Good afternoon, and welcome to the PacBio Second Quarter 2025 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PacBio's Second Quarter 2025 Earnings Conference Call. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website. 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 Jim Gibson, Chief Financial Officer. On today's call, we will be making forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, and guidance. 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. Please review our SEC filings, including our most recent Forms 10-Q and 10-K and our press release to better understand the risks and uncertainties that could cause results to differ. We disclaim any obligation to update or revise these forward-looking statements, except as required by law. We will also present certain financial information on a non-GAAP basis, which is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in our earnings release. 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 a replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call. I'll now turn the call over to Christian.

Thank you, Todd, and good afternoon, everyone. Our financial results in the second quarter demonstrate that we continue to make significant progress towards our goal of increasing the adoption of our long-read sequencing platforms and driving the company towards positive cash flows. We delivered both year-over-year and sequential revenue growth, reduced our quarterly cash burn, and we are on track to achieve the strategic initiatives that we laid out earlier this year. We reported $39.8 million in revenue, up 7% sequentially and 10% compared to Q2 of last year. This was driven by strong international growth with revenue in our APAC and EMEA regions combined, up 45% compared to Q2 of 2024. Non-GAAP gross margin was 38.3%, ahead of our expectations, driven by a favorable product mix with a better-than-expected contribution from consumables. And we ended the quarter with approximately $315 million in cash and investments, also above plan, reflecting our continued cost discipline and lower-than-expected operating expenses. Second quarter instrument revenue was $14.2 million, up sequentially and down 4% year-over-year as funding constraints, particularly with academic and government customers continue to pressure higher CapEx purchases. Consumables were strong during the quarter with revenue totaling $18.9 million, up 11% year-over-year and ahead of our expectations. Annualized Revio pull-through remained within our expected range of the low to mid-$200,000s per system, with steady utilization across our installed base. Our recently launched SPRQ chemistry is driving growth and expanding HiFi adoption. Compared to prior chemistry, it increases throughput up to 33%, lowers the cost per genome, and reduces DNA input requirements four-fold. As a result, sequencing gigabase output hit an all-time high in Q2, up approximately 66% year-over-year. Turning to the full year outlook. At this point, we are starting to see the impact from tariffs in China to be lower than we expected last quarter. However, it continues to be difficult to predict how tariffs will ultimately impact our business, particularly in China. Capital spending remains constrained, particularly among U.S. academic institutions, which continue to face government funding headwinds and NIH-related uncertainty. Taking these factors into account, we are maintaining the midpoint of our full year revenue guidance and narrowing the range to $155 million to $165 million, representing 1% to 7% growth over 2024. At the midpoint, this assumes mid-teen growth in consumables revenue as Revio utilization continues to ramp across a growing installed base, partially offset by mid-teen decline in instrument revenue due to the current macroeconomic environment, including uncertainty around academic funding. Despite these macroeconomic headwinds, we continue to see broad adoption of our HiFi sequencing platforms across research, translational and clinical markets. In the second quarter, we shipped 15 Revio systems and 38 Vega systems, bringing our cumulative total of installed base to 297 Revio and 73 Vega systems. On the Revio side, 60% of the placements went to brand-new customers and one third were to LDT, diagnostic or hospital labs, encouraging signs that HiFi is gaining share in these labs, replacing a number of legacy technologies. This is especially true in genetic and rare disease testing. A few recent examples include: Variantyx, a diagnostics lab based in Boston and a new PacBio customer that is seeking to improve key genetic disease assays by using Revio and PacBio HiFi sequencing in lieu of legacy sequencing technologies. GeneDx also added another Revio to its fleet in the second quarter and plans to incorporate our PureTarget chemistry to further advance key tests. Additionally, we placed additional Revio systems into hospital systems in Northern Europe, where HiFi is being used to advance the understanding and improve solve rates for rare disease at scale. Turning to Vega. The PacBio team has built a robust platform. We're extremely pleased with the system's continued momentum and strong performance in the field. In the second quarter, nearly 60% of Vega shipments were to new PacBio customers. And since launching in very late Q4 last year, Vega has brought over 40 new laboratories into the PacBio ecosystem, a number we expect to grow into the future. Importantly, Vega is not just broadening our customer base, it's also expanding the range of applications HiFi can support. We're seeing strong adoption among smaller labs and new market segments, and approximately 70% of Vega customers are using the platform for non-whole genome applications, including small amplicon sequencing, targeted panels, and microbial genomics. That's exactly the kind of accessibility and versatility we designed Vega to deliver, and it's performing exceptionally well. Customer runs consistently exceed our specifications across a range of insert sizes with HiFi read lengths and yields often surpassing expectations. At Charles University in Prague, for example, one researcher shared how switching to Vega has significantly improved his lab's scientific output. By eliminating months of troubleshooting associated with incomplete short-read data, he is able to double his publication rate while significantly improving data quality, starting projects with complete chromosomes from the outset. With its lower capital cost, compact footprint, and integrated analysis tools, we believe Vega is opening new segments of the genomics market to PacBio, including labs and institutions that were previously out of reach for long-read platforms. Miami University in Ohio is another great example. Researchers at the institution shared that the system was intuitive to operate with streamlined informatics capabilities, and they plan to use the platform across a wide range of applications, including single cell, epigenetics, and immunology. They also noted that Vega is more cost-effective than the leading low-throughput short-read next-generation sequencing platform with run costs that align well with the funding models common in many academic and translational research settings. We're also seeing growing momentum in population scale and multi-omic initiatives around the world. In July, PacBio HiFi technology powered the first Arab human pangenome published in Nature Communications. This study uncovered millions of previously undetected variants, reinforcing the importance of long-read accuracy when it comes to capturing genetic diversity and improving reference genomes. We believe studies like this demonstrate why highly accurate long-read sequencing is foundational to large-scale population genomics programs, especially those seeking to expand inclusion across historically underrepresented groups. We also recently announced that PacBio has joined the 1,000 Genomes Long-Read Project, a major global effort that is expanding beyond its original nanopore-only design to now include HiFi-based sequencing. As part of this next phase, PacBio plans to contribute full-length isoform RNA data from roughly 1,000 samples using our Kinnex RNA kits and Revio systems. The program's leaders specifically selected Kinnex for its data quality, isoform resolution, and throughput, offering what we believe is a clear advantage over existing short-read and long-read transcriptomic methods. This collaboration highlights how researchers are increasingly turning to HiFi and Kinnex to drive deeper insight into gene regulation and transcript diversity at population scale. As previously mentioned, we are seeing continued progress in clinical sequencing applications as well. Quest Diagnostics, for example, announced that its Athena Diagnostics division is using PacBio HiFi sequencing to enhance its Ataxia movement disorder panel. Built on Revio and powered by our PureTarget chemistry, this assay can detect repeat expansions and complex variants that can be frequently missed by conventional short-read tests. It's a clear example of how HiFi sequencing is making its way into routine clinical workflows, enabling more comprehensive and accurate testing. We are also expanding our clinical footprint internationally. Recently, we announced a new agreement with Haorui Gene, a leading genomics distributor in China with deep expertise in bringing long-read sequencing into clinical use. Haorui has already played a pivotal role in advancing HiFi-based testing in the region. They launched a HiFi-based HLA typing product in 2022, and they’ve since deepened collaborations with major blood centers to expand national research efforts in rare blood classification and antigen mapping, applications that demand the high-resolution, allele-level accuracy that HiFi uniquely provides. Through this partnership, we expect to further grow our clinical presence in transfusion medicine and hematology in China. In translational research, we were honored to be selected by Target ALS to support the largest global ALS genomics study utilizing HiFi sequencing to date. This project is expected to use Revio to generate whole genome data from thousands of ALS patient samples, aiming to uncover the complex genetic contributors to this devastating disease and generate the largest long-read open-access database for ALS. ALS presents a challenging genetic landscape, marked by structural variants, repeat expansions, and noncoding elements, many of which are invisible to traditional sequencing. We believe HiFi's length and accuracy make it particularly capable of resolving these difficult regions, helping researchers discover new links between genetic variation and disease progression. And because the data from this study will be made broadly available, it has the potential to accelerate discoveries that lead to better diagnostics, new therapeutic targets, and ultimately, hope for people living with ALS. And beyond HiFi adoption, we are also helping define the next generation of genomic benchmarking. Earlier this week, a study published in Nature Methods introduced the Platinum Pedigree benchmark, the most comprehensive, family-based variant dataset ever released. Developed by scientists at PacBio alongside collaborators at the University of Washington, University of Utah, and others, this benchmark characterizes not just simple variants, but also complex and repeat-rich regions that have traditionally been excluded from reference datasets. This resource was used to retrain Google’s DeepVariant AI model, resulting in a 34% reduction in erroneous variant calls genome-wide, with even greater improvements in the most difficult regions. It's a powerful validation of how HiFi data is improving the performance of AI-based tools and reinforcing PacBio's position as a leader in sequencing accuracy. Looking ahead, we are also making strong progress in the development of our multi-use SMRT Cell capability, a key innovation that will allow customers to run a Revio SMRT Cell, the most expensive component of our consumable, multiple times. This is a major step toward reducing the cost per genome for our customers and, at the same time, improving our own gross margin. We believe this capability will help unlock larger-scale projects, increase flexibility, and create more value for customers doing high-throughput research and clinical sequencing. We look forward to sharing more about this innovative technology at a later date. I’ll now hand the call to Jim to discuss financials before I finish with some closing remarks.

Thank you, Christian. I will be discussing non-GAAP results, which include noncash stock-based compensation expense. I encourage you to review a reconciliation of GAAP to non-GAAP financial measures in our earnings press release. As discussed, we reported $39.8 million in product, service, and other revenue in the second quarter of 2025, compared to $36 million in the second quarter of 2024. Instrument revenue in the second quarter was $14.2 million, a decrease of 4% from $14.7 million in the second quarter of 2024 due to lower Revio unit shipments, partially offset by 38 Vega systems as we commenced shipping this platform late last year. We ended the quarter with 297 cumulative Revio system shipments and 73 cumulative Vega system shipments. Turning to consumables, revenue of $18.9 million in the second quarter increased 11% from $17 million in the second quarter of 2024, with annualized Revio pull-through per system at approximately $219,000. Vega consumables continue to grow sequentially with the expansion of the installed base, and we anticipate providing an expected pull-through range at a later date once there is a larger and more established installed base. Finally, service and other revenue grew approximately 57% to $6.7 million in the second quarter, compared to $4.3 million in the second quarter of 2024 driven by an increase in Revio service contract revenue and revenue related to a large population sequencing program in Southeast Asia. From a regional perspective, the Americas revenue of $17.7 million decreased 15% compared to the second quarter of 2024 with the region most affected by government funding headwinds and NIH funding uncertainty. We're pleased to see Vega making progress with this customer base as over half the systems went to academic or government customers. For Asia Pacific, revenue of $12.6 million increased 53% compared to the second quarter of 2024 driven by increased Revio and Vega placements and increased revenue from a population sequencing project in Southeast Asia. EMEA revenue of $9.5 million increased 35% compared to the second quarter of 2024. Building off momentum in the first quarter, the region continued to see strength in Revio placements in the hospital and clinical research customer base and growing demand for the Vega platform. Moving down the P&L, second quarter 2025 non-GAAP gross profit of $15.2 million represented a non-GAAP gross margin of 38%, compared to a non-GAAP gross profit of $13.2 million or 37% in the second quarter of 2024 primarily due to higher consumable margins. Consumable margins improved in the quarter as a result of lower Revio consumable per unit costs. This was partially offset by lower instrument margin as we work toward shipping our production-rate Vega systems in the second half of 2025. Non-GAAP operating expenses were $58.1 million in the second quarter of 2025, representing an 18% decrease from non-GAAP operating expenses of $71 million in the second quarter of 2024. Operating expenses in the second quarter of 2025 included noncash share-based compensation of $11 million, compared to $16.1 million in the second quarter of 2024. The decrease in both non-GAAP operating expenses and noncash stock-based compensation was primarily due to the restructuring initiative we implemented earlier this year. Regarding headcount, we ended the quarter with 491 employees compared to 575 at the end of 2024 and 581 at the end of the second quarter of 2024. Non-GAAP net loss was $40.0 million representing $0.13 per share in the second quarter of 2025, compared to a non-GAAP net loss of $55.2 million, representing $0.20 per share in the second quarter of 2024. We ended the second quarter of 2025 with $314.7 million in unrestricted cash and investments, compared with $389.9 million at December 31, 2024 and $343.1 million at March 31, 2025. Turning to guidance. As discussed earlier, we are maintaining our revenue guidance midpoint but narrowing the range to $155 million to $165 million as we believe the prior downside scenario to China in 2025 has been significantly mitigated while the upside case continues to be pressured by the academic funding environment. Like last quarter, this continues to be an extremely dynamic macro environment, especially with respect to trade policy and uncertainty surrounding future NIH funding. Our guidance midpoint assumes consumable revenue grows in the mid-teens compared to 2024, partially offset by a mid-teens decline in instrument revenue. Consistent with the first half of 2025, we expect annual pull-through per Revio system to be in the low to mid- $200,000s. In the Americas, our guidance continues to assume significant uncertainty in the broader academic research community, especially in the near term with accelerating activity in the clinical market anticipated to offset some of the potential headwinds. For Asia Pacific, we continue to anticipate revenue growth in the region in 2025, though we expect a slight sequential decline in Q3 compared to Q2 due to modest tariff-related order acceleration in the first half of the year. We continue to expect EMEA to be the fastest growing region in 2025 as population sequencing programs scale, whole-genome sequencing in a clinical setting grows, and we expand our customer base with Vega. Looking at Q3 revenue, we expect revenue to be roughly flat on a sequential and year-over-year basis, partially due to a sequential decline in APAC after a strong Q2. Moving down the P&L, with the first half of 2025 coming in better than we expected and per unit cost reductions expected on Revio instrument and consumables in the second half, we are raising our 2025 non-GAAP gross margin guidance range and now expect it to be between 37% and 40%, and we continue to expect to exit the year above 40%. As mentioned, we are operating in an environment with trade policy uncertainty and if the U.S. enacts tariffs on certain countries in our supply chain, we could face incremental pressure to our cost of goods in the second half of this year. As of now, our guidance does not factor in a material increase in COGS related to tariffs. We continue to be focused on our spend and we now expect non-GAAP operating expenses to be in the range of $235 million to $240 million. We expect to continue to realize savings in 2026 and as such, anticipate 2026 non-GAAP operating expenses to be lower than in 2025. We now expect interest and other income to be between $6 million and $8 million in 2025, and the weighted average share count for EPS for the full year to be approximately 298 million. We continue to expect our ending balance of cash and investments to be approximately $270 million at the end of 2025. When excluding the $5 million licensing payment in Q1, this implies a $115 million cash burn in 2025 or an improvement of $72 million in adjusted cash burn compared to 2024. We remain on track towards our plan to achieve positive cash flow by the end of 2027 and believe our $315 million in cash and investments as of June 30 will fund us through this transition. I’ll now hand it back to Christian for some final remarks.

To close, I want to come back to the core of why we believe the company is positioned to deliver long-term value to its stakeholders. HiFi technology is fundamentally different from anything else in the market. It enables researchers and clinicians to read native single DNA molecules at lengths up to 25 kilobases with exceptional accuracy while simultaneously detecting epigenetic modifications, such as 5mC and 6mA, in the same sequencing run at no additional cost. We believe no other platform matches this level of biological insight at scale. With SPRQ chemistry, Kinnex RNA kits, PureTarget panels, and our upcoming multi-use SMRT Cell capability, we are delivering true end-to-end solutions, reducing barriers to adoption through improved cost efficiency, higher throughput, and workflow simplicity. Together, these innovations are setting the stage for broader adoption in clinical and population-scale genomics. We believe that we are well on the path to supporting not just tens of thousands of genomes, but ultimately hundreds of thousands, to even millions of genomes. And we are doing this with focus and financial discipline. By investing efficiently and narrowing our strategic priorities, we’ve meaningfully reduced our cash burn and are tracking toward our goal of becoming cash flow positive as we exit 2027. That’s the opportunity ahead. That’s why we’ve refocused on long-read innovation. And that’s why we believe PacBio is well positioned to lead the next chapter of genomic medicine. With that, I'd like the operator to begin the Q&A portion of this call.

The first question is from David Westenberg with Piper Sandler.

Great job on the quarter. I want to start off with the tough macro situation in the U.S. Are you seeing it impact just instruments? Are you seeing any kind of differences in consumable behavior, either by stocking or even putting off? And then I just wanted to follow up on that one and just ask, the Senate definitely sounds like they support NIH and will not allow the cuts to go through. Are you hearing the actual labs feeling that way? Or do they really need to see the proof in the pudding here?

Thank you, David, I appreciate your positive feedback on the quarter. We're proud of our achievements in Q2. The macroeconomic environment remains challenging in the U.S., which is certainly affecting instruments. Most of our Revio placements this quarter were with commercial providers rather than academic customers, and I expect this trend to continue until we have more clarity around the NIH. Consumables present a different picture; utilization overall has been quite healthy, with slight increases here and there. However, it's hard to gauge which experiments customers might be delaying due to NIH uncertainty, and while there is some of that, it hasn’t negatively impacted our consumable revenue so far. We believe the second half of the year will continue to show strength in consumables. Regarding the government and NIH, customers appear to be cautious and skeptical due to the current upheaval. Conversations with funding bodies reflect ongoing confusion and uncertainty about when funding will materialize. We've heard that the Senate is supportive of the NIH, and we think the cuts may not be as severe as initially suggested, but time will tell. It's important to note that our business is experiencing strong growth globally, with international growth at 45%. Specifically, EMEA grew by 35% and APAC by 53% this quarter. These impressive results are driven by increasing adoption and usage of Revio, with Vega helping us expand into a wider variety of accounts than ever before. We're very optimistic about our portfolio and are focused on navigating the current challenges in the U.S. market.

Got it. I wanted to follow up on Vega because I think instrument revenue probably beat all of us. Can you talk about the dynamics? I mean, before Vega, I think we had this conversation about overcapacity in the market. You did mention 60% are new to new customers. So I'm curious if these were predominantly actually ones that were outsourcing to large institutions in the past and you actually are seeing that dynamic where instead of sending it out to insources, they're in-sourcing it, and you're seeing not this kind of overcapacity. So supply and demand are more in equilibrium today than maybe a few years or a few quarters ago.

Yes. When you consider new customers, many of them have previously outsourced experiments to gain experience with long reads, although that's not always the case. There are various applications, such as microbial sequencing, small amplicon sequencing, and targeted panels, where Vega is an ideal solution. These customers can achieve much quicker turnaround times in their labs compared to outsourcing. At a list price of $169,000, it's very cost-effective. In fact, when comparing Vega to leading low-throughput short-read sequencers, it turns out to be more economical to operate Vega. We're hearing from some customers that they have always wanted to venture into long reads, and they are pleasantly surprised by its affordability and ease of use, as I mentioned earlier. I believe there is now a better balance in the market compared to a few quarters ago, as you noted. This aligns with the strategy we presented in 2021, which includes a range of sequencers tailored to meet customer needs with varying throughput, cost, and performance. Each of these options features PacBio HiFi's hallmark of high accuracy in epigenetics with every run at no additional cost and supports single molecule sequencing, enhancing the overall utility of the product. We will see how this develops.

Thanks for the questions Dave. Gary, we'll take the next question in the queue.

Next question is from Jack Meehan with Nephron Research.

I wanted to talk about clinical customer adoption. It felt like in the script, you made a lot of progress on that front over the last few quarters. Is it possible to get a rough estimate of how much of your consumables are coming from clinical now and just how that growth rate compares to the overall?

Currently, around 15% of our consumables are sourced from clinical customers, and this percentage is on the rise. We anticipate it will continue to increase. Most of these clinical customers are still in the validation stage, working on their assays and getting them ready for market. A few, such as Quest, have already launched their products, which is very encouraging. I believe that the 15% figure will grow over time and will be an important factor in the overall growth of our consumables.

When we consider translational clinical research, such as the ALS program we are involved in, it is not included in the 15%. The 15% primarily comes from diagnostic and laboratory-developed tests or direct hospital use for genetic diseases. If we include clinical research, the overall number is much larger.

Got it. And then the Revio pull-through in the quarter, I know it can bounce around a little bit. It stepped down from Q1. The guide assumes it picks up. I was just curious the dynamics around pull-through in the quarter. Do you think any of the funding issues might have impacted that? And also, how did the SPRQ rollout kind of influence overall consumables revenue?

Yes. When we consider the pull-through, it tends to fluctuate from quarter to quarter. In this quarter, it decreased slightly compared to Q1. In Q1, we experienced a significant boost due to the impact in Japan, which had an unusually high number of consumables due to the year-end. This contributed to the higher figures in Q1. Q2, on the other hand, was more normalized. I expect it to continue fluctuating within that range for the rest of the year, with a potential turning point when larger customers begin to use it regularly, which could influence it. Regarding SPRQ, the chemistry has shown remarkable results, with improvements of up to 33%. This has effectively reduced the cost per sample for our customers, allowing more samples to be processed on the system. While this might have a modest short-term impact, over 90% of our runs are now using SPRQ chemistry, so any effects on pull-through will likely stabilize over the next couple of quarters. We're currently witnessing significant adoption, and we should start seeing a normalized rate from it soon.

The next question is from Kyle Mikson with Canaccord.

Congrats on the quarter. I'm going to ask a multipart question. The first is on the clinical, just as a follow-up to Jack. You said 33% or I guess, 1/3 of the Revio placements were to LDT or hospital labs and you're replacing legacy tech. I just want to ask if these labs are typically using multiple long-read technologies. I'm curious if you're winning head-to-head or permanently displacing legacy shorter long read. And then secondly, on the placements, I mean, the instruments were great in the quarter, as Dave said before. How are you thinking about placements going forward? Was there any pull forward, I guess, from areas besides Asia, for example, in the second quarter?

We'll start with the clinical labs. Many of these labs are utilizing various sequencing technologies, primarily short-read sequencing technologies. They are incorporating our technology alongside these existing methods to obtain answers that were previously unreachable, and we are replacing older molecular biology techniques like different PCR and southern blot methods. In some instances where we've competed directly, we are also replacing other long-read technologies, which is thrilling. However, many labs are indeed operating with multiple technologies. Our customers have informed us that after launching PureTarget and SPRQ Chemistry, the cost-effectiveness of using Revio in clinical settings now aligns with their budgets. Additionally, the accuracy, performance, and ease of informatics offered by our system significantly surpass other long-read technologies, which enables them to enhance efficiency, reduce costs, and provide better outcomes for patients. We are very enthusiastic about the developments within clinical accounts. We designed our products to be extremely robust and user-friendly pertaining to clinical requirements. Given the background of our team, this focus is deeply integrated into our approach. Regarding instrument placements for the latter part of the year, we anticipate continued growth for Vega, and we believe we have not yet reached a steady state for placement rates. There is substantial potential in that area, and our sales funnel is expanding. We are particularly excited about Vega since we are experiencing a much quicker sales cycle compared to Revio, with opportunities arising in the early part of the quarter and closing within the same quarter, which is not typically seen with Revio. This sales momentum for Vega is beneficial, and I foresee growth in the latter half of the year. Revio's performance will depend on the emergence of NIH funding. We continue to observe significant opportunities internationally, and as stated previously, we believe Europe will be our fastest-growing region this year, largely due to rare disease initiatives with Revio. Our current projection for Revio placements is relatively stable, with potential fluctuations in certain quarters.

The next question is from Douglas Schenkel with Wolfe Research.

So my first question is just on the activity that's really close to officially getting an order on Vega and on Revio. I'm asking because I'm curious about how close you are to securing orders that you believe would convert into orders and eventually revenue if we experience a favorable NIH funding scenario. I'm interested in any way to quantify the pent-up demand that exists pending resolution. Additionally, I'm wondering if that represents a potential source of revenue upside this year or if it's something we should consider as we look ahead to 2026.

Yes, Doug, that’s a challenging question. Thank you for bringing it up. Todd and I were just discussing this before the call while reviewing the third quarter forecast and our current situation. What’s interesting is that the number of near-term forecasted opportunities is significantly larger than usual, especially regarding Vega. I can't provide a specific number, as that wouldn’t make much sense, but we are indeed seeing many near opportunities that aren’t officially part of the forecast yet. If there happens to be a budget flush in the third quarter, some of those could materialize, leading to potential upsides for us. However, we’re not expecting a budget flush, and until we have clarity about the NIH situation, it's hard to say for sure. There could still be additional opportunities even outside the United States, as sales funnels are showing improvement overall. It will be crucial for us in the second half to convert those near opportunities into actual deals, which may not solely rely on NIH but might be influenced by other macro factors. This situation could present potential upsides for 2025 and certainly lays the groundwork for 2026.

Okay. One technology roadmap question. You've mentioned the development of reusable SMRT Cells, which could help reduce costs for customers. I’m curious about which types of customers might be more receptive to this technology. Do you think it could be beneficial for the research side? And when considering clinical applications, is it less applicable in that area?

Yes, Doug. We've had many discussions with various customers, and they are quite enthusiastic about this, whether they are in clinical or research settings. We believe there will be widespread adoption of this capability. We are going to approach the rollout of this technology thoughtfully because it represents a significant innovation that the industry has not previously encountered in a substantial way. We will likely prioritize implementation for our higher volume, high throughput customers first, as they will derive the most benefit from it. We plan to implement the technology in a highly automated manner, ensuring it is customer-friendly and aligns with our goals at PacBio. We believe this will greatly assist those high-throughput customers on both the clinical and research fronts. Additionally, this technology not only reduces the cost per sample for our customers but also significantly boosts our gross margin at the same time. It's a unique innovation that offers a dual advantage: lower prices and higher gross margins, which is what we aim for.

The next question is from Subbu Nambi with Guggenheim Securities.

You saw a really strong performance outside the U.S., and I know you're assuming status quo with the tariff environment. But how much growth internationally is factored into your guidance with respect to tariffs? And is there any risk that outperformance internationally could be a risk to guidance?

Yes, that's a great question. We've been careful in our approach to tariffs, and we are not claiming that we have fully overcome the challenges associated with them. Our perspective remains quite cautious. Despite this, we've experienced significant growth in the first half of the year, and we anticipate that this trend will continue in the second half. The situation in China remains unstable, and the outcomes are uncertain for all of us. Consequently, we've framed our guidance around more cautious scenarios without being as conservative as we were last quarter. With half of the year behind us, when we look back at Q2, we remember that our previous guidance was issued while we were trying to understand the implications of Liberation Day and the various statements from China and the U.S. regarding China. While we find the situation somewhat clearer now, it is not significantly so. Thus, we have not overextended ourselves and continue to adopt a conservative stance with our guidance.

The next question is from Tycho Peterson with Jefferies.

This is Priya on for Tycho. Just a question on pricing. Are you able to take price to account for tariff dynamics? I know one of your competitors had called out a 5% tariff surcharge. So I was wondering what your thoughts are on pricing there.

So we have not adjusted pricing for any tariff dynamics. And quite frankly, we're not really seeing any tariff impacts at this point. And so I think that's masked as just a price increase, not a tariff surcharge. I think if we really were seeing a significant impact from tariffs, we would certainly have to evaluate whether we either change our price or add a surcharge as others will do. But at this point, I don't think we've seen any substantial impact to merit kind of evaluating that. But we would if we needed to.

The next question is from Mason Carrico with Stephens.

A lot has been asked here, but maybe I'll just stick to one. You've highlighted how some of these larger scale projects like the Estonia Biobank have helped drive strength in Europe. How concentrated, I guess, is 2025 revenue in these types of initiatives? And do you see similar opportunities, similar POPSEQ projects on the horizon that could sustain EMEA growth into 2026?

Yes, that's a great question, Mason. Thank you. You're correct that larger projects like the Estonia project have contributed to growth in Europe. However, I want to emphasize that in the second quarter, our European team successfully introduced Revio's technology into several hospitals in the Nordic region, focusing on rare diseases. This initiative began with translational research and is evolving into what could be viewed as national programs for rare disease. Thus, the growth in Europe is more widespread than just the Estonia project, largely driven by developments in rare diseases within the hospital environment. This is all clinical work occurring throughout the Nordics and the broader continent of Europe, and we are quite enthusiastic about it. Regarding the rest of the world, there are multiple POPSEQ programs underway, including the ongoing Precise CRISPR program in Singapore, along with initiatives in Thailand and other regions. These represent significant opportunities, and I wouldn't be surprised if some of these projects start contributing to PacBio's revenue growth by 2026. While I can't provide details on projects that aren't finalized yet, I believe there are substantial opportunities ahead, particularly outside the United States where funding is available. Please stay tuned for updates, and I look forward to keeping you informed.

The next question is from Luke Sergott with Barclays.

This is Jake on for Luke. So you mentioned not being able to supply some customers with SPRQ reagents at the end of Q1, so you had some back orders. Have those capacity constraints been addressed? And could you quantify how much of 2Q consumable revenue was pushed out from Q1, if it was material?

Yes, we did experience some back orders in Q1, but we addressed most of those issues during the quarter. It's not expected to have a significant impact on Q3 at this point, as we have resolved the majority of the problems.

The next question is from Tom Stevens with Cowen and Company.

Just another one on the reusable flow cell. So are you guys still committed to scaling throughput longer term? Or has the model switched to kind of consistent throughput but much higher gross margin? And then I've got another follow-up on kind of your unit costs.

Yes. Consistent with our strategy, our objective is to achieve lower costs and higher gross margins while also increasing throughput. We aim to approach price parity with short-read sequencing as well as match its scale. We believe that the future demands both to be successful. We are actively developing a higher throughput sequencer and are continuously working on such projects. Additionally, we are creating a multi-use SMRT Cell to help reduce costs. Together, these efforts will position us well to compete for the numerous market samples available. Thus, we are pursuing both initiatives simultaneously.

That's really helpful. And then just a quick one on kind of unit costs. You've obviously made really, really good progress here in a kind of low revenue environment. Have you changed how you guys are perceiving the long-term gross margin outlook given kind of the effective unit cost cuts you've been able to make in the last couple of quarters? Or is this just executing on a plan you guys already had in place?

We haven't updated our long-term gross margin guidance yet, but our goal is to significantly improve our gross margins moving forward. This involves making fundamental innovations on both the SMRT Cell and the instrument side. Each quarter, we are making progress in reducing instrumentation costs and increasing the yields of SMRT Cells. In fact, we achieved near record yields for SMRT Cells in the second quarter, which is propelling us ahead. We are implementing fundamental cost improvements, and as we scale, we will benefit from economies of scale, which will further enhance our gross margins. While we haven't revised our long-term guidance, we are focused on ending the year with gross margins exceeding 40%. We will communicate updates for the future at the appropriate time, but I believe there is a significant opportunity to considerably increase gross margins over the next few years.

The next question is from Yuko Oku with Morgan Stanley.

This is Jason on for Yuko. A lot has been asked. I'm just going to stick to one. So I just want to understand the type of applications on Vega. How similar or different are those applications compared to the main ones on Revio? Are the applications similar enough where Vega customers could transition to Revio in the long run if they need higher throughput? Or are some applications just more economical to run on Vega?

Yes, that's a great question. The advantage of our technology is that its applications can be utilized across our entire instrument portfolio. For instance, some customers may focus on microbial applications, where 60 gigabases of HiFi sequencing provides a substantial amount of sequencing. However, if they require greater scale, we offer multiplex technologies that enable them to process more samples and maximize the throughput of Revio. Ultimately, it depends on the scale of samples that the customer is considering and their laboratory's sample workflow. For example, it is common across various vendors that achieving the lowest price per sample requires a significant number of samples on a flow cell, and we encounter similar challenges with Revio for certain small genome applications. Having a high volume of samples simplifies the process, and if the samples are consistently plentiful, the transition is even smoother. Customers can effortlessly switch between Vega and Revio based on their specific needs at any given time.

So we're at the top of the hour. So we'll wrap it up here. Thank you, everybody, for all the questions. We look forward to connecting with you at several conferences later this quarter and when we report our Q3 results next quarter. Have a good one.

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