Good day. And welcome to the PacBio Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note today's event is being recorded. I would now like to turn the conference over to Todd Friedman, Senior Director of Finance and Investor Relations. Please go ahead.

Good afternoon, and welcome to PacBio's fourth quarter 2024 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 Investors section of our website at pacb.com or as furnished on Form 8-Ks available on the Securities and Exchange Commission website at sec.gov. A copy of our earnings presentation is also available on the Investors section of our website. With me today are Christian Henry, President and Chief Executive Officer, and Michelle Farmer, Chief Accounting Officer. On today's call, we will make forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, guidance, and the amount of the preliminary estimated non-cash impairment charges. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause their actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Forms 10-Q and 10-Ks, and our press release to better understand the risks and uncertainties that could cause results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. We also present certain financial information on a non-GAAP basis. It is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in our earnings release, which is available on the Investors section of our website. For future periods, we are unable to reconcile non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year. A recording of today's call will be available shortly after the live call in the Investors section of our website. Those electing to use the replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call. I'll now hand the call over to Christian.

Thank you for joining us today. I'll begin by reviewing our fourth quarter and full year 2024 performance, highlighting key commercial achievements and providing insights into our outlook. In the fourth quarter, we reported $39.2 million in revenue driven by the shipment of 23 Brevio systems. Additionally, we successfully commenced shipment of our Vega Benchtop platform, delivering seven units ahead of schedule. For the full year, revenue totaled $154 million, reflecting 97 Revio shipments. Our customer base continues to expand significantly with the Revio platform installed at nearly 200 customers as of December 31. Notably, in 2024, approximately 45% of all Revio shipments went to new PacBio instrument customers, demonstrating strong momentum in attracting users transitioning from other sequencing technology. Meanwhile, there remains a meaningful upgrade opportunity with approximately 125 active Sequel II and IIe users in the field, many of whom could transition to Revio for Vega in the coming years. The adoption of PacBio HiFi Longreach sequencing continues to accelerate. Total growth in genomic data output accelerated on our platforms, with an 81% increase in 2024, up from 68% growth in 2023, highlighting broader utilization of our technology. Since 2020, total sequencing output has expanded more than twelvefold, demonstrating a remarkable increase in HiFi sequencing activity. Correspondingly, consumable revenue grew 11% year over year in 2024 to $70.4 million, representing a 23% compound annual growth rate since 2020. Looking ahead to 2025, we anticipate that customers will continue to navigate an uncertain funding environment much like in 2024. Macroeconomic pressures are expected to persist, extending sales cycles, particularly for higher CapEx life science instrumentation like Revio. Additionally, the recent announcements regarding NIH funding involving a cap on the institute's direct funding rates have increased the uncertainty in the academic environment, particularly in the United States. Considering these factors, we expect 2025 revenue to range between $155 million and $170 million, representing 6% year-over-year growth at the midpoint and roughly in line with external growth estimates for the next-generation sequencing market in 2025. While product launches and macro factors have caused our revenue growth to fluctuate over the past few years, it's worth noting that our revenue guidance at the midpoint still reflects a 16% compound annual growth rate since 2020 and significantly outpaces the overall NGS market growth, which again demonstrates the growing adoption of our technology. I'll discuss our full 2025 financial guidance in more detail later in this call. Over the medium term and as the macroeconomic environment improves, we believe that we can achieve sustained double-digit revenue growth as long-range sequencing continues to expand genomic applications. Our key priorities for driving growth include expanding the adoption of HiFi sequencing by accelerating the uptake of the Vega Benchtop platform and enhancing the value and usability of Revio with Spark Chemistry. Leveraging recent innovations to substantially increase sequencing throughput while reducing costs. These advances have the potential to bring long-range sequencing closer to price parity with short-read technologies, delivering end-to-end solutions focusing on clinical applications where PacBio's HiFi technology provides unique advantages, like Connect for RNA sequencing and PURE Target, a targeted approach for sequencing difficult-to-sequence genes. Notably, in 2024, application and extraction kit revenue grew 56% year over year. Our strategy also includes providing turnkey bioinformatics solutions so our customers can go from sample to answer without running complex data analysis pipelines. Lastly, as a result of the continued and recent macroeconomic challenges, as well as the recent NIH announcements, we now anticipate turning cash flow positive by the end of 2027. We remain focused on lowering our cash burn and believe our $390 million in cash and investments at the end of 2024 will bridge us to becoming cash flow positive based on our current assumptions. Notably, after our note exchange in the fourth quarter, this timeframe still positions PacBio to return cash flow positive well before our first debt maturity in August of 2029. While we faced challenges in 2024, it was a pivotal year in strengthening our business and advancing our product portfolio. We successfully launched two significant innovations, the Vega Benchtop platform, and Spark Chemistry for Revio. With the launch of Vega, PacBio offers a suite of long-range sequencing systems tailored to different customer needs. A first in the company's history. Vega features a smaller footprint, lower capital cost, and reduced throughput compared to Revio, making it an accessible and versatile solution. Some of these customers include smaller academic labs focused on a range of applications that require less throughput, including RNA sequencing and smaller genomes. Core laboratories investigating transcriptomics and RNA biology, and larger clinically focused labs utilizing HiFi sequencing for targeted panels. Early customer feedback has been strongly positive. Berry Genomics, one of our first Vega customers, reported that the platform delivers results identical to previous PacBio systems while offering notable improvements in high-value deals, quality values, reduced run times, greater data processing efficiency, and less hands-on time. As a result, Berry Genomics plans to purchase 50 Vega units over the coming years to support its thalassemia and Fragile X assays, underscoring the platform's value in clinical applications. Beyond clinical markets, Vega's versatility extends into biodiversity and environmental genomics. At the recent Plant Animal Genomics Conference, one researcher highlighted how Vega offers a lower entry point cost, increased portability, and throughput so well suited for sequencing biodiversity in remote locations. And it also noted how it will facilitate best practices in sequencing unique or difficult-to-access fauna in the field. Another customer from Johns Hopkins University and Cold Spring Harbor Laboratory shared how he looks forward to using the platform for many projects spanning the entire tree of life, from identifying new risk factors in human disease to diversifying and enriching the food supply with new crop species, to understanding the microbial world beneath our very own feet. Our funnel of sales opportunities continued to grow for the Vega platform, especially with potential new customers, as nearly three-quarters of the customers in our sales funnel have never bought a PacBio sequencer before. This demonstrates the potential reach of the platform. While Vega delivers versatility, the Revio system is our most powerful and scalable platform. In the fourth quarter, we enhanced the platform even further as we started shipping our Spark Chemistry. With Spark, the Revio system could sequence up to 2,500 complete days of HiFi human genomes a year at a cost below $500 per genome while significantly lowering DNA input requirements for whole genome sequencing to just 500 nanograms. This represents a 75% reduction. This helped drive new customer adoption in Q4, like the J.K. Gregg Center, which plans to use Revio to sequence thousands of full deployed phased genomes over the next several years to find missing heritability resulting from years of SNP studies and short-read sequencing fragments as part of the institute's overall goal to advance genetic testing for women's health and genetically diverse populations. Last month at the JPMorgan Healthcare Conference, we shared a little bit more about our technology roadmap, which is focused on improving our on-market platforms and developing future platforms to expand margins and increase throughput. These programs include developing higher density smart cells, which reduce costs and increase throughput. We expect our next generation of smart cells to yield multiple times the output of today's 25M Revio smart cells. Integrating new smart cell formats that make automating our technology even easier for customers. Migrating to more advanced semiconductor inputs, such as the 300-millimeter wafer instead of 200-millimeter, and this can drive the cost of the SmartCell down, enabling us to lower our cost to customers and expand our gross margin. Innovating on our smart cell and reagent technologies to allow customers to sequence in a smart cell more than once. Utilizing faster chemistries, which are expected to enable faster run times and more throughput. Finally, leveraging our computational biology team and collaborations to offer more informatic capabilities across the end-to-end solutions to broaden customers' access to advanced bioinformatics pipelines. We've been thrilled with how Vega and Revio have changed the paradigm of highly accurate long-range sequencing and we are inspired by the development pathway to scale this technology even further. Looking ahead, I want to reiterate that our primary objective in 2025 is to grow revenue and expand gross margins through four main activities. First is enabling the full-scale release of Vega, which we expect will broaden the reach of our technology in the market and bring more new customers to high-value sequencing. Second, we aim to accelerate the number of samples on the Revio platform through the launch of the Spark Chemistry and Application Kit. Revenue has the potential to drive further growth in long-read data. Third, we will continue to invest in future product launches to both amplify and diversify our offerings. I mentioned several of the exciting initiatives that we're currently working on earlier in the call. And finally, to progress our clinical strategy, to improve outcomes and create durability. With these activities, we believe we can drive growth and market expansion in 2025, continuing to improve our financial profile.

Thank you, Christian. I will be discussing non-GAAP results, which include non-cash stock-based compensation expense. I encourage you to review the reconciliation of GAAP to non-GAAP financial measures in our earnings press release. As discussed, we reported $39.2 million in product, service, and other revenue in the fourth quarter of 2024, which represented a decrease of 33% from $58.4 million in the fourth quarter of 2023. Instrument revenue in the fourth quarter was $15.3 million, a 56% decrease from $35.1 million in the fourth quarter of 2023, primarily driven by lower Revio system shipments. We ended the quarter with 270 cumulative Revio system shipments. Turning to consumables, revenue of $18.8 million in the fourth quarter was roughly flat. The annualized revenue pull-through per system was approximately $240,000. Finally, service and other revenue was $5.1 million in the fourth quarter compared to $4.4 million in the fourth quarter of 2023, driven by an increase in service contract revenue related to Revio. From a regional perspective, Americas revenue of $20.2 million decreased by 41% compared to the fourth quarter of 2023, as the region is most affected by academic and NIH funding uncertainty. For Asia Pacific, revenue of approximately $8.9 million decreased 33% over the prior year, with sequential growth in consumables offset by lower revenue plate. Similar to the US, several countries in the region also face government funding headwinds with respect to capital expenditures. Finally, EMEA revenue of $10.1 million decreased 9% over the prior year period. The region saw record consumables revenue in the fourth quarter, with growing Revio utilization as key projects like Estonia Biobank, Radford, and Dubai's population sequencing programs continued to sequence at scale. Moving down the P&L, fourth quarter 2024 non-GAAP gross profit of $12.3 million represented a non-GAAP gross margin of 31% compared to a non-GAAP gross profit of $11.1 million or 19% in the fourth quarter of last year. Non-GAAP gross margin increased year over year due in part to charges for scrap inventory in the fourth quarter of 2023. Compared to the third quarter of 2024, gross margin declined by approximately 120 basis points, primarily due to scrap inventory in the quarter related to a temporary decline in SmartCell manufacturing yield and lower ASPs on Revio due to certain strategic deals in the quarter, partially offset by per unit cost decreases in Revio instruments and consumables. Non-GAAP operating expenses were $68.6 million in the fourth quarter of 2024, compared to $88.4 million in the fourth quarter of 2023. The decrease primarily reflects reduction in R&D and SG&A related to our restructuring initiated in the second quarter of 2024. Regarding headcount, we ended the quarter with 575 employees, which was flat to Q3 2024 and 28% lower than 796 employees at the end of the fourth quarter of 2023. Operating expenses in the fourth quarter included non-cash share-based compensation of $14.8 million compared to $15.4 million in the fourth quarter of last year. Non-GAAP net loss was $55.3 million, representing $0.20 per share in the fourth quarter of 2024, compared to a non-GAAP net loss of $72.5 million, representing $0.27 per share in the fourth quarter of 2023. We ended the fourth quarter with $389.9 million in cash and investments, compared to $441 million at the end of the third quarter of 2024. Cash outflow in the quarter included approximately $54 million in debt repayment and associated fees related to the convertible note exchange with SoftBank. During the quarter, we conducted an interim goodwill and intangible asset impairment test following a sustained decline in our stock price and market capitalization. Based on the preliminary results of this analysis, we recorded non-cash impairment charges totaling $90 million, which includes approximately $55 million related to goodwill and approximately $35 million associated with an in-process research and development asset. The impairment was driven by macroeconomic headwinds and revised outlook on future cash flows and is excluded from our previously discussed non-GAAP results. It is important to note that these impairment charges are non-cash accounting adjustments and do not impact our liquidity, operations, or ability to execute on our long-term strategy. I'll now return the call to Christian to discuss guidance and provide closing remarks.

As discussed earlier, we expect 2025 revenue to range between $155 million and $170 million. At the midpoint, this represents a growth rate of approximately 6% compared to 2024. At the midpoint of our guidance range, we expect instrument revenue to grow modestly, with growth in Vega shipments offsetting a year-over-year decline in Revio's shipments, with annualized pull-through per Revio system in the low to mid $200,000 range. Our guidance anticipates that customers will continue to navigate an uncertain funding landscape, much like in 2024, and the macroeconomic environment is consistent with what we've experienced over the past few quarters. When looking at guidance from a regional perspective, the change in administration has added further uncertainty to the funding environment in the Americas. In the near term, based on our initial conversations with customers, recently announced federal funding freezes, particularly with NIH intramural spending, have added significant uncertainty in the broader academic research community. Our guidance considers this uncertainty, especially in the near term. On a more positive note, accelerating activity in the clinical market is anticipated to offset some of those potential headwinds. For Asia Pacific, while we anticipate growth in the region in 2025, the funding dynamics in several countries continue to affect capital purchasing timelines for the Revio platform. Additionally, our guidance does not consider the impact of tariffs or other activity that would impact our ability to export products to the region. We expect EMEA to be the fastest-growing region in 2025, as population sequencing programs scale, whole genome sequencing in the clinical setting grows, and we expand our customer base with Vega. Looking at Q1 specifically, we anticipate typical seasonality. As a result, we expect revenue in the first quarter of 2025 to be lower than the fourth quarter of 2024, with Revio systems and consumables revenue partially offset by increased Vega system revenue. Moving down the P&L, we expect the 2025 non-GAAP gross margin to be between 35% and 40%, representing over 400 basis point improvement compared to 2024, and we expect to exit the year above 40%. We expect to continue removing costs from the Revio system and consumables, and the Vega cost of goods sold per unit is expected to improve as the platform moves from pilot manufacturing lines to the full production line. We expect non-GAAP operating expenses to decline 3% to 7% compared to 2024 and be in the range of $270 million to $280 million, reflecting in large part the annualization of our restructuring in the second quarter of 2024. We expect interest and other income to be between $5 million and $7 million in 2025, and the weighted average share count for EPS for the full year to be approximately 299 million. We expect to end the year with a cash and investments balance of approximately $260 million, implying a $130 million cash burn in 2025, or an improvement of $57 million in adjusted cash burn compared to 2024. Finally, as discussed, with our current expectation for 2025 revenue growth, we now anticipate turning cash flow positive by the end of 2027 as a result of the continued and recent macroeconomic uncertainty, as well as the recent NIH announcement. We remain diligent in lowering annual cash burn and believe our approximately $390 million in cash and investments will bridge us to becoming cash flow positive. Importantly, after our note exchange in the fourth quarter, this timeframe still positions PacBio to turn cash flow positive with meaningful time before our first debt maturity in August of 2029. As mentioned previously, we are focused on identifying a leader who will help drive our next phase of growth and champion operational efficiency throughout the organization. Now I'll pass the call on to Michelle Farmer to discuss our financials.

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

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

Thanks, Tycho, for the question. Of course, the funding environment is very dynamic in the United States right now. There's no question about that. But we fully contemplated some pretty significant headwinds, particularly in the first half of the year, and you saw we said in our guidance typical bit of typical seasonality, but we expect revenues to be down in Q1 versus Q4. Partially because of that uncertainty, partially because of typical seasonality. And so I do think we have, to the best of our ability, kind of based in what could be a real challenging time into our guidance. One thing we've done, of course, since the 15% came out over the last week, is we looked at every single opportunity. I actually personally went to each member of the American sales team that have an opportunity closing this quarter to try to get an assessment of each, you know, each instrument opportunity in particular. And, you know, the feedback was still some uncertainty. A lot of positivity about getting the deals done that we forecasted. But we still have to get them done. I think, Tycho, one area where you may look where we've been really thoughtful here is we've lowered the call-through expectation. So we did $240K or so in Q4. We said we gave a pretty broad range of, you know, low $200s to mid $200s. And that's an area where, you know, you could see some funding freezes or pauses, you know, slow activity. And so we're monitoring the situation. We think we've given responsible guidance here.

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

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

Okay. That's one last one, you just pushed out cash flow breakeven by a year. I just wanna make sure I mean, I know you're guiding below consensus here, just over $20 million, but are there other levers you could pull if you need to pull that forward?

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

Hey, guys. Thanks for the questions. Just to kinda follow-up on the guidance why are Revio shipments declined this year if 2024 places were already about half of that of 2023? Like, you know, why is that product fading? Is that an act related? Market-related, or just cannibalization from Vega so far? And, you know, is there further downside to the guidance?

Yeah. So first of all, I would argue that you know, that data is not significantly cannibalizing Revio at all, and I would also argue that Revio is not fading at all. We are really in a, you know, in one of the most unprecedented macroeconomic times, at least in my career, and in this space. And so, you know, when we think about the challenges we're having with respect to Revio and accelerating shipment volume, it really is driven by funding concerns. We're seeing all over the world customers, you know, publishing more and more using HiFi needing more scale. We're seeing customers, you know, extoll the virtues of HiFi specifically as a long-read platform. We're winning projects like we've won last year in Estonia, etcetera. But but the reality is that the macroeconomic environment is really tough.

Thanks, Kyle. Next question, Rocco.

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

Well, I think our total NIH revenue is roughly 20% of revenue. You know, historically. And, you know, I do think you can work through I do think it's difficult to game out, you know, down to a dollar. I know you're looking for, well, it's x million dollars exactly of a risk, but the reality is it's a lot more complex than that. And I think some of our peers, you know, you know, were were helping to try to explain that to the street. Think from our perspective, what we're seeing is it's really a deal by it's really a deal by deal institution by institution. Some institutions have, you know, funds their instrumentation out of different pools of money. Other institutions, you know, have the significant override that they're going to absolutely apply. And I think it's too early to really game out dollar by dollar. So what we've done is we've taken a look at our sales funnel and taken a look at our opportunity set, particularly in the Americas, and evaluated that in its totality to try to come up with guidance for what we bought. Here's what America's gonna do. Here's what Europe's gonna do. And here's what Asia's gonna do. And that's why this year, we gave a little more color region by region our guidance.

Hey, good afternoon, guys. I have let me just draw I think it's two or three quick questions. Actually, I'll keep it to two. One is on gross margin, you are targeting an exit rate above 40% this year. We were above consensus, and your exit rate is actually higher than our estimates. So there's some sunshine on a rainy day. Can you talk about the progress you are making on gross margin and how much gross margin can you get to this year, you know, if you say revenue comes in closer to where consensus was, versus where you're targeting as we start the year.

Yeah. Thank you, Doug. Those are great questions, and I appreciate the sentiment on gross margin because I do think it is an area where we're gonna see significant opportunity this year. When what's really happening, you know, in growth margins in Q4, we had some yield issues on which drove you know, which drove some impact to our GM. Those have been largely resolved and we're we're on, you know, on our way back. We continue to make progress in terms of lowering the per unit cost of both your the chips, our, you know, our smart cell as well as the as well as the instruments themselves. We've in-sourced a lot more of our our instrument manufacturing, which is driving pretty substantial savings. And as those instruments go into inventory and then get sold through, we'll start to see the benefit of that as well. So there, you know, we do have a very strong path to exiting you know, over 40 and then and actually nicely over 40. Your point about relative to prior, you know, prior consensus is actually an interesting one because you're right. It's likely that gross margins would be higher if we were, you know, the more revenue we do, the more likely the gross margins are gonna be higher. And the reason for that is because you're gonna see a greater push of consumables which carry generally carry higher gross margin. One of the things we were pretty thoughtful about how we thought about our consumable revenues, which, you know, on the one side, being if they're lower on your revenue guidance, that hurts your gross margin. But if you end up doing a little bit better that will help your gross margin. So that's kind of gives you some color on how to think about how we're gonna move through the year with gross margin. And exit the year quite frankly in a in a what we believe will be a really strong position moving into 2026.

Hey, guys. Good evening, and thanks for the time here. Christian, I just wanna get a sense for how you're incorporating some of the concentration risk into your 25 guide. You flagged the MAO momentum a couple of times, but it sounds like it it is Estonia, Radbourn, and Dubai that are, you know, certainly important there.

We are you know, we've had lots of conversations with our Chinese customers and you know, interestingly, there are no alternatives to what we do in China which which certainly decreases our risk of any blowback from what's what's going on with our competitors.

Hey, Thank you. Good afternoon. Just hoping to get a little bit more color on Vega. The seven units that you shipped in the fourth quarter, the initial revenue was there. And then as you look to 2025, how does the order book look? And kind of what are you assuming in terms of placement? Thank you.

Yeah. So we haven't we haven't disclosed, you know, kind of the ending orders for 2024, but we we have talked in, you know, in terms of that we've developed at this point hundreds of of opportunities over 70% of them are new customers. We, you know, we would expect to scale manufacturing over the course of the first half of the year and it's likely that will be more manufacturing limited than than order limited with respect to to revenue. And we'll see how that unfolds.

Hey, guys. Thank you for taking my question. I'm curious if you're running into Roche in any of their potential beta sites and how do you think about the possibility of another long lead market entrant?

Yeah. So we haven't really run into Roche to my knowledge at all yet, and we haven't had any any deals stalled because of Roche.

This concludes the question-and-answer session. Like to turn the conference back over to Todd Friedman for closing remarks.

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

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