Good day and welcome to the PacBio First Quarter Fiscal 2022 Financial Results Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Todd Friedman, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to PacBio's first quarter 2022 earnings conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call. A copy of which is available in the Investors section of our website at www.pacb.com, or is furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer; and Susan Kim, Chief Financial Officer. Before we begin, I'd like to remind you that on today's call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, expectations, intention, guidance, expectations for, including advantages and capabilities in connection with new products, technology and software development and launches, and the anticipated timing of such development and launches, expectations resulting from continued building and enablement of HiFi ecosystem, expectations with respect to our partnerships and collaborations, estimates, intentions, and plans to use the company's cash and investments to fund current development and commercialization initiatives until achieving positive operating cash flow without the need to raise additional capital and other information. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties and could cause actual outcomes and results to differ materially from currently anticipated results, including challenges inherent in developing manufacturing, launching marketing, selling new products and achieving anticipated new sales, competition, unanticipated increases in costs or expenses, interruptions, or delays in the supply of components or materials for or manufacturing of PacBio products and products under development, potential product performance and quality issues and potential delays in development timelines. The impact of the COVID-19 pandemic risks associated with international operations among others. These risks and uncertainties as well as other risks and uncertainties are more fully described in our press release earlier today and in our Form 8-K, Form 10-Q and Form 10-K and other filings with the SEC. We disclaim any obligation to update or revise these forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. In addition, please note that today's call is being recorded and will be available for audio replay on the Investors 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 call. I'll now turn the call over to Christian.

Good afternoon, everybody. We appreciate you joining us today as we discuss our results for the first quarter of 2022 and our outlook going forward. As usual, I'll walk through some of the business and commercial highlights, and then Susan will walk through the financials and guidance in more detail, and then we'll open it up to Q&A. I'd like to start there by saying there are three key takeaways that I hope you come away with from our discussion today. First, we are executing on our core objective of rapidly expanding the install base of Sequel II and IIe systems as evidenced by us achieving another record quarter of instrument shipments. This growth in our install base will enable more HiFi data reaching the market. Second, we are making excellent progress on our next-generation of short and long-read sequencers. Our mid throughput short-read SBB instrument is on track for commercial shipment in the first half of next year. And we continue to believe this will be the world's most accurate short-read platform. We're also achieving our internal milestones towards the development of our next-gen long-read sequencers. And third, PacBio is in a strong financial position based on -- and based on our estimates, we intend to fund the company's current development and commercialization plans using the cash and investments on our balance sheet, until we reach positive operating cash flows without the need to raise additional capital. With the volatility in the equity markets today, this puts us in a unique and desirable position. Now, let's walk through our Q1 results and discuss how the team is on track to execute on our 2022 plan. The first quarter was a solid start to the year and in the upper end of our guidance range with revenue of $33.2 million,…

Thank you, Christian. As discussed, we reported $33.2 million in product and service revenue in the first quarter of 2022, which represented an increase of 14% from $29.0 million in the first quarter of 2021 and was at the high-end of our range. Instrument revenue in the first quarter was $15.6 million, an increase of 4% from $14.9 million in the first quarter of 2021. We delivered a record Sequel II and IIe systems during the first quarter growing the install based to 424 systems a as of March 31. Turning to consumables. Revenue of $12.7 million in the first quarter grew 22% from $10.4 million in the first quarter of last year and Sequel II and IIe consumables represented approximately 85% of our total consumable revenue in the first quarter, with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and IIe install base in the first quarter was approximately $115,000. In the first quarter, as we discussed on our last earnings call, we saw lower utilization largely due to the impact of COVID-19 flowing lab productivity. While we saw improvements in some regions towards the end of the quarter, the escalating cases in China and associated lockdowns impacted utilization throughout Q1. As we discussed before, our record placement in Sequel II and IIe may have a short-term impact on pull-through, especially as we onboard new customers. Finally, service and other revenue grew to $4.9 million in the first quarter compared to $3.7 million in the first quarter of 2021, reflecting our growing install base. Shifting to a regional view. America's revenue of $19.1 million grew 57% compared to the first quarter of 2021, as the region delivered a record number of systems and grew consumables and service revenue commensurate with a…

Thank you, Susan. The team executed tremendously in the first quarter amidst one of the most trying macro environments we've ever seen. With a third year behind us, we believe that we are on track to meet our revenue target we set fourth at the beginning of the year. Our product roadmap is full of exciting and innovative products that we can't wait to share with the genomics world. And by our estimate, we intend to fully commercialize these exciting new products using the cash and investments that we currently have on the balance sheet. And in turn, we believe that will drive us to operating cash flow positive in the future. With that, I'd like to invite the operator to open the floor to Q&A.

We will now begin the question-and-answer session. And our first question today will come from Dan Brennan with Cowan. Please go ahead.

Great. Thanks for taking the questions and congrats. Maybe just a couple of tactical ones short-term and then some bigger picture ones. Just on -- I know there's a lot of discussion on China, you guys summed it up there in the concluding comments. And I'm just wondering, did you say what China did in Q1? And what specifically -- it sounds like you're assuming by the end of the quarter, Q2, it's kind of getting back on track kind of what's assuming in Q2 and for the rest of the year for China.

Yeah. I think, in Q1, China probably represented about 15% of the business. And for the rest of the year, we're hopeful that as it recovers I suspect second quarter might be a little lighter than that, given the lockdowns in the environment right now. But as Susan pointed out, if things kind of start to moderate in the summer, that gives us some good belief that we're going to achieve the 160 to 170 that we've outlined.

Got it. No. Thanks Christian. Just one more tactical one. Since you brought it up last quarter, I didn't hear a mention of it today, but you to get it off the table, like emerging biopharma, you guys excited some noise coming into the year. Not -- I'm not even quite sure how big that as percent of your revenues, but just to kind of check the box here. Was there any impact? What was the trend in that customer base as the year started off in the first quarter?

Yeah. I think, it was consistent with what we were talking about back in January. Any of the smaller emerging companies that are not generating positive cash flows and that are sitting in this macro environment are definitely longer sales cycles right now. And they were that way throughout the first quarter. And quite frankly, I don't expect them to change over the balance of the year. We've considered that when we -- when we're talking about our guidance and how we're thinking we're going to build the business. Obviously, we're really excited in areas like AAD, where there are some smaller customers that are smaller in terms of size and balance sheet customers there, that have been rapidly adopting the products, because the Sequel IIe really serves them well across what they're trying to do. But some of the emerging, kind of more traditional pharmas, I still think that that business is going to be tough for us for -- until as they manage their own balance sheets. And I suspect that will continue -- that will start to improve as the world normalizes, but Q1, as I'm sure you understand, Dan, was a pretty big shock to the system for all of us.

Got it. And then, Christian, you spent a fair amount of time in the prepared remark, discussing all the advantages that native long-read sequencing platform has over something that is -- deem to be synthetic. But I'm just wondering, like, did you see any pause at all? Is there any pent-up demand for placements, such that as we get through AGPT and we see kind of more details about infinity. Is there -- could there be either an unlock event with some customers that are on the sidelines right now, just maybe give a little color for kind of what the Salesforce was seeing during the first quarter?

Yeah. Obviously, I asked that question a lot, and really been laser focused on it. And what we've seen is, in general, it hasn't really slowed the sales cycles down, perhaps maybe a little bit in Europe, more than in the United States and in APAC. And I do think there's probably potential for a bit of an unlock as you kind of -- as folks start to understand what other techniques might look like. But when you really sit and talk to the customers, they care back to me all of the things I just pointed out on the -- in the prepared remarks that, if we're serious about doing long-read sequencing, we need to be using PacBio because there you just get the -- you get more complete information, you resolve the biology in a more detailed way. And they know that we are continuing to approve, as evidenced by the direct methylation launch that we had just a few weeks ago. And so, they just see that there's -- there are significant limitations. But that doesn't mean they're not learning about this. And I think at the end of the day, our growth is likely to be unhindered by Infinity.

Great. And then maybe one last one, just on the new high throughput platform, I think we're expected to get some data or a look at it in the back half of this year. Just could you remind us specifically, like what we're going to see, when we're going to see it? And how should we be thinking about? Obviously, Sequel IIe doing well, you have a big opportunity ahead of you, but that I think there's potentially building excitement for the new platform could be and do. So, just maybe an update on what we're going to see and how we think about what the potential opportunity is versus -- number one, there's an upgrade opportunity obviously, but like what's the -- how do we think about the potential new customers that, this could draw into the long-read market?

Yeah. Dan, that's a good question. Thank you for it. I think the one thing that we've seen time and time again, as you can start to offer advances in the technology that are very significant to long different axis, whether that's accuracy, throughput cost, you get to see major traction in the market and you see a bit of a replacement cycle. You see new customers coming into the market and our intent -- and it's basically the same strategy that I described to investors. When I first joined is to build a multi-product portfolio with different instruments at different price points and throughput capabilities that give more and more customers access to the power of long reads and the power of HiFi sequencing. And this is part of that journey. And we're obviously moving towards the higher end first, because we see incredible opportunity in whole genome sequencing in particular at -- with higher throughput platforms, the ability to reach the sub thousand dollars cost, that we've talked about in the past. And when you start to think about our development programs, our programs are progressing well, the teams are working hard. And as I've pointed out, I guess, at JPM in 2021, these would -- these platforms would take a few years to get out. And I think we're largely on track. And so, later on this year, I suspect we'll give more information, but today I don't want to let the cat out of the bag, so to speak.

Great. Thanks Christian.

And our next question will come from David Westenberg with Piper Sandler. Please go ahead.

Hi. Thank you for taking my question. And so, my first question is say a follow-up on the high through platform, but instead like the collaboration with Invitae. I totally appreciate. It has to do a lot with Invitae's cash position is what kind of a reading into it. But -- and sorry if I'm a hard headed here, but if they're not funding this and you're not changing your guidance, except for, like there was $5 million that was stock-based comp, how is this platform getting funded? And is this maybe a 2023 funding event? I'm sorry if I'm missing that maybe I'm too hard headed here.

No. It's a great question. It's probably good to take a moment to just clarify. So, if you think about it, the way we're doing the accounting for the Invitae payments, what they really are, are prepayments for buying the actual system. And so, what they -- what we've been doing is as they pay us, we put that into deferred revenue and we're still paying the -- we're still recording the R&D expense on our P&L. So, the P&L doesn't change at all. We've been investing all along and recording R&D expense, we will continue to do that. And then, you've got this building deferred revenue. And so, we are working with Invitae such that all we're really doing is changing the timing of when they make payments to give them some flexibility on their cash. And that's why it's really important to understand this, what's really happening is, is we increase the pricing of the final product, such that we'll actually capture more gross margin, more -- if you look at the NPV of this particular project, if you look at other project, we actually will make more profit and more cash flow under this amendment than we otherwise would've made. And the other thing that's really beneficial to us is that their pricing will be such that others will be able to compete with them a little bit better. I mean, they're still going to have incredible pricing. They're completely committed to the relationship and they're still investing their internal resources. But we've just reallocated how they pay for the machines by paying at the end of development instead of along the way. And so, that's really the difference and the R&D expense continues to be recorded as it has been.

Got it. Appreciate you. I had a gap in my coverage of you guys when was signed. So, thanks for the reminder there. And then, in terms of pull-through, I think Susan laid out some of the Omicron in January, and then kind of what was happening in China. Would maybe give us a sense for what you had in pull-through and maybe March or April? I mean, I'm just trying to get a sense of, is this pull-through normalizing as we're heading further into the quarter and it looks like it's behind you or, anything like that?

Well, I don't think we're going to give individual months, because any individual month could be aberration. But what we can say is that pull-through is improving over what we reported in Q1. And now, pull-through is a metric that's dominated by both the enumerator and the denominator. And so, at some level, as we sell more instruments per quarter, the pull-through will likely go down, particularly when we're selling to so many new customers. One of the things that in our executive business reviews this quarter was uncovered is that the time to get a new customer to run their first chips or first smart cells could be as much as 90 days from when it's installed, because they're working on workflows, et cetera, et cetera. And then, from there, it's training and scale up with samples. And so, as you're seeing us get so many new customers, that puts pressure on the short-term pull-through and as we sell so many more instruments, obviously that hurts the denominator. Now, when we sell through a very high throughput or high throughput capable customer, like the Broad Institute at such a large scale, that will likely help the pull-through, but it will be somewhat offset because they have -- they get great pricing because they do so much volume. And you have that whole mix. But at the end of the day, we think that that pull-through will increase from here. And also, China, right? China has been -- we did okay in APAC, because we sold a lot of instruments. Pull-through in China was well below our expectation during the quarter. And as that recovers, that will bring the number up as well. So, there's a lot of different factors at play. But I do think on balance, you're going to see the number improve from here. And we'll go from there.

Perfect. That was a really nice detailed answer there. I'm just going to ask really one, because I think it's going to be very short. The one-third of two new customers, was that inclusive or net of that big order to the Broad Institute.

That's inclusive of -- we take the whole -- we ship 50 systems, so it's one-third of those 50 systems.

So, it's closer to closer to more than half. All right. Thank you very much.

Thank you.

And our next question will come from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good evening. So, I want to go back to that Broad order you mentioned, Christian. As you sort of had framed the guide on your 4Q call, was that sort of already contemplated, or was that all upside, which came through late in the quarter? And then, as you think about your order funnel or your instrument backlog here heading into the back half of the year, can you just give us a sense for the breadth of the demand versus any other sort of like large multi-unit orders that we should be thinking about?

Yeah. Okay. A couple things. So, with the 1Q guide, some of the Broad order was contemplated, but not all of it. And we were hedging a bit in our internal thinking because you -- when it's an order that big, you never know when it's going to -- the timing of which it was going to actually manifest itself. So, some was, but not all. And then, if you think about the back half of the year, one of the things that's really exciting and one of the things that is driving why we made these commercial investments is the number of named opportunities for new instruments is that one of its largest -- if not its largest level ever in the history of the company. And what that means is that we have more sales coverage or more coverage of potential instrument sales to meet our forecast and meet our guidance. And let's face it. That's because we've hired more sales reps and those sales reps are in fact prospecting. And so, there's lots of ways to look Salesforce productivity. And I tried to highlight that on -- in the prepared marks, hopefully that was effective. But it's revenue per rep over time. It's sales velocity. It's -- how big is the sales funnel and the quality of the leads you're getting. All three of those things are generally improving for the company and give us a strong pathway to growth for a long time to come. And that's what's so powerful. I guess, the last thing I'd say with respect to the funnel, when you do a -- an 18 unit sale to the Broad that now they have 23 instruments in their fleet, that's really a lighthouse account. And that's a validation of the technology, a validation of where the technology's going, the applications, they see lots of opportunity in numbers of samples and projects and that lighthouse genome centers and that might be competitive with them. And so, that's actually -- that's one reason why it's such a powerful win for us during the quarter. And the other reason is, we really enjoy working with the Broad. They're very collaborative and they will help push us as much as anyone else. So, that's really great.

Got it. Super helpful. And then -- appreciate the color you've shared on China, Christian. But I guess, one of the questions that we've been getting is, what sort of like driving your confidence, perhaps conversations with local government authorities, or your marquee sort of customers in the region there, that makes you assume that things get better by the summer? It seems like it's a pretty fluid situation. And the lockdowns kind of like ebb and flow, at least in Shanghai and Beijing, et cetera. So, I'm just curious as to how you thought about that when you made that assumption in the guide of a summer recovery and normalized utilization and placements there in the back half.

Well, I think, one of the reasons why we've made some of these assumptions is we actually hired a really highly qualified country manager in China now, who is phenomenal. And in fact, he was a big reason why we had such a nice quarter on instruments. We had a lot of trade-ins from Sequel I to Sequel IIe. And so, we were building a little bit, I mean, better than the company's ever had Intel on the ground, which helps us kind of understand that. But as Susan said in her comments, look, we don't know -- we -- none of us know exactly when things will return to normal. We probably air on the optimistic side instead of the absolute pessimistic side. But we also see our business growing throughout APAC. And we also see -- like, we talked about China had a -- I mean Japan had a fantastic quarter. We finally sold an instrument in Australia. We're starting to build out some of these other territories that can help offset some of the challenge in China should -- should China not recover as we expect. And if China -- and as Susan also said, look, if China doesn't recover, it will clearly put pressure on our guidance at some point. But we have a lot of -- as I said before, our opportunity funnel is very significant and we will work to mitigate that and grow on top of that, as you guys would expect us to.

Got it. And then one final one for me on, just traction for that HiFiViral kit. I think, on the last call, Christian, you'd mentioned sort of high single digit millions in COVID contributions. This year you'd -- that was last year and this year you'd expect that to skew more towards consumables. Is that a possibility of a little bit of upside there, given how that kit perhaps did, thanks to the Omicron variant, or how are you feeling about that contribution at this stage of the year?

I think that -- I think it has potential that contribute, but I don't think it's going to be a significant contribute -- contribution to make our year or not make our year. And one of the reasons for that is, particularly in the United States, testing is down a bit, or surveillance has been down a little bit. The time to implement a new technology, some labs are -- they love the assay. They want to be engaged, but they're not -- there's a lot of uncertainty of how much further surveillance there will be in funding. And so, although, it's been an incredible learning experience for us and generated some good revenue and been able to get a us into public health labs where we had no chance of getting into before. I don't expect it to be a major contributor to our revenue for the balance of the year. I could be wrong, if we have another search, but that's kind of where we see it on that.

Got it. Very helpful. Thanks for the time guys.

Yeah.

And our next question -- And our next question will come from Kyle Mikson with Canaccord. Please go ahead.

Hey, guys. Thanks for taking the questions. Congrats on the quarter. I wanted to start with the next …

Hey, Kyle.

Sure. So the PacBio products like the next-gen kind of tools need be kind launching, hopefully soon. It has been three years or so since the launch of the 8M chip in the Sequel II, and like, earlier in the call, you're pretty vocal without developing at least a next-gen sequencer pretty soon, so that would probably require a higher density smart cell. And I know that like, whole genome costs and throughput are kind of like the critical factors you're assuming. And when you became CEO, Christian, in 2020, you talked about like, I think increasing throughput by 25X and reducing costs by like, I think seven-fold or so. So, are those like metrics -- those kind of like threshold, like, so kind of reasonable for the smart technology in near-term. And these like next-gen kind on of PacBio products. Could those be launched like this year in 2022 or is that more of a 2023 kind of story?

Yeah. So, we have not said, Kyle, exactly when we're going to launch these products and when development will be finished, nor have we given specific specifications. And clearly, it's because the Sequel IIe is performing extremely well in the market. Customers are very excited about it. But at some point we will continue to advance the technology to the state where -- you're talking orders of magnitude and levels of throughput, et cetera. I don't want to quote specific numbers today, but it is kind of -- our mantra, right, is we have to increase the throughput very significantly. So, we enable scaled science, whether that's in clinical research applications or in kind of whole genome, surveillance kinds of projects or genomics like projects, et cetera. And so, it will be important for us to get there and get there soon. We will unpack that more. The development programs are going very well. And we continue to hit our internal milestones. And so, we're right on track for that. But at the right time, I -- we will unveil it more wholesomely. But we want to make sure that we maximize our opportunity with the Sequel IIe platform while we have it, if that makes sense.

Okay. Yeah. That was great. That's fair, Christian. Appreciate that. And maybe just on Omniome kind of similarly, this has been touched on before. I just want to revisit it because the beta launch, I think should be ongoing. Can you provide any more -- maybe details on the specs for the Omniome platform, maybe for the beta units right now? There's been talk about flexibility obviously in the marketplace. Like how many flow cells per run are you thinking, maybe cost per flow cell even? And I guess, overall, like how should we and how should investors really think about some of these metrics as they stand out and kind of stack up versus the emerging of the existing under short-read companies, for example, cost per gig basis, five to 50 gig -- per gig nowadays. And so, I'm just curious to hear, like any more clarity there, given the market is obviously becoming a little bit more crowded.

Yeah. So, that's a good question, Kyle. I'm sure we'll talk about it more at AGBT. And so, hopefully, if you're there, we'll spend a lot of time on it, I'm sure. But in a nutshell, we see the platform as being highly competitive with any of the emerging players. It'll be a mid throughput system, as we've talked about. It will have accuracy Q40, accuracy. 90% of the reads will be Q40 is our expectation right now. And in terms of cost per G, it will be competitive with the emerging players and the existing players. But one of the things that we're going to -- our accuracy is so much higher than the competition that we really want to change the narrative, because we want to talk about the price for answer, because if you can -- even if you're selling it $5 to $7 a G, let's just use that hypothetical that you said, what really matters is how many Gs do you need to get that answer? And that's really the -- that's really where I think we're going to shine a more than the other emerging players. I mean, on a straight cost for G, it'll be competitive. Absolutely. But -- and we'll still be able to generate more gross margins, that will make sense for us. But it's really about the offering to the customer. How many Gs of sequencing or how many samples can I put in a flow cell to get the answers I want, because that's what really drives the economics. And the accuracy drives the level of coverage and less coverage obviously means less sequencing, less sequencing means less cost, also means more speed, which gives us a lot of competitive advantages that I think will make the platform very compelling.

Okay. That was great. I look forward to hearing more at AGBT. And maybe just finally, I want to touch on some of the new workflows that kind of transformed the Sequel IIe like a five base sequencer, without all the kind of additional costs and time and effort. I guess, I'm just kind of wondering like what the five base functionality does for your clinical efforts. And I know that Children's Mercy values epigenome modifications for pediatric rare disease. I think that you were alluded that earlier, but ultimately, like, do you think that the direct methylation could improve diagnostic yield of long-read treatment thing for different diseases?

Absolutely. I mean, we -- we'll stick with the Children's Mercy example for a minute. I mean, they were one of the early access users and even the first runs that they're getting, they're seeing allele specific or haplotype specific epigenetic profiles that give them indication and clues into disease. And so, I think that, at a fundamental level changing the narrative of what a complete genome is, what a clinical grade genome is, the utility from the genome, it's all of these different tools, whether it's structural variant analysis, whether it's methylation, whether epigenetic status, whether it's the ability to call the appetites without having to do any extra work. And starting to see all of this genetic picture in one assay with one informatic workflow, really changes the game and helps us resolve the biology. And at the end of the day, that's going to be one of the core value propositions of the long-read sequencing in general versus short-read. And as we get throughput and cost down, it would be surprising to see -- to not see very significant transition, particularly in clinical applications when you want to -- you just want to see more of the genome to understand what's going on.

Okay. That was great. Thanks a lot. Appreciate it. Congrats again.

Thanks Kyle. It's good to talk to you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Christian for any closing remarks.

Great. Thank you. Thanks everyone for the questions. After two years of limited travel, we're finally excited to get back on the road and interact with our customers and investors. Right now, we're in the midst of our discoveries road show, where we're traveling to 20 cities around the world to put HiFi sequencing on display. I invite you to look at our schedule on our events webpage and join us for one of our meetings, if you're available. We're also excited to see you at AGBT next month. We'll be having an investor meet and greet and panel Q&A with our leadership team to kick the event off. So, we hope you can make it. Thank you. And we look forward to continuing to update you on our progress throughout the year. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line at this time.