Hello, and welcome to the PacBio Third Quarter Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Mr. Todd Friedman, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to PacBio Third Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release outlining the financial results we will be discussing on today’s call, a copy of which is available on the Investor’s section of our website at www.pacb.com, or as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. With me today are Christian Henry, President and Chief Executive Officer; and Susan Kim, Chief Financial Officer. Before we begin, I would like to remind you that on today’s call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, expectations, intentions, guidance, and others, including expectations regarding our Revio Onso system in their commercialization timeframe. You should not place undue reliance on forward-looking statements because they are subject to assumptions, and risks, and uncertainties that could cause our actual results to differ materially from those projected or discussed, including those inherent in developing and commercializing new products. We refer you to the documents that we file with the SEC, including our most recent forms 10-Q and 10-K in our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures, combined with US GAAP financial measures, provide useful information to compare our performance relative to forecasts and strategic plans and benchmark our performance externally against competitors. Reconciliations between US 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 Investor’s section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today’s call may differ or change materially after the completion of the live call. Finally, we will be hosting a question-and-answer session after our prepared remarks. We ask that analysts please limit themselves to one question and one follow-up question, so that we can accommodate everybody in the queue. I will now turn the call over to Christian.

Good afternoon, everybody. Thanks for joining us today as we discuss our third quarter results and business highlights. Before I begin with my prepared remarks, I'd like to remind everyone that we are hosting our first Investor Day in New York City on November 15. You can find out more about the event in the Investors section of our website. On today's call, we will first recap the product announcements we shared two weeks ago at the American Society for Human Genetics Conference in Los Angeles, then we will discuss our third quarter financial results, and then I'll provide some commentary on our commercial activity during the quarter. Then I'll hand it off to Susan to walk through our quarterly financials in more detail and, of course, as always, there will be plenty of time for Q&A. When I joined the company in September of 2020, I outlined two important aspects of our strategy for growth. First, we needed to develop a new long-read platform that offered our customers significantly higher throughput at much lower cost, and second, since we believe that understanding biology is becoming a more multiomic endeavor, we need to develop multiomic capabilities so that we could provide the right solution for our customers depending on the biological question that they are trying to answer. At ASHG on October 21st, with the announcements of Revio and Onso, two groundbreaking new sequencers, we demonstrated that we are well on our way to achieving these two critical aspects of our strategy. Let's start with Revio, our next-generation long-read sequencer. Revio is expected to provide 15 times more data output than our current flagship sequencer, the Sequel IIe. At the core of Revio is a completely redesigned smart cell, which has 25 million zero-mode waveguides more than three times as…

Thank you, Christian. As discussed, we reported $32.3 million in product and service revenue in the third quarter of 2022, which represented a decrease of 7% from $34.9 million in the third quarter of 2021. Entrant revenue in the third quarter was $11.4 million, a decrease of 28% from $15.9 million in the third quarter of 2021. We delivered 34 Sequel IIe systems during Q3, growing the installed base to 494 Sequel II and IIe systems as of September 30, 2022. Turning to consumables. Revenue of $16.1 million in the third quarter grew 10% from $14.6 million in the third quarter of last year and was a record for PacBio. Sequel II and IIe consumables represented approximately 90% of our total consumable revenue in the third quarter with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and IIe installed base in the third quarter was approximately $125,000. Consumable revenue in China continued to improve, partially offset by newer PacBio customers being slower to ramp and certain customers dealing with sample delays. Of note, global supply chain constraints related to auxiliary equipment has had an impact on new instrument ramp time, and one of the other reasons noted was a lack of nitrogen at the time of installation, which we're pleased to say will not be a requirement with our new Revio platform. Finally, service and other revenue grew $4.8 million in the third quarter compared to $4.4 million in the third quarter of 2021, reflecting our growing installed base. From a regional perspective, Americas revenue of $16.7 million declined 14% compared to the third quarter of 2021, primarily driven by lower Sequel IIe placements as customers delayed purchases due to lab space limitations funding and deferred orders due to the anticipation of…

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

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

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

Sure. Thanks Tejas. So, I didn't really get a lot of pushback on the -- on what you call to be a high price point. I think people saw the incredible value and opportunity associated with long-read sequencing for $10, $11 a G at list and getting lower than that and genomes at scale. So, I didn't really get any pushback hardly at all. Now, we do have -- as with any product transition, there's always customers that just bought at the end of the third quarter or people that bought in 2022 and so we were very thoughtful about that and put together a pretty aggressive customer loyalty discounts that would account for them and give them an opportunity to get into Revio and still get some power out of the Sequel IIe until Revio is broadly available to them. And so what that really did was it said, if you bought in 2022, you're going to get a bigger loyalty discount than if you bought in 2021, we tried to basically recognize the newness of the system. And so far, we haven't had much pushback on that discounting scheme. And so I think in the long run, you're going to see discounting less than what we discount the Sequel IIe, but -- and we will -- but for the trade, not trade-ins, but for the loyalty discounts, I want to be very clear. It's not a trade-in program. The loyalty discounts you will see customers that bought most recently get a very good price. And we're happy to do that because that was part of the strategy is to enable the market with a larger installed base, so that we could go upgrade that installed base to Revio as quickly as possible.

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

Yes. I've -- just to go backwards, yes, that's probably right. It will depend obviously, on how people think about coverage. One of the things that we found, and we've been doing a lot of work on this year is understanding, what long-read coverage you need using HiFi relative to the traditional 30x metrics. And as with anything, it really depends on your application. But if you're doing population scale genetics, kind of large projects, you could go anywhere from 10x. We see some customers talking about 10x and some talking about as high as 20x. So you could kind of think about an increase in scale relative to even that 30x paradigm. But that being said, from a pull-through perspective, you talk about a multiple of Sequel IIe, I think that's the right way to think about it. When you think about what's the max opportunity, you can do the math. It's a 24-hour run time. And so you probably think you're using the system 50 weeks a year and you can multiply and just start with the list price and then apply whatever discount metric you want to use for a price per genome and that probably can give you enough to do the math to figure that out. But we expect with respect to the ramp down, Sequel IIe will be continued to be used for quite a long way from here, we will be scaling up Revio, and we will have -- I suspect we will have -- we've had an incredible amount of interest already. And so we will have a lot of customers upgrading their systems. It's too early to kind of gauge what that ramp down in consumables might look like specifically, but that ramp down would probably occur more in the back half of next year than the front half. And so that's one thing to talk about. And I think next week at the Investor Day, we'll try to provide some more detailed color on that to kind of how we see that playing itself out. Because you're right, it's going to be a bit of a nuanced thing for a few quarters here as we get the product launched and shipped and people convert their samples and then scale-up on new projects, because people are imagining things they could never do before. And that's why the world is so excited about Revio, quite frankly.

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

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

Very helpful. Thanks, guys. Appreciate the time.

Yep.

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

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

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

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

Yes. That's a good question, Julia. So we -- in the prepared remarks, we tried to give you a little color there on the fact that there's still some applications where the Sequel IIe will be quite adequate and, quite frankly, a great platform, things like AAV and even some of the power you get using the Maf kit on isoform sequencing, you get really nice -- you can get really nice scientific results. And so, there are going to be applications where Sequel IIe will be very useful. We do expect though that Revio will become the predominant platform that we sell over in 2023. And -- but we do expect, A, kind of smaller level of kind of consistent demand throughout 2023. And that's probably about as far out as I want to talk about right now for the Sequel IIe platform. So we're definitely going to keep supporting it, keep all of our existing customers who are using it happy and making sure the platform is robust and doing all things it needs to do, but there certainly is a big push in the market and strong demand for Revio.

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

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

Got you. Helpful. Thank you very much.

Yes.

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

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

Well, I think, Dan, we -- we're not going to comment on that today. I think we have to see how things unfold. Obviously, the MAS being able to run four smart cells at a time, 24 hours a day, seven days a week gives us an incredible opportunity. And it's actually really, really important to driving the gross margin story over time because that product mix will change where consumables will become a much larger portion. But on today's call, we're not going to speculate on exactly what that number is going to look like in terms of pull-through nor the relative revenue mix. I think we've learned -- at least I've learned over the course of my career, that you have to watch the consumables pull-through for several quarters before you, kind of, have confidence that you can nail down what that is. But there's no doubt that Revio gives us a new -- is an inflection point. And there is also no doubt that there's elasticity of demand in the market for long-read samples, and they're going to come from two spots. They're going to come from new demands for new projects and transitioning -- others transitioning from short reads to long reads because the economics are such that they can see the whole picture for economics that they can afford at a scale they can handle. So, I think there's plenty of samples in the world for us to go after, and we'll see how that transitions. You're right -- and as you said right at the beginning, that's not really the metric. It's really when you look out four quarters from launch, let's say, how are we doing at that point. Hopefully, that helps a little, Dan.

Yes, definitely. And then maybe just one other -- we can look at what the RS to S1 and S1 to S2 happened. But in terms of the number of placements that have occurred and the pull-through that's occurred, but you talk about a whole new trajectory for the company. I guess it's a long way of saying, when we look at the growth in the installed base and how each successive box expanded that installed base by kind of by a factor, maybe one and they have twofold, is it fair to say like maybe the old playbook you throw out the window because now you're at a point where you really are like maybe if not linear, like you're tapping into new markets and new opportunities that you really couldn't penetrate even with the RS, the S1, and the S2.

Yes. I think that -- I do think that it is a new playbook, for sure, for a couple of different reasons. The first reason is that we spent the first part of my tenure here building out a new commercial infrastructure that is prepared to hit the whole market immediately as opposed to what the company has done in the past. And I think that can't be underestimated. All of this strategy -- all of this is very consistent with the strategy that I've laid out for everyone from the first day I got here, was build a commercial infrastructure, build a multiproduct portfolio and then collaborate with others really well so that you could demonstrate the power of HiFi, and this is just another part of that. And so I fully expect the commercial organization to leverage that to give us a stronger inflection than what's happened in the past. And I do also think that the market itself is so much bigger than it's ever been. And so -- and the interest in HiFi in particular, because it is so accurate and provides all of the benefits of completeness and structural variation and epigenetics, which are all going to be really important to disease research then translate and translational research into actual clinical application, where we get that long-term durability. And so yeah, I do think – I think you've got to change the playbook, because we've changed the company pretty significantly.

Great. Thanks, Christian.

Yeah.

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

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

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

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

I think it's a little bit of everything. I mean, basically, we're just broadening our reach and our footprint pretty generally across the space. But I can take a specific examples of population scale programs that are either underway or being contemplated now that Wow, Revio should be a bigger part of that than they ever thought maybe PacBio should be or if we'd be even in the game at all. So I would say, that's one really exciting area. I do think that kind of continued translational research in rare and undiagnosed disease, this gives better price points, faster turnarounds, better, more data. And so I think that there's real opportunities there. And we have had a lot of customers ask us about two things. The Revio, the Revio, Sequel IIe bundle, because that's a short-term program that we have, so people can get into Sequel IIe. We've had some interest in that. But also interest in the Revio, the Revo, Onso bundle. And what's cool about that is that at list price, it's still cheaper than some of our competitors' larger systems and gives you best-of-breed capabilities in long and short reads. And I don't think that's lost on customers. I see -- I think they have a view of, wow, if I can get best-of-breed solutions and then from one company that it's actually a pretty intriguing opportunity. We'll see how it actually plays itself out as we get Onso closer to actual shipments. But there definitely is a lot of excitement about that.

Perfect. Okay. Thanks, Christian. Appreciate it.

Yes. Thank you, Kyle.

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

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

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