Great. Good morning, everybody. I'm Luke Sergott. I cover life science tools and diagnostics here at Barclays. It's my pleasure to have Susan Kim, CFO of PacBio. We're just going to start digging right into it, I guess. So let's talk about Revio placement expectations, how that's trended versus what you guys originally had in the model, and then kind of walk us through the dynamics from 3Q, 4Q, and then what's embedded at 1Q.
Yeah, happy to do so. Before I get started, I do have to say that I may be making forward-looking statements, so I refer everyone to our SEC filings, as usual. I also would like to thank Barclays and Luke for hosting PacBio at this conference. For those of you that are new to PacBio, Revio is our flagship long-read sequencer, and Luke's questions are certainly about the Revio platform. We announced and launched that platform at the end of 2022, and then we started shipping in March of 2023. So we've had about kind of 10 months, nine to 10 months, in the year of 2023 in terms of shipping that platform, and the reception has been phenomenal. So we're very excited. It's our most successful product launch in the history of PacBio.
We shipped 173 instruments in the year, 96 in the second half of last year. So certainly, a very strong start to the Revio platform. And it is true we're just getting started. Now, looking ahead to Q1 and this, the beginning part of this year, we are seeing that macro pressures are putting pressure in terms of the capital budget for some of our customers, which is making the sales cycle take longer to close an order for a capital purchase. And so therefore, there is some pressure, certainly in Q1, and what we've guided for the year is that shipments will be sequentially down relative to Q4. But we are very excited for the fact that we're just getting started on the Revio platform.
Okay. So when you guys started the launch 10 months ago, talk about how the backlog dynamics kind of shaked out, shaked out, I guess it's proper grammar, and then how you guys are seeing the backlog building now. Before, it was like you didn't want to have a backlog because you wanted as many boxes in the place, and now you're starting to talk about building a backlog to catch momentum in the beginning of the year. So what's changed in the strategy or what you're seeing to have to do that now?
So it is true that, once we launched the Revio platform, we actually had record backlog starting into 2023. The end of 2023, starting 2024, our backlog is at $19 million. So it's still a relatively strong backlog. And our goal is not necessarily to grow the backlog, but we are trying to grow the our focus is on growing the Revio install base, and so that means that the pace of orders and the shipments at which we start to ship the instrument are closer together than what we saw in 2023. Looking into 2024, we are expanding the Revio install base from a number of different places. Certainly, new customers is a big component of our growth this year. Last year, 40% of our orders came from new customers. We do expect that to grow, maybe upwards up to 50% or maybe even more.
Existing Revio customers also looking to expand their capacity on Revio will be a source of opportunity for us. We saw that already in the first nine months of shipment where customers would purchase their first Revio system and then go on to purchase their second and even their third and fourth, even within that first nine months. So that'll be an opportunity for us to place shipments in 2024. And then, of course, our existing customers who haven't upgraded to Revio will be an opportunity for us to get some orders this year as well.
Then all those existing customers, you know, that haven't upgraded yet, give us a you know, obviously, there's going to be different kind of install base Sequel IIe, but what are you seeing from swap rate? Is it three to one? Is it two to one? Why haven't they upgraded yet? Just kind of what's on that existing customer base, the dynamics.
Yeah, actually it tends to be a lot of different reasons. So one-third of our Sequel II customers have upgraded to Revio, so two-thirds still have not. And a lot of those customers want to see how the first batch of Revios are running, want to see the data out there. And then some may be dealing with the capital budget concerns, and some may be deciding, "Hey, I just purchased a Sequel II. I'd like to run it for longer." So there are those aspects. But we do expect that the majority of the Sequel II customers will upgrade to the Revio platform. Just given the dynamics of the economics and the throughput, it makes a lot of sense to move to the Revio platform.
If I look at the makeup of the install base of the Revio, it's roughly about the number of customers if I think about the number of customers, it's about one, 1.25 to 1.5. So some of those customers have purchased multiple Revios, but we also have many customers that have still only purchased one Revio.
Okay. And then we noticed that you're running a promotion, 50% off on the Revio instrument if you have the premium on the SMRT Cell. You buy the, you know, 384 SMRT Cells at $1,400. So kind of walk us through the strategy behind this, and why you're, you know, is this an attempt to try and shorten that sales cycle you were talking about? Just give us a sense of the, you know, the trajectory here for that.
Yeah. So we wanted to be creative in this, a macro environment where capital budgets are a bit more constrained to continue to have the conversation with customers, to find a way to see if there is a way to work within the constraints that our customers are operating within. So if capital budgets are hard to get approved, can we work with our customers to structure a bundle that enables them to pay less on the capital, but then we get paid back on the consumable side?
And so, at the end of the day, this is something that the total economics of that bundle look very similar to our traditional instrument sale and then consumable sale, but it's also showing a willingness and giving our sales force a tool that we'd like to work with our customers to see if there's an opportunity to still, if they would like a Revio, that we could get a Revio in their labs as soon as possible.
So with that strategy, I mean, you have a—there's those labs are doing a lot more than just long-read. So is this also in response to the competitive environment from short-read, the new instruments, you know, the NovaSeq X Plus, the X? Then you have the spatial comp, you know, the instrumentation there. So, you know, is this more of like, "Okay, if you guys don't have the CapEx budget to buy the full-price Revio, we'll be able to kind of penetrate that as well"? Is that fair?
It, it's less about the competitive dynamic, but it's more about making sure that we continue to have the conversation and the dialogue with the customer to better understand the constraints that they may be working within, and then also see if we can come up with a solution. At the end of the day, the economics are the same. The cash flow may be a little bit different, but we're starting the year very well capitalized with enough cash on our balance sheet that it was okay if that cash is spread over, for example, 12 months versus getting a lot of it upfront.
And so we wanted to just have that dialogue and make sure that the conversation didn't stop with the fact that, "Well, my capital budget is frozen right now," and just at least start to have more of a dialogue with our customers.
Okay. And then from a utilization perspective, what's you know from a pull-through, when you're looking at the number of samples coming through, you know a regular installed base again, obviously, it's going to be very widely, but just as you you know bucket the user into like a low throughput, medium throughput, high throughput, give us a sense on the type of volumes that you guys are getting through those.
Yeah. So on the Revio platform, the theoretical max in terms of annualized consumable pull-through can be over $1 million, $1.3 million in terms of the extreme max. But we see a wide distribution right now in terms of utilization. We certainly have the high utilization customers that are utilizing their Revios, 60%-80% utilized in 80%+. And then we also have a long tail of customers that are just getting ramped up on their Revios. So it's kind of a it is a mix. The high utilization customers, kind of the 20%, the top 20%, really make up kind of 80% of the consumable revenue. So we still see that dynamic even with the Revio install base.
But right now, one of the phenomena that we're seeing is kind of quarter-to-quarter changes with respect to the consumable annualized pull-through on the Revio install base. And that has more to do with the fact that the install base is growing, and so the law of averages, each incremental shipment can have a bigger impact on the average pull-through. So right now, we haven't guided an annualized pull-through for the year, but we have talked about quarter to quarter, it could be within the range of $300K-$400K.
Then how, when you have the discount and you have the essentially guaranteed sample volume come through, so break-even's about 1,600 samples, give or take, you know, whatever it is, but how does that impact on that pull-through? Are these customers, when they make this order, is it going to be they basically get a full inventory of that, or is it going to be, "This is your minimum that you're going to have to order throughout the year"? Just as a follow-up from the dynamic.
in terms of the promotion?
Yeah.
So, in terms of the promotion, it is essentially for a year, for example, it might be 50% off the instrument price, but then the consumable list price I'm sorry, the consumable price is 40% higher. And so then, therefore, the total economics over a year come out to be the same as long as the customer purchases, for example, in that scenario, 385 SMRT cells. And so the economics ends up being the same.
But what ends up on the P&L is that the accounting, because the relationship with the customer is the same, the timing of the cash flows may be different, but the customer still owns the capital, and we, of course, support in terms of the warranty requirements and then, of course, ship the consumables on a shipment schedule over 12 months, that that bundle gets accounted for very similar to a traditional bundle a customer might purchase. And so the revenue gets allocated according to basically our typical selling price on the instrument and then also our typical selling price on the consumables. And so you actually won't see an impact on the P&L because of these promotions.
Okay. So it shouldn't make any, like, increased lumpiness in your pull-through.
It won't change the pull-through dynamic.
Okay. Cool. On your guide, you know, 55% of revenues in the second half, pretty sizable step up here, especially when you're, you know, understandable when, you know, middle of the launch, and the first year is obviously going to be a little more capital, you know, tight on the CapEx budget. So just kind of walk us through, you know, the underlying dynamics, what you're seeing, and how you guys came to that step up for that back half, especially on the consumable side.
Yeah. So the back half of 2024 does not necessarily need to increase in terms of the average run rate of the annualized pull-through. Our consumable revenues will grow because our install base has grown. And so that's a large factor when we thought about guidance for the year. And so what you're seeing is that the consumable revenue is growing fast, faster this year, and so the volume of consumable is nicely helping in terms of our growth margins as well because the revenue mix is more concentrated on consumable revenues compared to 2023.
All right. Okay. And then, as you know, walking through the rest of the guidance, you know, 4Q growth margins came in, you know, you had a bunch of inventory impacts there. So, kind of walk us through what the proper jump-off point from 4Q is into the full-year guide that you guys are looking for.
Yeah. So, for 2023, we did have some one-time charges, the bulk of which was, in Q4, related to Sequel II inventory, excess Sequel II inventory that we had on the balance sheet that, with the transition to Revio and, a faster transition to Revio than what we had originally anticipated, that resulted in a faster decline in terms of the Sequel II demand. And so there were some write-offs that we took, especially in Q4. Over half of the write-off in Q4 was instrument inventory related. And in fact, that was related to one customer in China that had brought down their forecast for Sequel II. And then the rest of it was related to consumable inventory where we took a write-down. And keep in mind that for every incremental Revio demand, that's actually the equivalent of three Sequel II chips.
And so then you have an accelerating decline in terms of the declining demand Sequel II. We spent a lot of time in Q4 making sure that we had cleaned that up. So we see that as something in the past, and it was a one-time charge for 2023 that we don't expect in 2024. If you normalize for that, then the growth margins are 34% for the year, and our guidance implies a midpoint of 37.5% this year. So you take out that one-time charge. We also have a number of initiatives that we have already started to help improve our growth margins for 2024. And maybe I'll take a moment to walk through some of that. I would say that there are four main initiatives in 2024 that's going to help improve our growth margins.
The first is the fact that we consolidated our San Diego manufacturing with Menlo Park manufacturing and so moved all of that into one location, which is Menlo Park. And so what that does is it helps to fill that factory and helps to lower the labor and overhead expense on a per-unit basis for all the product that we manufacture. So that is helping our gross margins. Another side is on the Revio instrument. There was an opportunity to better optimize what we do in-house versus what we outsource to contract manufacturers and reduce how much we were spending with contract manufacturers, on the order of tens of thousands of dollars that we are already going to see that benefit as soon as the Q2 shipments, which, which is great.
And then the R&D team has also been undergoing a number of development activities that helps to lower the component costs on the Revio instrument such that the material cost is lower. And those savings will be rolled out over the course of 2024. And then the fourth item is yields improving, especially when it with respect to our chip manufacturing. And so that's going to help improve our growth margins in addition to the dynamic I described, which was bringing all of the capacity into one factory. And then lastly, of course, the revenue mix being more consumable revenue helps to improve our growth margins as well.
Yeah. That makes sense. On the on the inventory write-down that you have from Sequel IIe, how much of like, give us a sense of what your Sequel IIe backlog looks like and, and why I understand that you took a big you, you looked at your existing customer base from Sequel IIe and it's like, "Okay, we have to write that down," but why would this be just a one-time, or why wouldn't this continue to be recurring if you are continued placing Revio and doing these slots? Have you guys been, like, proactive in, like, looking at all your customers, or is this just kind of what's in the backlog right now?
Yeah. So a lot of the orders in Sequel II are not carried in backlog. We tend to receive the order, and then we ship the Sequel II instrument. And so this is looking at the forecast and looking at our opportunity and getting that input from our commercial organization. And so we were very thoughtful about different scenarios in terms of what we think could happen. And I would say that we were very; we tended towards kind of being more on the cautious side with respect to how much Sequel IIs we'll place, again, just given the value proposition of Revio. And so a lot of that inventory has been written down, and so that's why I don't see it as recurring.
Okay. That's helpful. We talked a little about the new customers, but the big push here and opportunity for long read is going to be on the human side.
Mm-hmm.
So, talk about the applications that you're seeing really kind of from the long read perspective and, and Revio, where you're starting to get that penetration.
Yeah. So, the human segment, it's certainly an area in which Revio is very compelling for our customers, and it's the largest segment of the overall sequencing market, and it's growing and has healthy growth over the next handful of years. It's an opportunity for us to really make a meaningful traction in terms of long read penetration. We had released in our earnings that 40% of our revenues come from the human applications. And most notably within human is whole genome sequencing. One of the things that we talked about is with Revio, it gives our customers the ability to have the most accurate and complete picture of the genome, which makes it very attractive for human whole genome sequencing. And so we're seeing a lot of interest there.
A lot of our new customers are certainly looking at human applications, which has been very exciting for us and already looking at human applications in the clinical setting as well, which is an additional opportunity of growth going forward. Now, we're also continuing to help sustain demand for Revio by introducing new applications that can be utilized on the Revio. For example, last quarter, we announced the Kinnex kit, which is ours. It helps enable RNA-seq applications on Revio but also on Sequel II as well.
And so we expanded and improved the MAS-Seq application, that kit that we had previously, which was a collaboration with the Broad, which helped to concatenate very elegantly small insert size to have a longer insert such that you can then benefit from the HiFi sequencing technology that we have to be able to enable scientists and biologists to see the full isoforms, which you can't see with short-read sequencing. So very elegantly enabling transcriptomic studies for our customers. So there's lots of opportunities within the human segment that's going to be a growth opportunity for us.
How do you see pull-through and kind of demand on, you know, differing then from the more legacy type of customer on the smaller genomes between the human applications?
That's a great question. I think that in terms of, the pull-through, it's really a dynamic of the size of the lab and, and the size of the project. And that is one thing that's very exciting, in the current framework, having the Revio platform, is that the funnel of larger projects, has doubled even in the last several months. And these larger projects are thousands to tens of thousands of samples that can be enabled with Revio that was challenging for us with our Sequel II platform. And so it is the size of the lab, large genome centers, large service providers, larger projects that help to, increase the utilization and therefore the pull-through. And a lot of that is in the human space, I would say.
Mm-hmm. And then how does, on these large pop-gen projects that you're talking about, you know, how long typically does it take from when you guys win one to actually, you know, seeing the benefit in the P&L?
Oh, well, it can be all over the map.
Yeah.
And so it is a wide range. And so the funnel of larger projects, which are not only pop-gen projects, there are large, you know, rare and inherited disease studies, neurological studies, cancer research, even large, PAD projects that are kind of part of the opportunity that might come to us. And the timing of that is hard to predict and can be all over the map. We are very excited that the pop-gen project in Singapore that Christian mentioned at a previous conference earlier this year is getting started in April. And I think one of the things that we're excited by is just the ability to share more of that as it gets closer to the decision point and our ability to announce them.
But these larger projects are very strategic for us because it enables there to be more sequencing done, more data generated with our Hi-Fi technology, which helps to generate the flywheel of demand, which is certainly an important aspect of continuing to sustain the demand on Revio.
Is that, that large project is that content starting in April? Is that contemplated in the current guide, or is that?
Yes. So projects that we knew about are, you know, modest amount is contemplated within our guide.
Okay. All right. Let's talk about the LRP that you guys laid out the analyst day, and you're talking about Revio. So with growth, you know, your 2024 estimate here or guidance coming and above below that, that implies, you know, the out year's going to be a pretty sizable step up. So talk about the dynamics that you're going to, you know, underlying there, or is this kind of more, you know, maybe not 2025 but 2026 or 2027?
Well, so when we set out our long-term target, we talked about 40%-50% growth from 2022 with a minimum of $500 million of revenue out in 2026. When we set that target, we knew that some years would grow faster and some years would grow slower than that range. And last year in 2023, we grew above that range. We grew 56% in terms of the top line. And based off of our guidance, we are going to be below that range. And so there is some fluctuation in that. If you look at the midpoint of our guidance, that's essentially 30%, kind of growth rate off of that 2022 starting point. And then the top end of our range is within the range of 40%. So, there's certainly lots of opportunity out there.
Customers are so excited when they get their hands on Revio but then also Onso, our short read platform. So getting their hands on the data and being able to see more than they could before, one of the things that was very exciting is that at our commercial sales kickoff that we do at the beginning of the year, we had some customers come and do talks and talk about, you know, why did they choose PacBio? And the key takeaway was they're very excited by aspects of the genome they couldn't see before. And also, the message to PacBio was that we needed to keep doing what we're doing because the world needs our solutions.
Great. In that, you know, let's talk about the product development pipeline. After that, we just talked about the LRP. So you, you know, what's the plan here coming up over the next couple of years from should we expect the desktop in, you know, next year and then the following year like Revio 2.0? Just give us a development, you know, the overall R&D strategy.
Yeah. So, our product roadmap hasn't changed. Within our product roadmap is the fact that we are expected to have within the mix a desktop long read sequencer. We also, of course, on the short read side, Onso is our mid-throughput short read sequencer with that order of magnitude higher accuracy, Q40 levels of accuracy. And so within our product roadmap is also a higher throughput short read sequencer leveraging the same chemistry to get that Q40 level of accuracy. And so both are kind of products that we've talked about. The desktop unit on the long read side is very strategic for us to continue to increase our market penetration for long read sequencing. We get access to thousands and thousands of labs that are looking for more of that low-CapEx solution that can then start to do their own Hi-Fi sequencing.
So that also starts to accelerate market penetration and gives us an upgrade cycle or gives those customers an opportunity to upgrade from a desktop unit and in the future maybe to a Revio and then beyond for newer products we have at that point. So it is very important for us, and it's an important aspect of our future growth.
Great. Thanks for all the time.
Thank you.
Thanks.