Pacific Biosciences Of California, Inc. Q1 FY2023 Earnings Call

Good day and welcome to the PacBio First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of IR. Please go ahead.

Good afternoon and welcome to PacBio's first quarter 2023 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 section of our website at www.pacb.com or as furnished on Form 8-K 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'd like to remind you that on today's call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance, and others, including expectations regarding our financial guidance, our Revio and Onso systems and their commercialization plans, the future availability, uses, accuracy, coverage, advantages, quality or performance of, or benefits or expected benefits of using PacBio products or technologies, including our Revio and Onso systems, and expectations with respect to customer demand for our products and technologies and growth in our business. 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 than those projected or discussed, including those inherent in developing and commercializing new products. We refer you to our documents that we filed with the SEC, including our most recent forms 10-Q and 10-K, and 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. We will also present certain financial information on a non-GAAP basis during the call. The non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under US GAAP. Management believes that non-GAAP financial measures, combined with US 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 historical US GAAP and non-GAAP results are presented in tables within our earnings release. For future periods, we are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the items indicated in our press release. In addition, please note that today's call is being recorded and will be available for audio replay on the Investor 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. Finally, we will be hosting a question-and-answer session after our prepared remarks today. We ask that analysts please limit themselves to one question only so that we could accommodate everybody in the queue. With that, I will now turn the call over to Christian.

Thank you, Todd. Good afternoon, everyone, and thank you for joining our call today. Last October, we unveiled Revio, a long-read sequencer that is 15 times more powerful than our previous generation sequencer. The system enables researchers to analyze what we believe are the most complete genomes in the industry with paradigm-changing scale and economics. As we saw in Q4, these features captured the imagination of scientists and researchers across the community, and we started 2023 with a backlog of 76 systems. In March, we began shipping the Revio system at scale to customers around the world. I'm pleased to say our launch of Revio is progressing extremely well and is ahead of our targets. The demand for our new system continues to be robust, so much so that orders for Revio in the first quarter outpaced our shipments of Revio, resulting in a net increase of instrument backlog. This sets us up favorably to deliver on our growth targets for the rest of 2023. During the first quarter, we delivered 32 Revio systems, surpassing our expectations and demonstrating that our robust manufacturing capabilities can scale and deliver on new instrument launches. With Revio manufacturing capacity scaling up in the first quarter and customers beginning to ramp down Sequel II and Sequel IIe consumable spending, PacBio still delivered record revenue of $38.9 million in the first quarter. The initial customer reception of Revio, its robust field performance and our ability to scale manufacturing has given us the confidence to raise our full-year guidance. We now expect revenue to be $170 million to $185 million for the full year, or 33% to 44% growth year-over-year. Interestingly, the 32 Revio shipments in Q1 nearly matched the total HiFi capacity in the market for our cumulative Sequel II and Sequel IIe installed base. This is extremely important for our growth as the increased demand for long-read sequencing is clear. I believe our customers will ramp and fill their sequencers with both new projects and existing samples that may have been sequenced using other short-read technologies. Before I move on, I'd like to congratulate our global service and support teams. They were essential to the successful launch of the platform. I'm happy to report that all 32 instruments have been installed in all regions and have completed their first sequencing runs. Additionally, the platform's early field performance has exceeded our expectations. For runs with sample libraries that are 15 kilobases and higher, our customers average above 90 gigabases of output per SMRT Cell, with many customers exceeding 100 gigabases per SMRT Cell. That's 400 gigabases per 24-hour run on Revio. To put that in perspective, Sequel IIe generates just 30 gigabases of sequence in 30 hours. The strong early field performance has given us the confidence to accelerate some shipments in April, and we are now actively shipping instruments according to our manufacturing plan. I'd like to take another minute to discuss the composition of customers who have already received Revio. They're a diverse group that spans 10 countries and includes commercial service providers, academic core labs, children's hospitals, pharma, and agriculture. These customers are expected to use their Revio for large-scale human genome projects and human disease research to plant, animal, and microbial research. The scalability and flexibility of Revio can power multiple-omic applications and is expected to ultimately drive a diversified customer and installed base as the product launch progresses. To highlight the specifics behind a few of our customers in the past quarter, we start with GrandOmics, a longtime PacBio service provider based in China, who successfully implemented Revio and is now preparing to run large-scale cohort studies, pangenome projects, and biodiversity sequencing efforts. In its first sequencing run, the company reported an average SMRT Cell yield of over 102 gigabases per SMRT Cell, with median Q scores of Q30 or better. Additionally, the Australian Genome Research Facility or AGRF, plans to implement Revio to offer long-reads at extraordinary scale and affordable cost to its customers. We've also shipped Revio to multiple sequencing centers that plan to use Revio to scale up long-reads for the NIH's All of Us program. These examples are just a few, as many other early Revio customers were willing to share their excitement for the platform and their initial experience on social media. I look forward to many more of these posts this quarter and into the future. Revio opens the door to large-scale genomics and we are currently tracking several multi-thousand-sample genome project opportunities. Revio has already enabled us to win some of these projects, and we are in discussions with several other potential partners. Revio not only gets PacBio a seat at the table for these large-scale programs, but it makes us a top competitor as we can deliver what we believe is the most complete and highest value human genome. This means potentially more insights into genetic disease, a better understanding of cancer, and ultimately improving human health. We take pride in delivering our customers high-quality complete sequencing products and services. Delighting our customers, after all, is one of our core values and is a critical part of our mission. So I'm incredibly pleased with our initial results from our in-progress annual customer survey, showing a Net Promoter Score of over 60, a significant improvement over last year and higher than other sequencing providers have reported. Our survey closes in a few days, and I look forward to relaying more feedback. We've also continued to see interest from new PacBio instrument customers, as one-third of the Revio systems ordered in the first quarter were from brand-new customers, and over one-third of the systems in our sales pipeline for the remainder of 2023 consist of new customers. In fact, our largest instrument order in Q1 was from a new customer, a European genomic testing lab looking to incorporate HiFi genomes to investigate rare disease cases. The customer ordered multiple systems. They indicated that one of the key factors to implementing Revio was the ability to sequence thousands of HiFi genomes under $1,000 a genome so that they can shift from short-read exomes directly to long-read genomes. Another new customer, a hospital in Canada, decided to reallocate a portion of its budget for a high-throughput short-read sequencer towards acquiring a Revio and expanding its capabilities in highly accurate long-read sequencing. Revio is also reigniting legacy PacBio customers' interest in leveraging long-reads, as Weill Cornell Medical Center ordered Revio for their genomic score, which will be their first PacBio instrument since their RS II. Their team is looking forward to partnering with PacBio and has shared with us that they plan to move several active short-read projects in applications like human whole-genome, RNA, and epigenetics to Revio once their system is installed. In the near term, we expect most Revio shipments will be to existing Sequel II and Sequel IIe customers, which is why we've been investing so heavily in expanding our installed base over the past couple of years. Since the end of 2020, we have grown our Sequel IIe installed base by 150% and more than doubled our Sequel II and Sequel IIe customers. This has helped set the foundation for a multi-year product transition. After our strong launch, we believe the customer conversion cycle to Revio still has a long runway, as only about one-fifth of our nearly 300 Sequel IIe customers have placed orders for Revio. As we turn our focus to our groundbreaking short-read sequencer, Onso, I'm pleased to report that our beta program has been quite successful and our partners continue to sequence on their systems. We have recently enabled each site with our latest 2x150 paradigm chemistry delivering increased sequencing robustness and reliability over our previous versions. Regarding its performance, we're excited to share that the beta sites are seeing output that achieves our commercial specifications of 800 million paradigm reads and regularly get over 90% of the reads between Q40 and Q50. Our beta partners are running samples where low variant allele detection is critical, such as circulating tumor DNA and gene editing analysis. They're looking forward to sharing additional data from these challenging data sample types. On the operational side, our manufacturing team is finalizing scale-up plans for Onso. We've completed our first Onso pilot manufacturing builds in-house, with the first runs going well. And on the commercial front, I'm pleased to announce that we've already received multiple Onso orders as we continue to build our sales pipeline. We believe Onso is likely to be available for commercial shipment around the end of the second quarter. As one would expect, there has been a lot of attention on Revio and Onso platforms, but we continue to make great progress on improving the sequencing workflow. During the quarter, we launched our latest high-throughput Nanobind Extraction Kits to enable fast, reliable, and scalable large fragment DNA extraction across blood, cells, and tissue samples. This new offering lowers extraction time to less than two hours, minimizes sample input, and eliminates the need for harmful chemicals or mechanical homogenization. The new high-throughput protocol is automated for a complete walkaway solution, enabling labs to scale their PacBio sequencing. Also, on the front-end workflow, we've partnered with Corteva Agriscience. We released end-to-end workflows that streamline DNA extraction through library preparation, enabling thousands of samples to be sequenced annually. Corteva received its first Revios during the first quarter and is beginning to transition sequencing over to the platform. On the informatics front, we continue to develop the tools for researchers to make impactful discoveries. For example, some of the recent tools that we have developed include SMRT Analysis to face de novo assemblies TRGT or T-R-G-T for tandem repeat genotyping and visualization, paraphrase, to help call highly homologous genes, and HiFiCNV for identifying large copy number variants across the genome. Rolling out new and improved ways to interpret long-read data and collaborating with third-party providers is a key pillar to our informatics strategy and will help further drive adoption of our platforms. In addition to making the workflow more accessible, we develop kits to power customers' research across various omic applications. In transcript omics, our recently launched MAS-Seq kit has already been ordered by 100 of our customers since its launch late last year. MAS-Seq addresses transcript omics and single-cell research, which are incredibly important and rapidly growing areas in sequencing. For example, in a preprint in March, researchers at UCLA and other institutions used PacBio Iso-Seq to build a full-length transcriptome atlas of the developing human brain, mapping over 200,000 unique isoforms, over 70% of which had never been detected before. This can allow us to better understand risk variants associated with neurodevelopmental disorders and help reshape our understanding of brain development and disease. And then just a few weeks ago, in cancer research, another preprint described the first isoform resolution colorectal cancer transcriptomic atlas using PacBio Iso-Seq to identify several hundred dysregulated transcript structures in tumor cells. Both studies used our legacy Iso-Seq solution on Sequel II, but with new solutions like MAS-Seq and the expansion into bulk Iso-Seq, along with the throughput of Revio, we can further enable these groundbreaking studies, which ultimately may translate into improved clinical research outcomes. With that, I'll turn the call over to Susan to discuss our financial results in more detail.

Thank you, Christian. As discussed, we reported $38.9 million in product, service and other revenue in the first quarter of 2023, which represented an increase of 17% from $33.2 million in the first quarter of 2022. Instrument revenue in the first quarter was $20.7 million, an increase of 33% from $15.6 million in the first quarter of 2022. The increase in revenue was primarily driven by the launch of Revio in the first quarter, which is sold at a higher ASP than our previous Sequel II and Sequel IIe platform. We ended the quarter with an installed base of 32 Revio systems and shipped six Sequel IIe systems. Turning to consumables, revenue of $14.0 million in the first quarter grew 10% from $12.7 million in the first quarter of last year with approximately 10% of consumable revenue coming from Revio systems and the remainder from other platforms and other consumables. We expect Revio as a percent of total consumables to increase throughout 2023 as we continue shipping Revio and customers transition to the new system. Finally, service and other revenue was $4.2 million in the first quarter compared to $4.9 million in the first quarter of 2022. From a regional perspective, America's revenue of $19.1 million was roughly flat compared to the first quarter of 2022, as the higher ASP in Revio offset a record Sequel II/IIe placement order for the region in the first quarter of 2022. As a reminder, last year included 18 Sequel IIe delivered to the Broad Institute. For Asia-Pacific, revenue of $12.0 million grew 43% over the prior year. China grew approximately 40% year-over-year and posted its highest revenue since the second quarter of 2021, as customers in the region are taking to Revio and as the country recovered from last year's COVID-19 related lockdowns. Japan also showed strength, as consumables continue to grow on top of its record consumable quarter in Q1 of 2022. Finally, AMEA revenue of $7.9 million grew 38% over the prior-year period, with changes in FX rates representing approximately a 5% headwind in the region year-over-year. The region had its highest instrument revenue quarter in over a year, as customers like the Wellcome Sanger Institute, Radboud University, and MBRU received their first Revio to scale their long-read genome projects. Moving down the P&L, a GAAP gross profit of $9.8 million in the first quarter of 2023 represented a gross margin of 25%, compared to a GAAP gross profit of $14.2 million in the first quarter of 2022, which represented a gross margin of 43%. First quarter 2023 non-GAAP gross profit of $9.9 million represented a non-GAAP gross margin of 26%, compared to a non-GAAP gross profit of $14.3 million or 43% in the first quarter of last year. Gross margin declined year-over-year due in part to instrument mix, as Revio instruments sold during the quarter had a lower margin primarily due to customer loyalty discounts provided and higher initial manufacturing costs. Additionally, GAAP and non-GAAP gross profit in the first quarter reflect adjustments of approximately $3.5 million, primarily related to excess consumables inventory resulting from a faster-than-expected decline in demand for Sequel II/IIe consumables due to the product transition to Revio. This accounted for an approximate 900 basis point headwind on gross margin in the quarter. While we expect gross margin to expand during the remainder of the year, gross margins could fluctuate depending on the pace at which Sequel II/IIe usage declines and Revio manufacturing is scaled. GAAP operating expenses were $101 million in the first quarter of 2023 compared to $91.7 million in the first quarter of 2022. Non-GAAP operating expenses were $88.7 million in the first quarter of 2023, representing a 4% decrease from non-GAAP operating expenses of $92.7 million in the first quarter of 2022. The increase in GAAP operating expenses primarily reflects an increase in the fair value of contingent consideration liability during the first quarter of 2023 of $12.3 million related to the milestone payment to Omniome shareholders. Non-GAAP operating expenses declined year-over-year, primarily driven by the transition of Revio from development to commercialization. Regarding headcount, we ended the quarter with 793 employees, compared to 769 at the end of Q4 2022 and 774 at the end of the first quarter of 2022. Operating expenses in the first quarter included non-cash share-based compensation of $16.0 million compared to $20.9 million in the first quarter of last year. GAAP net loss in the first quarter of 2023 was $88.0 million, or $0.36 per share, compared to a GAAP net loss of $81.5 million in the first quarter 2022, or $0.37 per share. Non-GAAP net loss was $75.5 million, representing $0.31 per share in the first quarter of 2023, compared to a non-GAAP net loss of $82.3 million, representing $0.37 per share in the first quarter of 2022. Turning to our balance sheet items, we ended the first quarter with $875 million in unrestricted cash and investments compared with $772 million at the end of the fourth quarter of 2022. The change in cash reflects net proceeds from our public offering in January of approximately $189 million, less cash burn of approximately $86 million, which included our annual employee bonus payout and a prepayment for future inventory in the first quarter of 2023. As a reminder, we expect to pay the Omniome shareholders approximately $200 million in cash and equity dependent upon the achievement of a milestone in connection with the commercial shipments of the Onso platform. Inventory balances increased in the first quarter to $62.0 million, representing 2.1 inventory turns, compared with $50.4 million at the end of the fourth quarter of 2022, representing 1.6 inventory turns. The increase in inventory primarily reflects purchases of Revio and Onso instrument and consumables inventory. Accounts receivable increased in the first quarter of $29.6 million compared with $18.8 million at the end of the fourth quarter of 2022, while our DSO of 56 days declined in the first quarter compared to a DSO of 70 days in the fourth quarter of 2022. Turning to guidance, as discussed earlier, given the successful launch and positive customer reception toward Revio, we are increasing our guidance for 2023. We now expect revenue in the range of $170 million to $185 million, representing a growth rate of approximately 33% to 44% compared to 2022. The lower end of the range continues to assume a year-over-year decline in consumables as customers transition to Revio. The high end assumes consumable revenue was slightly higher compared to 2022. Service and other revenue is still expected to be lower compared to 2022. We continue to ramp up manufacturing capacity and expect to reach our planned production rate for 2023 during Q2. As such, we expect to continue to increase Revio shipments every quarter this year. And as a result, we expect revenue to be more weighted toward the second half. Moving down the P&L, we expect the 2023 non-GAAP gross margin, which will exclude the amortization of intangible assets, to be lower than our previously guided range of 36% to 40% due to inventory reserves in Q1 resulting primarily from the decline in demand of Sequel II and Sequel IIe consumables due to customers' product transition to Revio. We expect margin expansion beyond 2023 as Revio placements will help drive a mix shift toward higher margin consumables and higher volume and optimization drive lower manufacturing unit costs. We continue to expect non-GAAP operating expenses to grow less than 5% in 2023 compared to 2022. Additionally, we expect interest and other expenses to have a minimal impact on our full-year EPS, as interest income on our cash and investments is expected to offset our interest expense from the convertible debt. We expect the weighted average share count for EPS for the full year to be approximately 255 million, reflecting the recent sale of common shares and shares expected to be issued as part of the Omniome milestone later this year. I'll hand it back to Christian for some final remarks.

Thank you, Susan. As you can see from our prepared remarks, we're off to a strong start for the year. We're driving the rapid adoption of Revio with over one-third of our sales funnel being new to PacBio instrument customers and existing customers sharing how they plan to increase the amount of long-read sequencing with the platform's 15-fold throughput capacity increase. For Onso, our beta program is progressing well and we're scaling our operations with an eye towards commercial launch at the end of this quarter. We look forward to more customers getting their hands on Q40 Plus accuracy and becoming the only company with both leading long-read and short-read technologies in the market. Financially, we remain well-positioned with $875 million in cash and investments on our balance sheet. We believe our strong financial position allows us to drive toward both our growth targets and our goal to become cash flow positive during 2026. 2023 is the first step in this journey of becoming a multi-platform, multi-product company, and we look forward to updating you on Revio and Onso throughout the year. And with that, I'll turn it over to the operator so that we can begin the Q&A.

Thank you. We will now begin the question-and-answer session. And the first question will come from Dan Brennan from TD Cowen. Please go ahead.

Great. Thank you. Thanks for taking the questions. Congrats on the quarter. Maybe just a couple. Christian, you kind of kicked it off, I think, saying Revio is exceeding your expectations. You've been obviously pretty optimistic given the profile of the box. Maybe just give us some flavor for like where that is, how that is. Is it the pipeline, is it the number of customers, is it the initial kind of performance? Just give us some color on kind of where it's more optimistic. And then I'm just wondering, you guys, I know you're not giving order numbers out, obviously, but you did talk about a record backlog, so obviously orders were greater than what was placed. I'm just kind of trying to get a flavor for any other color around that in terms of the extent of that and/or the funnel, things of that nature. And then I might have a quick follow-up. Thank you.

Revio is exceeding my expectations in several areas. First, we are successfully executing our plans by getting the product shipped on time and ensuring it works smoothly for our customers with minimal issues right from the start. The performance has been impressive, with our clients achieving at least 90 Gb per SMRT Cell, often exceeding 100. This early performance is highly encouraging and indicates our ability to deliver effectively. Secondly, the range of applications and the demand we've observed is significant. We have received orders from various fields, such as microbial research, whole human genomes, and both plant and animal studies. This broad adoption of the platform highlights the need for the throughput that Revio offers. While I hoped for this level of demand, witnessing it across the community is gratifying and bodes well for future interest. Regarding orders, we have made it clear that we won’t disclose quarter-to-quarter numbers. However, I can share that the order book was very strong in Q1, exceeding our shipments, which is fantastic and positions us well for the rest of the year. The sales funnel remains robust, with many new customers exploring the product and others considering scaling up. Looking ahead at Revio’s growth trajectory fills me with excitement and opportunity. While there is always work to be done, I believe we are in a very good position.

Yeah, that's very helpful. I just have a quick follow-up. I know it's still early; it's May 2nd and our first customers received this at the end of March. I'm curious about the feedback on filling the boxes and the potential of Revio. You mentioned it might take about four quarters to see a consistent run rate. What are you hearing from customers regarding its capability to generate 1,300 genomes? As we think about modeling the utilization of Revio based on early users and demand trends, what does this initial traction suggest?

It's difficult for me to predict the future, but I can share a couple of observations. Firstly, the shipments of consumables for Revio exceeded our initial expectations right from the start, indicating strong enthusiasm. Secondly, we have had numerous discussions with customers who are shifting from short-read to long-read projects. This suggests that they see value in long-reads and in Revio, and that there are samples available to facilitate this transition quickly. Both of these points are encouraging. Most of the systems were delivered between mid to late March, so it's still early to assess their performance fully. However, users are actively utilizing their systems, with hundreds of SMRT Cells already processed, and the performance has been impressive. This not only supports the new instrument pipeline but also indicates that this product can be used extensively over time. That's all I can share at the moment, but we'll continue to monitor the situation each quarter and provide insights where possible. As we move forward, we will begin reporting on pull-through metrics and our outlook, but it's still a bit early.

Thank you. The next question will come from David Westenberg from Piper Sandler. Please go ahead.

Hi, thank you for the question, and congratulations on the impressive instrument orders and placements. I wanted to start by asking about the gross margin. I understand that some customers who purchased Sequel II last year received a discount. How should we think about the gross margins moving forward? When can we expect to see the benefits of manufacturing leverage? As we head into 2024, will the discount roll off, potentially leading to higher average selling prices and improved gross margins? Additionally, regarding the $3.5 million in inventory being reduced, is that the only factor affecting guidance for this year, or are there additional concerns? I believe those questions are directed at Susan.

I’ll start and then pass it to Susan. The strategy for Revio, including pricing and launch, was designed to ensure we delight our customers and make the transition from Sequel to Revio as smooth as possible. Our experience tells us that product transitions can be challenging. We implemented a loyalty discount program that provides a discount based on when a customer purchased a sequencer, with the largest discounts offered to those who bought in 2022. Consequently, nearly all of the first 76 orders received significant discounts, and that program concluded in February. As we analyze our financials and projections for the year, we expect the lowest average selling price to occur this quarter, with increases anticipated in Q2, Q3, and Q4, normalizing in early 2024 as we fulfill our backlog. Regarding gross margins, the charge taken in Q1 was based on the expected demand for Sequel II consumables. The transition to Revio is happening faster than we anticipated, which is hard to predict. Consequently, we needed to ensure we had sufficient inventory and capability for both a slow and fast transition. We're observing this transition occurring quicker than we modeled, leading to a $3.5 million charge primarily related to consumables. In Q4, we also took a charge for the Sequel II instrument. At this stage, we believe we have addressed most of the excess inventory challenges, and we don't foresee significant issues moving forward.

I want to add, David, regarding when we can expect to see the benefits on gross margin. We've discussed how the consumable mix plays a significant role in achieving that leverage on gross margins. With the increase in our installed base, as indicated by our guidance, this year will be heavily focused on instrument revenue. In the next year, we expect to see a rise in consumable revenue as our Revio installed base expands. This growth will contribute to the gross margin improvement that we anticipate seeing more prominently in 2024 compared to this year.

We should note, Susan, that we anticipate this to be the lowest point for gross margins in the first quarter of this year. We expect improvements to occur each quarter, ultimately achieving the leverage we have discussed, particularly in 2024.

Thank you. The next question will come from Kyle Mikson from Canaccord. Please go ahead.

Thank you for taking the questions and congratulations on the strong start. I wanted to ask a couple of things. First, regarding the guidance update, you raised the guidance after a strong first quarter, and Revio is performing better than expected. You mentioned that the 32 Revio matched the total HiFi capacity currently in the field, which is an interesting point. Could you provide more details on the assumptions for the rest of the year, both specific to the company and regarding the broader market? I'm interested in how much caution you're incorporating into your expectations. Is it too early to say what could push you above the $185 million high end? Secondly, you mentioned receiving over 32 Revio orders in the first quarter, compared to the 76 following that large ASHG event. How do you see orders developing moving forward? Could the run rate be around half of this 32 number? Also, will you finish the year with a backlog of instruments? Thank you.

Thank you for joining us, Kyle. We have a wide range of guidance because we are still working to understand the impact of the Sequel II consumable decline and how quickly Revio picks up. This remains a tactical question for us in 2023 concerning our revenue performance. The positive aspect is that right now, we see a lot of excitement around the Revio ramp-up. Looking ahead, we believe we have a significant opportunity to grow our consumables and improve our gross margins. We've kept the range broad due to this uncertainty but did increase our guidance modestly based on a strong performance in the last quarter. There's an ongoing build-up in our sales funnel, leading us to believe that there are plenty of opportunities this year. While we are aware of ongoing macroeconomic factors, our strong performance in the first quarter gives us confidence for the second quarter. We will monitor how the year develops and may clarify our guidance later on. The first quarter was impressive, and I’m proud of our team's efforts. The demand curve and order book look promising. We aim to exceed the 32 orders we received in Q1, even though quarterly numbers may vary due to several factors. Overall, I anticipate growth throughout the year and into next year.

Thank you. The next question will come from Tejas Savant from Morgan Stanley. Please go ahead.

Hey, guys. Good evening. So, Christian, one on the hardware side and then a couple of the consumables. So on the instrument side for the Revio, can you just walk us through what your key learnings were in terms of the customer feedback you received during that April shipment pause that you had called out earlier in the year? And then on the consumable side of things, you've talked about sort of max pull-through on the box being about 400k or so, so about 30%, 35% of the max pull-through rather. Any early insights from these placements around the slope of that ramp? Is this sort of a two-year dynamic in your mind or could it be sort of more of a longer-term thing? And then my final sort of consumables question here is, can you just share some color around the process and duration of the workflow for long-read sequencing? I mean, you highlighted the new Nanobind Extraction Kits, but are there any other sort of key areas you feel you need to do work in to support the higher throughput that the Revio enables? Thank you.

Yeah, Tejas. Thank you for the questions. The pause was quite modest, quite frankly. We were excited to continue shipping because the system is performing so well. The key learnings were, there were some software issues that any launch will typically have. We did some patches for bug squashing, which are mostly behind us now. We also just wanted to see how the first runs would be going in the field. The runs have gone really well, and we're seeing above-spec output generally across all of our customers. One of the challenges, if there was one, is that the loading characteristics of loading your DNA onto the SMRT Cell to get the optimal performance out of the 25M SMRT Cell is a little bit different than the 8M. Our customers have been getting up to speed, optimizing the amount of DNA loading for their sample type or their application. We learned a bit here and can put new processes in place to make that better, particularly as we scale to higher density SMRT Cells down the road. Overall, the launch is going extremely well, and customers so far are satisfied. We will still have run failures. Run failures are at our target spec right now, which is good; we think we can do better and over the course of this quarter, we'll make further enhancements to the platform to decrease run failures. But they are a very small portion of all the runs that have hard failures at this point. We launched the system in a very robust way. Regarding max pull-through and early insights, the truth is there's not enough run data out there to glean those insights. The enthusiasm of the customer base and their consumable purchases have been faster than expected, which is good. Higher-throughput customers run the systems in development mode until they've locked the workflow down and then scale up. We're seeing that happen with our customers, which is encouraging. First, I think that number is going to be highly variable amongst the customer base. More importantly, I think that ramp will be much faster than two years. It’s somewhere between 12 months and 18 months to start to see that. The sequencing workflow isn't much longer than short-read technologies. It's really about automation so that you have a complete walkaway solution, enabling labs to scale their PacBio sequencing. As I said, we're focused on continuing to improve that process.

Thank you. The next question will come from Sung Ji Nam from Scotiabank. Please go ahead.

Hi, thank you for the question and congratulations on the quarter. I was wondering, Christian, about the Revio installed base performing so well. Are there differences in how quickly existing Sequel customers and HiFi users are ramping up compared to new PacBio customers? Additionally, are there any differences in performance between new users and existing users who are achieving results above your expectations? Lastly, are you seeing any orders related to bundling with the Revio at this time? Thank you.

Yeah, great. So with respect to the ramping up between new and existing customers, the workflow is essentially the same for Sequel II to Revio, and that's a real benefit of Revio. We see existing Sequel II customers typically can get ramped up faster than the new customers, but Revio's innovations make it easier to use. I don't think the ramps for new customers will be too onerous, probably 30% to 50% longer, but not severe. As for Onso, there are lots of conversations about bundling. We have received orders but also single Onso orders right out of the gate. It's exciting to see the ramp of our sales channel. We are finishing the late stages of Onso development and getting ready for global scale manufacturing and commercialization. Our target date is by the end of the quarter, and I expect we’ll have a lot to talk about very soon.

Thank you. The next question will come from Julia Qin from JPMorgan. Please go ahead.

Hi, good afternoon and congrats on a strong quarter. Christian, you've mentioned on the prepared remarks about POP-seq programs that are being included in the pipeline. Obviously, we appreciate the strength at the Broad for All of Us that you mentioned, but could you give us more color on the other POP-seq programs and where we are in terms of discussion and the cycle? And then regarding the Revio mix, a third being from short-read users, is that a positive surprise to you? And how are you thinking about this mix going forward as probably both the cost on both the short-reads and long-reads continue to go down?

Thank you, Julia. I'm going to try to be quick here. With respect to the Revio mix and short-read samples coming onto the platform, that's not surprising at all because we've achieved the economics and throughput that that's enabling. That's a fundamental piece of the thesis here is that we're going to be able to take market share and expand the market with the unique capabilities of Revio. It just helps taking samples from existing projects helps us grow faster and increases Revio's speed. With respect to POP-seq, there are lots of projects percolating right now. I don't want to get into specifics due to competitive reasons, but there are early, mid, and late-stage projects. The later-stage ones are the focus right now, and we expect to be winning or participating in those programs as early as later this year. Revio is making us a strong competitor, and the projects have taken notice.

Thank you. The next question is from John Sourbeer from UBS. Please go ahead.

Hi, thanks for taking the question and congrats on the quarter. Just a couple of quick clarifying ones here. China was pretty strong in the quarter. Just any thoughts on how that ramps throughout the year in reopening? And then just a follow-up to that last question. On the third of new customers to PacBio, are those all new to long-read customers? Do you have a sense on how many of those might be maybe existing Oxford Nanopore customers that are converting over? Thanks.

Yeah. So first of all, China was a really strong result, 40% growth in the quarter, and really, it continues to be strong. China can be variable, as we've learned over the last 24 months, but I do think Revio and Onso are helping us allay any headwinds that others may have with respect to China, so new products certainly help. We see that business continuing to be strong throughout the year. With respect to new customers, most of them are generally new to long-read. They may have done some projects with service providers, but they're generally new to long-read. Some have tried Oxford and some have not, but I don't know the exact breakdown. Although we both have long-read technologies, we both attack different parts of the market.

And the next question will be from Ross Osborn from Cantor Fitzgerald. Please go ahead.

Hi, congrats on the quarter, and thanks for taking our questions. First of all, I'll re-ask Kyle's question regarding color on your comment that Revio placements matched HiFi demand in the market, as I do not believe it was addressed, but did think that was an interesting comment. And then for my question, can you just walk us through how you're balancing meeting stronger than anticipated Revio demand while trying to launch Onso without cannibalizing the strong Revio demand?

Sure. Those are good questions, Ross. Just a little bit of color on that comment was that with Revio launching, we are now increasing the capability for customers to generate HiFi data. The more HiFi data created, the more demand there will be for it. Revio is the beginning of the flywheel that drives a paradigm shift in how researchers think about their projects and how long-read technology can go toe-to-toe with short-read technology. That was the reason for the comment. Balancing demand while launching Onso is a daily focus for me. We have specialist folks focusing principally on Onso. We still have one unified commercial organization, but we ramped up our intensity of focus on Onso. We don’t think it is impacting our Revio focus. In the last six months, we've pushed the Revio story hard to drive and create a big funnel. Now we can execute on it and build the Onso funnel.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Todd Friedman for any closing remarks.

Thanks, Chad, and thank you all for joining our call. That concludes it for today. We look forward to catching up with many of you at our conferences and investor events this quarter and updating you on our Q2 progress this summer. Thank you and talk soon.

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