not encountered much resistance to this discount approach. I believe that in the long term, the discounts will be less than what we offer for the Sequel IIe. However, I want to clarify that this is not a trade-in program; the loyalty discounts will allow recent customers to receive a favorable price. We are pleased to implement this as part of our strategy to expand the market with a larger installed base, enabling us to upgrade that base to Revio as quickly as possible.

Got it. That's helpful. And then one on the consumables line, and I’m not sure how much visibility you have on there at the moment. But just curious as you think about sort of the ramp down in Sequel consumables, particularly given some of these larger studies that are already in flight. How are you thinking about the consumables line winding down for the legacy platforms? And then on the other side of that, can you share some color on the theoretical maximum pull-through at 30x coverage in the Revio? Is it fair to think of it as like a low to mid single-digit multiple of 175,000 a year that you saw on the Sequel IIe?

Yes, to go backwards, that's probably right. It will depend on how people perceive coverage. One of the things we have been focusing on this year is understanding the long-read coverage needed with HiFi compared to the traditional 30x metrics. It really varies based on the application. For large-scale population genetics projects, coverage could range from 10x, with some customers mentioning as high as 20x. This suggests an increase in scale compared to the 30x paradigm. Regarding pull-through, you can think of it in relation to the Sequel IIe. To evaluate the maximum opportunity, consider the 24-hour run time. If you operate the system 50 weeks a year, you can calculate it by starting with the list price and applying any discount to estimate the price per genome, which should help you determine the financial aspects. We anticipate that Sequel IIe will continue to be utilized for a significant time as we increase the use of Revio. There has already been substantial interest, and we expect a large number of customers to upgrade their systems. It is still too early to accurately assess the decline in consumables, but it will likely happen more in the latter half of next year than the earlier part. We'll discuss this further at the Investor Day next week, providing more details on how we envision this transition occurring. It will be a nuanced process over the next few quarters as we launch and ship the product, and as customers begin converting their samples and scaling up new projects, particularly as they explore possibilities they hadn't considered before. This is a key reason why there is so much excitement around Revio.

Got it. And one last one for me on Omniome. Just on that sort of price per inside value prop that you've talked about in the past question. If you think about sort of the higher accuracy enabling lower depth of coverage, can you just share some sort of thoughts on what that means for consumable pull-through, or do you expect that the sample volume will inflect enough to offset some of that dynamic there?

Well, I think the sample volume will clearly have a big impact there. And I think it's too early to kind of game out the throughput, so to say, or the pull-through, because it's going to really depend on how the customer decides to use the system. If they use it for kind of doing what they do today but just with less coverage, that will result in more samples. But if they do it in a way that they want to find variants that are even deeper that they can't find with any other platform, that will result in more sequencing. And so either way, it means samples coming to the platform and a unique opportunity for us in the area that we're pointing the Onso system. And so as we get closer to actual shipments, we'll try to provide as much color as we can. And then it will be one of those things where we'll get to see how our customers leverage this major advancement in accuracy.

Very helpful. Thanks, guys. Appreciate the time.

Yep.

The next question comes from Julia Qin with JPMorgan. Please go ahead.

Hi. Good afternoon. Thanks for taking a question. So regarding the Revio, Christian, I was wondering if you could share a bit more color on the order book in terms of the number of instrument orders you've placed so far? And what's the mix looking like between different applications, PropSeek, human genome, plant animal? And how does that compare versus your expectations?

Well, I think the – I mean, to be honest, the expectations so far have blown my expectations away, and that's just – that's to be – that's honestly the truth. When you think about we had $10 million social media impressions last week or two weeks ago at the conference, it just showed me how much demand there is for long-read sequencing, how much demand there is for a new paradigm of completeness, and a new paradigm of seeing the whole picture, those messages seem to resonate. And our sales team at ASHG was extremely busy, which was incredible to see. We – as I've said, we do have several multiunit orders already on the books. I'm not going to share all the details today. We probably will share some more details next week at Investor Day. But even then, I think it's really all about this building demand curve and setting us in a whole new trajectory for the future of the company. And the early indication is that all of those facts seem to be bearing themselves out.

Got it. Great. And then in terms of the legacy platform, how should we think about the residual demand here? Is the idea that you'll still keep Sequel IIe as maybe an easier entry point for new to long-read customers? And how should we be thinking about the mix of as you know the legacy versus Revio instrument mix and demand going forward?

Yes, that's a good question, Julia. In the prepared remarks, we aimed to highlight that there are still applications where the Sequel IIe will be quite adequate and, frankly, a great platform. Examples include AAV and even some of the advantages you gain by using the Maf kit on isoform sequencing, which can yield very favorable scientific results. There will be applications where Sequel IIe will be very useful. However, we expect that Revio will become the main platform we sell in 2023. We do anticipate a smaller, consistent level of demand throughout the year. That's about all I want to say for now regarding the Sequel IIe platform. We will continue to support it, ensure our existing customers are satisfied, and make sure the platform remains robust and functional. However, there is certainly a significant push in the market and strong demand for Revio.

Got it. That's helpful. And lastly from me, could you talk about your manufacturing capacity for Revio and also respectively? And how to think about the ramp in the near term?

Yes. So, actually, one of the agenda items at Investor Day is operations, because I knew this question would come. And so Mike Goloubef, our SVP of Manufacturing and Operations will give you much more detail on that next week. But what you can be assured of is we've had a lot of experience with managing platform transitions over the years, this team of executives. And so, we are appropriately scaling up both Revio and getting ready for Onso, so that we can meet the demand. However, it's likely when we start at the beginning, we will ship a bolus of units, make sure they get into the market and are robust and doing what they need to do and then scale from there. In other words, we don't want to ship all of the demand necessarily in one quarter. We want to make sure we have a very, very smooth launch. And we've really worked hard on getting the supply chain ready for broad commercialization. I think that's one of the key competitive advantages we have over, particularly the emerging sequencing companies to meet all of the demand. And that's probably all I want to say about it right now, Julia.

Got you. Helpful. Thank you very much.

Yes.

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

Great. Thanks for taking the questions. Look forward to next week. Just running back to Tejas' question at the onset, just on the regular pull-through, we'll obviously hear a lot more next week. But it sounds like the theoretical upside here is dramatically higher with over $1 million of potential annualized pull-through. And it sounds like Christian, at this early juncture saying that the actual pull-through could approximate two to threefold, or several times what you're seeing on Sequel I and Sequel II, certainly seems like a reasonable starting point. I mean not out of the gate, obviously, but as the installed base starts using the product?

Well, I think, Dan, we're not going to comment on that today. I think we have to see how things unfold. Obviously, the MAS being able to run four smart cells at a time, 24 hours a day, seven days a week gives us an incredible opportunity. And it's actually really, really important to driving the gross margin story over time because that product mix will change where consumables will become a much larger portion. But on today's call, we're not going to speculate on exactly what that number is going to look like in terms of pull-through nor the relative revenue mix. I think I've learned throughout my career that you need to observe the consumables pull-through for several quarters before feeling confident in understanding it. However, there's no doubt that Revio represents a significant turning point. Additionally, there is clear elasticity of demand for long-read samples in the market, which will emerge from two areas: new demands for projects and the shift from short reads to long reads, as the economics allow them to see the complete picture within a manageable scale. I believe there are many samples available for us to pursue, and we will observe how that evolves. As you mentioned at the outset, that's not really the key measure. Instead, when we consider the situation four quarters post-launch, we can evaluate our performance at that time. I hope that provides some clarity, Dan.

Yes, definitely. We can examine the changes from RS to S1 and from S1 to S2. The number of placements and the pull-through indicate a new trajectory for the company. Essentially, as we observe the growth of the installed base and how each successive box has expanded it, perhaps by a factor of one and even twofold, it's fair to suggest that the old playbook should be discarded. We are now in a position to tap into new markets and opportunities that were previously inaccessible, even with the RS, S1, and S2.

Yes, I believe this is definitely a new approach for several reasons. Firstly, during my initial time here, we focused on establishing a new commercial infrastructure that can engage the entire market immediately, unlike previous strategies. This is a significant development that shouldn't be overlooked. Our approach is aligned with the vision I shared from day one, which involves creating a robust commercial infrastructure, developing a diverse product portfolio, and collaborating effectively with others to showcase the potential of HiFi. This is simply another aspect of that initiative. I fully expect the commercial organization to utilize that to create a stronger impact than we have seen previously. I also believe the market is significantly larger than it has ever been. Furthermore, the interest in HiFi, due to its accuracy and the benefits of completeness, structural variation, and epigenetics, will be crucial for disease research and its translation into clinical applications with long-term durability. Therefore, I think we need to change our approach, as the company has evolved considerably.

Great. Thanks, Christian.

Yeah.

The next question comes from Kyle Mikson with Cantor. Please go ahead.

Hey, it's Kyle Mikson from Canaccord. Thanks guys for the questions. I guess, just starting first with the fourth quarter and then going to the new products. So on 4Q, just any qualitative comments, Christian, on customers that were in your 4Q, or even like 1Q 2023 signal to order funnel that you think like have converted to Revio or like will convert any full guidance. So for the fourth quarter, it could be strong, it could be live you don't mean for sure. I guess, if there is a shortfall, how much of that do you expect will be the macro pressures versus slight delayed instrument purchases?

Yeah. Great question, Kyle. I think I'll start with the kind of the – how does our fourth quarter funnel look today versus it did two weeks ago. And I would say that, Revio, has – everyone is going back to see if they can find the additional capital or many people are trying to find the additional capital so that they can purchase Revio. And so I think there is an impact there. There still is Sequel IIe in the funnel that we expect to close in the fourth quarter, and we're pretty confident we'll close as Sequel IIe, not Revio – and whether they get across the go line every quarter is a new venture. But we're seeing kind of a base level line of demand for Sequel IIe, but obviously predominant demand for Revio. We've got lots and lots of quotes in the out there already. And it's a real testament to our commercial operations group. They were ready to go as soon as I got on stage at de novo, and we were quoting effectively that night already, which was pretty cool. When I think about Q4, Q1, that we still have – we're doing all of this under a pretty negative macro backdrop. We still have – we still have inflation tiers and interest rates have gone up a lot. So people that are leasing their systems, that's getting more expensive for them. Europe continues to be challenged just all around even – and as Susan pointed out in her remarks, Americas in Q3 wasn't – it wasn't really a great quarter for us in Q3 for principally macroeconomic and kind of the whisper that new products were on the horizon, and so we had to manage that. We knew that day was going to come, and we felt very strongly that if we could announce the new products in early in Q4, that would give people time to get their budgets ready for next year. So there was a lot of strategy behind figuring out how to do this in Q4, if we could. And so that's where we are. I think I kind of answered your question in a pretty circuitous way, but it is a combo of macro factors still going to be overhanging us. I think well into next year. I don't really see that. But one bright spot is I do think China is starting to open back up. We talked about strong consumables there, and there's definitely strong demand for Revio in APAC, no question about it. So we'll see how that goes.

Okay. That was great, Christian. Thanks for that. And at APAC, there was a lot of excitement and demand, I guess, for Revio and for Onso. Based on the last two weeks since the announcement, can you just talk about of the customer types that you think Revio has unlocked kind of like beyond the legacy Sequel II user base? And then with respect to the synergies with Onso, like how does the dynamic that I just kind of mentioned like how kind of help you get in the door better. So are any of these incremental customers like obvious users of a platform like Onso that wouldn't have been a touch point for you previously?

I think it's a little bit of everything. I mean, basically, we're just broadening our reach and our footprint pretty generally across the space. But I can take specific examples of population scale programs that are either underway or being contemplated now that, wow, Revio should be a bigger part of that than they ever thought maybe PacBio should be or if we'd be even in the game at all. So I would say, that's one really exciting area. I do think that kind of continued translational research in rare and undiagnosed disease, this gives better price points, faster turnarounds, better, more data. And so I think that there's real opportunities there. We have received numerous inquiries from customers regarding two specific offerings. The first is the Revio and Sequel IIe bundle, which is a short-term program designed to facilitate access to the Sequel IIe. There has been notable interest in this. Additionally, customers are also expressing interest in the Revio and Onso bundle. What's appealing about this bundle is that, even at the list price, it remains more affordable than some of the larger systems offered by our competitors while providing top-notch capabilities for both long and short reads. I believe customers recognize this advantage. They seem to appreciate the opportunity to obtain exceptional solutions from a single provider. We'll see how it actually plays itself out as we get Onso closer to actual shipments. But there definitely is a lot of excitement about that.

Perfect. Okay. Thanks, Christian. Appreciate it.

Yes. Thank you, Kyle.

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

Thank you. As a reminder, a replay of this call will be available on the investor website section of our website. Thank you for joining us. This concludes our call today, and we look forward to seeing you next week at our Investor Day in New York. Thank you.

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