Ladies and gentlemen, thank you for standing by, and welcome to the Pacific Biosciences of California Incorporated First Quarter 20 20 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your first speaker today, Ms. Shravan Rard. Ma'am, please go ahead.
Good afternoon, and welcome to the Pacific Biosciences' Q1 2020 conference call. We hope that you are keeping well during this time. We're hosting our call from a number of different locations today, so please bear with us if there are any technical challenges or pauses. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or alternatively as furnished on Form 8 ks available on the Securities and Exchange Commission website at www.sec.gov. With me today are Mike Hunkepiller, our Chief Executive Officer Susan Barnes, our Chief Financial Officer and Ben Gom, our Vice President of Finance and Treasurer.
Before we begin, I would like to remind you that on today's call, we may be making forward looking statements, including plans and expectations relating to our financial projections, products and other future events, such as the impact of COVID-nineteen pandemic on our business partners, customers and employees and the use of our products in COVID-nineteen research. You should not place undue reliance on forward looking statements because they are subject to assumptions, risks and uncertainties and may differ materially from actual results. In particular, the extent of COVID-nineteen's continued impact on our business will depend on several factors, including the severity, duration and the extent of the pandemic as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed reports on Forms 8 ks, 10 ks and Form 10 Q. Pacific Biosciences undertakes no obligation to update forward looking statements.
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 may change materially after the completion of our live call. I'd now like to turn the call over to Mike.
Thanks, Trevon. Good afternoon and thank you for joining us today. On this call, we will review our results for the previous quarter as usual. We will also describe how the COVID-nineteen pandemic has impacted our business and how we have been responding. I'll start with some highlights of our Q1 2020 financial results.
Consumable revenue for the quarter was $8,300,000 up 6% from Q1 twenty nineteen and down 11% sequentially from Q4 twenty nineteen. This result was generally in line with our expectations going into the quarter. As anticipated, our consumable sales into China were down sequentially due to seasonality and early impacts of customer shutdowns in China due to COVID-nineteen. Meanwhile, our consumable sales in the U. S.
And Europe were generally strong for most of the quarter with customers only starting to cut back in the latter part of March. Instrument revenue for the Q1 was $4,000,000 down 28% from Q1 2019. Our instrument revenue was negatively impacted by COVID-nineteen as many customers postponed taking delivery of instruments they had ordered. Our instrument sales and installs are usually weighted heavily towards the end of each quarter. However, as customers across the U.
S. And Europe began shutting down their operations in March, we were unable to complete numerous installations. We ended the quarter with an installed base of 125 SQL2 systems. Total revenue for the Q1 was $15,600,000 down 5% from Q1 2019. In the early part of the quarter, we expected our Q1 revenue to increase compared to last year.
However, this was before COVID-nineteen had begun to spread in areas outside of China. The picture changed drastically in mid March as many of our customers in the U. S. And Europe shut down operations. As a result, the revenue we generated in the last weeks of the quarter were much weaker than usual.
Gross margin for the Q1 was 48%, up from 31% in Q1 twenty nineteen and up from 46% in Q4 twenty nineteen. Per the terms of the merger termination agreement with Illumina, we received a total of $132,000,000 from Illumina during the Q1, out of which we recorded $34,000,000 as non operating income. As a result, we generated positive net income of 1 point We ended the quarter with $142,600,000 in cash and investments on hand. Now I'll provide a few comments regarding our current state of operations. Our headquarters and manufacturing facility is located in one of the countries that first issued counties that first issued shelter in place orders on March 16.
These orders forced many businesses in our area to shut down. However, essential businesses have been permitted to continue operating. We are considered an essential business by virtue of the fact that we are a life sciences company that supplies other essential businesses with tools and consumables necessary for them to carry out critical activities. However, for the safety of our employees and those close to them, we are having the majority of our employees work from home. We have maintained limited on-site operations at our Mineral Park facility to provide a continued supply of consumables and instruments to our customers who are still operating.
A certain number of our employees in the field are also providing on-site support to customers as needed. In addition, we are continuing to conduct certain research in wet lab activities, largely in support of efforts related to COVID-nineteen. I'd like to acknowledge the efforts of all the employees who are working to ensure that our customers can continue their important work on COVID-nineteen and other essential areas. Now I would like to offer some perspectives on how PacBio's products and technology can be useful in the fight against COVID-nineteen pandemic. First of all, the high demand in the near term for testing individuals to see if they have been infected by the virus is not an application suited for PacBio's products or other sequencing technologies.
Such tests are based on reverse transcriptase polymerase chain reaction or RT PCR, which can generate a relatively fast inexpensive diagnostic test from a sample taken from an individual. PacBio's products on the other hand can be valuable for studying how the virus responsible for COVID-nineteen, namely SARS CoV-two evolves over time. Viruses in general tend to mutate over time in order to adapt to their environments. Researchers can sequence different samples collected at different times within an individual, within a community or across regions in order to track how the virus may have evolved or how the virus has spread across different regions, identifying which strains of the virus are present. PacBio sequencing technology can be particularly valuable for this type of research because it allows researchers to easily detect multiple mutations in an individual virus genome with very high accuracy.
As an example, we have partnered with LabCorp, who is well positioned to conduct studies on the SARS CoV-two virus using PacBio sequencing systems. LabCorp is already an experienced user of smart sequencing for applications in human biomedical research, and we are pleased and honored that they are expanding their use of our products for COVID-nineteen research. In the future, as scientists and researchers develop antiviral therapeutics to combat COVID-nineteen, it will also be valuable to understand how the virus may mutate in its response to both drugs and vaccines. Another valuable application for PacBio sequencing is the analysis and study of the host immune response to the virus. Researchers can sequence the genomes of people who have been infected with SARS CoV-two to identify antibodies that these patients have generated to fight the virus.
The study of protective antibodies in recovering patients can be very valuable in the ongoing development of vaccine candidates. Researchers are also interested in studying the genetic background of host to understand how different people are affected by exposure to the virus. While we have seen how exposure to the virus can be deadly for some people, others who have tested positive have experienced very little negative impact. The explanation for why there is such a wide range of reactions across different hosts may be hidden in the underlying differences within the host genomes. PacBio sequencing has proven to be a valuable tool for sequencing the complex regions within the human genome that control immune response.
We are proud to be serving multiple customers who are engaged in various studies aimed at fighting the COVID-nineteen pandemic. That said, in the near term, our business has decreased significantly. At this time, a majority of our customers with SQL and SQL2 systems have shut down most of their operations. And it is difficult to estimate when these sites will come back online and resume running the PacBio systems. It will likely vary region by region and state by state.
In the long run, we remain confident that the demand for high value pet bio sequencing will continue to increase. We are privileged to provide a technology that can truly make a difference science and society, and we're seeing that play out today with our customers' response to the COVID-nineteen pandemic. Before concluding my initial remarks, I think it's worth noting that while much of our time and energy today is being spent on the response to the COVID-nineteen pandemic, Our traditional customers who are working on diverse areas, including human biomedical research and plant and animal sciences have made tremendous progress using PacBio tools and products in the past several months, generating the most accurate and comprehensive genomes in their respective fields. We assure you that we continue that we will continue to push on improvements to our products and the advancement of smart sequencing into a growing number of applications. We look forward to reengaging with a lot of our customers who are temporarily adhering to stay at home orders when they are able to return back to their labs.
I will now turn it over to Susan to provide more details on our financial results.
Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with a financial overview of our Q1 that ended March 31, 2020. I will then provide details of our operating results for the quarter with a comparison to Q1 of 2019. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our Q1 2020 financial highlights.
During the quarter, we recorded revenue of $15,600,000 and recognized net income of $1,300,000 We ended the quarter with $142,600,000 in cash and investments. Turning to revenue, The $15,600,000 of product, service and other revenue in Q1 of 2020 was 5% lower than the $16,400,000 of product, service and other revenue we recorded in Q1 of 2019. Breaking down the revenue. Instrument revenue recognized in Q1 2020 was $4,000,000 down from $5,600,000 recognized in Q1 of 2019. Consumable revenue for the Q1 of 2020 was $8,300,000 up from $7,800,000 reported in the Q1 of 2019.
Service and other revenue was $3,300,000 in the quarter compared to $3,000,000 in Q1 of 2019. With regards to gross profit and margins, in Q1 of 2020, we generated a gross profit of $7,500,000 resulting in a gross margin of approximately 48%. This is up from $5,100,000 of gross profit and 31% gross margin in Q1 2019. Moving to operating expenses. Operating expenses in the Q1 of 2020 totaled $40,200,000 compared to $35,300,000 in Q1 of 2019.
This increase was primarily $1,000,000 advisory fee incurred in conjunction with the termination of the merger agreement with Illumina. Non cash stock based compensation included in operating expenses was $3,500,000 in Q1 of 2020, down from $3,900,000 in Q1 of 2019. Breaking down our operating expenses. R and D expenses in the quarter were $15,300,000 slightly down from the $15,500,000 incurred in Q1 of 2019. Sales, general and administration expenses in the quarter were $24,900,000 up $5,100,000 from the $19,800,000 in Q1 of 2019.
This increase was a result of $6,000,000 advisory fee I mentioned earlier. In Q1 2020, we recorded a $34,000,000 gain below the operating income line. This was a result of the continuation advances we received from Illumina. Larger as a result of the $34,000,000 gain, we recorded net income of $3,100,000 in Q1 2020 compared to a net loss of $30,300,000 in Q1 of 2019. Turning to our balance sheet.
As I mentioned at the beginning of my comments, our balance of unrestricted cash and investments was $142,600,000 at the end of the first quarter compared with $49,100,000 at the end of the Q4 of 2019. This increase was primarily a result of the 130 $2,000,000 received from alumina, which was a combination of $34,000,000 of continuation advances and a $98,000,000 merger termination fee. Inventory balances increased in Q1 to $16,100,000 from $13,300,000 at the end of Q4 2019. Accounts receivable decreased in Q1 to $7,300,000 from $15,300,000 at the end of Q4 2019. And finally, in February 2020, the debt we had outstanding under the facility agreement matured.
We repaid the principal balance of $60,000,000 to retire it. This concludes my remarks on the financial results for the quarter. I would like to turn the call over to Ben.
Thank you, Susan. In light of the uncertainty caused by the COVID-nineteen pandemic, we will not be providing a revenue forecast. That said, we are continuing to experience the headwind caused by the pandemic. As Mike mentioned earlier, a majority of the sites with PacBio Systems are currently shut down. At this time, we are not able to predict when the sites who have shut down will resume their normal operations.
We are still supplying those sites that are running with consumables. Moving on to gross margin. We were pleased to see the improvement in our gross margin during the Q1. For most of Q1, we were running our manufacturing facility at a production rate and output level similar to that of Q4. However, since the middle of March, we have significantly reduced our manufacturing output, leading to idle capacity.
As a result, we expect our gross margin to decrease significantly in the near term. Now moving to operating expenses. In Q1, we recognized a onetime expense of $6,000,000 related to the termination of our merger agreement with Illumina. Since there are no further such expenses scheduled to occur, we expect our operating expenses in subsequent quarters this year to be significantly lower than what we recorded in Q1. Below the operating income line, we noted earlier that we received the $98,000,000 reverse termination fee from Illumina in Q1, but did not recognize this as income in Q1.
We anticipate recognizing this as non operating income later in the year. In addition, since we retired our debt in February, we will no longer be incurring the interest expense associated with it. Finally, regarding our cash, we ended the quarter with $142,600,000 in cash and investments on hand. While this represents a higher cash balance than what we have had over the past several years, due to the ongoing uncertainty in our sales as a result of the COVID-nineteen pandemic, we are not providing a specific forecast of our future cash usage at this time. That concludes our prepared remarks, and we will now open the call up for questions.
The first question is from Doug Chenko of Cowen. Your line is open.
Hey, guys. This is Togo on for Doug. 30% of your sales are from Asia Pacific and much of this is in China. How did revenue progress in China over the course of Q1? I know it's a good fit, but now that it's stabilizing, how has it progressed through April?
And what does it study over the outlook for the rest of the year for sequel replacements and utilization? And have a couple of follow ups.
I'm sorry, but I only caught about half of what you said there. But I gathered is that you're asking how do we see the revenue plus or minus going forward. Is that correct?
Yes, I'm trying to. Yes, that's correct.
Well, as Ben noted, I think that the issue for us is, we ended last year in what we thought was a pretty strong position. The success of our SQL 2 introduction about this time last year, really at the end of April, and particularly the success of the HiPhi chemistry approach that we demonstrated on that system that gives highly accurate long reads for the first time put us in a pretty strong position. And the COVID-nineteen obviously caught everybody off guard in that. And while we have a lot of customers operating right now still, although the number of sites has gone way down, They're mostly focused on COVID-nineteen or very closely related activities And they've cut down a lot on the other kind of things that were a lot of the bread and butter of our customer base. And how fast we recover from that is totally dependent upon how fast the sites are able to get up and running.
A lot of our academic customers, for example, unless they were doing research in this area, had been impacted pretty strongly. And it really is dependent on when the reopening of the world, particularly in the U. S. And Europe happens. China, given that's where it started, has actually come back earlier than the rest of the world for us.
And so it's hard for us to give a meaningful forecast until we get a better sense. As the U. S. And some of the countries in Europe are starting slowly to reopen, we can get a better handle on what the uptake timeline is going to be. But right now, that's really difficult, I think, for everybody around the world.
So then based on your commentary, thinking about Q2, China may be turning into a tailwind. How should we toggle between these as we think about updating our models?
Well, to be honest, your guess is as good as ours at this point. It really is because a lot of our businesses is obviously in the U. S. And Europe. China is an important customer for us.
But we saw the certainly on reagents. And we mentioned that in the last certainly on reagents and we mentioned that in the last conference call. But it's really been the downturn in the U. S, in Europe and other places in Asia that impacted what we're seeing now. And it all depends on whether a light switch gets flipped, which I'm certainly doubtful of, the kind of slow uptick of people getting back into an operating mode.
And I don't think the U. S. Government understands that enough to give good projections and certainly we don't.
Okay. And if I might
just add add. I just might add. Within the quarter, obviously, China was the first to get hit and we saw China's utilization of systems go down sharpest in February. But within the quarter, China did start coming back. And maybe not exactly to where it was, let's say, in Q4, but it's come back a pretty fair amount.
So I think one of your questions was, particularly how we've seen things in China. And I think Mike alluded to it before that it has come back quite a bit.
Okay. That's encouraging. And I have one last tough question. As the pandemic hit, you were just about to progress with broader commercial efforts with presumably additional hiring. And while managing cash makes sense, on the other hand, you also want to be ready to place and support instruments when things do get back to normal and once everything starts to look encouraging.
So and it takes time for new hires to become efficient. So how do you balance between these seemingly conflicting dynamic?
You want to take that one, Ben?
Sure. So as we mentioned in our last call, we did set out in Q1 to hire some more folks in the field. And in fact, we are pleased with our ability to hire some of those people over the past few months. So we are making some progress there. I think we also mentioned that it takes time to actually bring those people on board.
So it's probably going to be something that we're going to continue to work on. Generally speaking, in terms of your point is watching expenses, some of the things that we can do right away is, we're shipping less product and as just to balance out the sort of supply and demand, we're also receiving less product. So that helps. Obviously, we are currently saving on things like travel and utilities. But at this time, we have not instituted anything draconian like reducing headcount.
We've maintained our headcount.
Got it. That's helpful. Thank you, guys.
The next question is from Rachel Van Dao of Piper Sandler. Your line is open.
Hi, guys. Thanks for taking the questions. So my first question is around the installed base. So can you talk about how placements were tracking relative to your expectations prior to the slowdown in March? And then can you give us any incremental color on the orders you received that you couldn't place those last few weeks due to the shutdowns?
And then I have a
few follow ups as well. I can give you the qualitative thing and then and necessary Ben can add to that. So as Ben pointed out, we do, as most instrument companies do, tend to do a lot of their instrument installs late in the quarter. And I think that until sort of the early part of March, we were kind of tracking on what we expected to be able to do in that space, even with the uncertainty that was growing at that point in China. But the minute that in particular the U.
S. Country started shutting down, a lot of the universities started closing up, the ability to just to get into sites to do installs just changed overnight. And that kind of put us up and you can kind of see that a little bit by the fact that our inventory shot up more than it normally would. And it hits you in 2 ways. 1 is you can't get in and do installs.
The second is that just arranging for those that you can winds up being slow. Air travel got a little more confused. The ability to even if somebody wanted the lab and still had their lab open to get through the bureaucracy who wasn't an employee of the site, could become an issue. And we certainly saw that in the last month a lot. Relative to new orders, we feel pretty confident about where we're going there from a pipeline.
But right now, in all these places, since they're effectively shut down, you don't even have a purchasing operation there for a lot of things. And so it's obviously been a spongle. But from everything that we've seen, we haven't lost opportunities. It's just been that the process is either blocked or very, very slow.
Yes. I don't have much to add to that, Rachel. I mean, we did end up with installed base of SQL2s at the end of the quarter of 125, which means that we're actually only able to complete installs of 11 SQL Twos during the quarter. As Mike mentioned, we tend to do a fair amount at the end of the quarter. And that's why it ended up being a pretty small number for Q1.
Got it. Yes, that all makes sense. Thank you guys. Next, can you just kind of walk us through what you're seeing for customers upgrading from SQL 1 to SQL 2? Obviously, I'm sure that was disrupted given the same comments that you said to my first question.
But in the 1st few weeks of the quarter where things were more normalized, was that transition happening faster or slower than your expectations?
Well, the upgrades can come in 2 forms. There are people who with limited budgets have an old instrument upgrade where we go in and do part replacement and so forth to bring a SQL1 up to a SQL2. You might expect that's even more difficult in these times because that's a process that in a lab can take as much as a week. And so that has been pretty well stopped while we're doing this for most of these sites. We just don't have the opportunity to get in there that long.
And so the alternative is people, they've had a SQL1, they've been happy with it, but they want to increase performance strictly on a throughput perspective of the SQL2. And there they're buying additional SQL2s. And we still see that happening in a limited way, given the other constraints of a lot of people being shut down. So either upgrade path has been slowed down in the same way that a completely new customer has been slowed down. I mean, that said, we have had individual sites who, if they were really actively involved in COVID-nineteen research, maybe push forward a little bit their purchase or an upgrade of a system.
Great. And then last question for me. So I appreciate all the comments on China as to some of the first questions. But so looking at their consumables usage starting to come back given they had an earlier onset of the COVID breakout. Can you tell us about any of the trends you're seeing in consumable usage in the U.
S. And Europe from the trends from late March to now April early May? You started to see it rebound at all, for example. Thank you.
I'll let Ben handle that one. But I think in general, certainly this month or last month has been much slower in the U. S. And Europe than it would have been. I mean, that's where the impact really start to get felt in those areas.
It's right at the beginning of April.
Yes. The only thing I would add is, it dropped fairly rapidly in the U. S. And Europe. But I would say it's stabilized in terms of the utilization that we're able to kind of monitor that.
It has been fairly stable on the sites that are still open throughout the really most of April. So we're looking forward to when the other sites are actually able to reopen. But it doesn't look like we have any sort of continuing trend of, say, more people shutting down.
Yes. I mean, it adds up pretty quickly. And what you saw is that people, a lot of them who continue to operate were ones who were switching what they were working on in terms of the samples they were sequencing because people were doing other things on the system and they once they got back up even working on their systems, it was to use projects that are focused around the pandemic response to a large degree, not completely, but in the U. S. And Europe mostly.
Great. That's it for me. Thank
The next question is from Kyle Mixon of Cantor Fitzgerald. Your line is open.
Hi, thanks for taking the questions. So last call you guys mentioned plans to release chemistry and software upgrade throughout the year. Just given the near term uncertainty due to the pandemic, will those upgrades be delayed or maybe adoption is going to be a little bit more muted? Just kind of trying to understand how COVID is going to affect the timelines going forward? Thanks.
Well, we were ready for a software release at the beginning of this quarter, which we have ready to go, but we delayed doing it since so many people are shut down. And the other a lot of the ones that were still going were obviously doing critical projects and didn't want to interrupt that in the short term. So that in a sense is from a development perspective ready to go, but we will look at what the right time to get that out there is. The bigger issue for us is getting the throughput up and our goal for the year has been to get and still is to get the point where a single cell run is enough for a quite good human genome level look at variation in the genome structure of an individual and to get that down from the sort of 2 cells it takes now to down to 1, particularly if we're looking for structural variance. And that's still our goal for this year.
It may be a little bit later in Q4 than October 1 date, but we're still targeting that. And we're starting to get back a little bit more into the lab to continue working on that. People have been able to do a lot of the planning to get ready for that while we're shut down. But I think they're pretty much planned out at this point with video conferences. And so we've begun to open up the labs just in the last week a little bit more to get people going to make sure that we meet those timelines.
Okay, perfect. I was also wondering, like how much inventory your customers are holding and what's the shelf life of the consumable products? Just I'm trying to understand how long customers are going to have before they have to start reordering and that's going to affect consumables throughout the year.
You want to take that one, Ben?
Sure. I would say even though it varies, plus or minus, customers usually try to target around a month's worth of inventory. And our shelf lives on our products are typically we shoot for 6 months or a little bit more than that. So there shouldn't be that much of a, let's say, delay when people are back up and running for people to kind of run through whatever inventory they have and need to reorder.
Okay. That makes sense. And then just one housekeeping question. Can you break out the consumables revenue in the quarter for SQL 1 and 2?
So we broke that out in the Q4. And actually, in the Q1, it was kind of similar. So SQL2 represented at least 50%, a little more than half. And SQL1 was around 40%. So it's pretty stable from where it was in Q4.
Yes. We do expect that to continue to evolve. A lot of the some of the diagnostic labs that were using the system to do COVID-nineteen work we're on SQL-1s. And so there was probably a disproportionate from a normal perspective, uptick in the sales there for consumables. But we're even there, we're starting to see these people start to switch over to the higher throughput, SQL2 systems.
They just take longer than a research lab because they have to go back and validate any new instrument that they're going to use for testing.
And sorry, I should have said that the remainder was RS2 and the RS2 component is less than 10%.
Ben, what did you say for SQL 1? I think I missed
that. So in the Q1, SQL1 comprised around 40%, maybe a little bit more than 40% of the total consumables.
Okay, perfect. Thank you.
There are no further questions at this time. I would now like to turn the conference back to Mr. Mike Hancopuller. Sir?
Thank you. In closing, we remain steadfast in our commitment to bringing the advantages of our smart technology and products to our customers and scientific community. We believe that smart sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance and sequencing accuracy, uniformity of coverage, long read lengths and ability to characterize DNA based modifications. These attributes can be particularly important to understanding the complicated mutation patterns in evolving viral populations as well as the genetic characteristics of host immune response to viral infection. I'd like to acknowledge the team at PacBio who, despite the challenging environment brought about by the COVID-nineteen pandemic, have responded in fantastic fashion to assist in the global pandemic response.
Thank you for joining us and we look forward to talking again in 3 months' time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.