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Pacific Biosciences of California, Inc. (NASDAQ:PACB) Q1 2024 Earnings Call Transcript

Pacific Biosciences of California, Inc. (NASDAQ:PACB) held its Q1 2024 Earnings Call on May 9, 2024. The company is not among the 30 most popular stocks among hedge funds at the end of the third quarter. The call was led by Todd Friedman, Senior Director of Investor Relations, with Christian Henry, President and CEO, and Susan Kim, CFO, also present.

During the call, forward-looking statements were made regarding the company’s growth potential, sales, and commitment to becoming a sustainable cash flow positive company by the end of 2026. The company also discussed its financial results for the first quarter, which fell below expectations due to delays in instrument purchases and softness in consumable shipments. As a result, full-year revenue is now expected to be in the range of $170 million to $200 million.

The revenue shortfall in the first quarter was attributed to elongated customer purchasing cycles, uncertainty surrounding funding for new capital equipment, and slower-than-expected ramp-up in sequencing by small and mid-sized customers. Despite these challenges, PacBio remains confident in the value of its platforms and its ability to capture market share in the sequencing industry.

Looking ahead, the company is focused on returning to revenue growth and has outlined its priorities for 2024. While near-term growth may be lower than originally anticipated, PacBio is optimistic about its long-term growth potential and remains committed to becoming a sustainable and successful company in the sequencing market. The call concluded with a question-and-answer session for analysts. In the first quarter, a higher number of customers than anticipated utilized their Revio systems at less than 20% capacity. Many of these customers are newer, with systems that are less than four months old, indicating that they are still in the early stages of ramping up their usage. The pace of this ramp-up depends on various factors such as sample availability, lab readiness, and funding. Measures are being implemented to help these customers reach full utilization as quickly as possible and to drive consumable growth.

Strategies are being put in place to accelerate instrument and consumable revenue. This includes focusing intensely on customers to drive new sales opportunities, close existing deals, and speed up consumable revenue ramp-up time. PRISM customer-focused roadshows are being launched to engage with PacBio users and genomics opinion leaders to showcase the groundbreaking science enabled by Revio.

Events are being organized in six global cities with over 1,000 registered attendees from 500 organizations, many of whom are potential future Revio users. The commercial organization is being streamlined to allow leadership to be more involved in the sales process. ‘Tiger teams’ are being established to work with low-volume customers to accelerate their Revio ramp and secure samples for sequencing.

Efforts are also being made to address the upfront CapEx barrier some customers face when considering HiFi sequencing. Promotions are being implemented to ease customers’ upfront CapEx requirements while preserving PacBio’s overall economic value. Product development is focused on a benchtop platform to lower the entry cost and potentially attract hundreds of new global customers to PacBio HiFi sequencing.

The market and applications addressable with Revio and HiFi are being expanded through the development of library prep and informatics solutions. New launches such as PureTarget and Kinnex are enhancing the platform’s value proposition. Future enhancements are being developed to reduce DNA input requirements, opening up more samples and projects to HiFi sequencing.

Despite facing challenges in the industry, PacBio remains optimistic about the business and the prospects for long-read sequencing. The demand for their products indicates a significant market opportunity. The amount of data generated by customers with their sequencers is increasing, demonstrating the growing utility and acceptance of HiFi technology.

Since the launch of Revio, the sales pipeline has continued to grow each quarter. The company believes that the current pipeline can support their revenue targets for 2024. Data generated from PacBio long-read sequencers has grown significantly, indicating market share gains for long-read sequencing. The rapid growth in Revio shipments demonstrates customers’ desire to use PacBio HiFi technology.

New customers adopting Revio include prestigious institutions such as the University of Tartu and the first Revio customer in Latin America. These customers are embarking on large-scale projects to sequence human genomes for personalized medicine and research into rare diseases. Collaborations with organizations like Ambry Genetics aim to sequence thousands of long-read HiFi genomes for insights into rare disease etiology and treatment.

Hospitals are also implementing Revio to gain insights into genetic and rare diseases. Existing customers like Seoul National University Hospital and a leading pediatric hospital in Canada are utilizing HiFi technology to improve testing capabilities in rare diseases and cancer. HiFi technology is proving to be a valuable tool for clinical-oriented customers due to its low error rate compared to other sequencing technologies. In order to better support our customers, we are constantly improving our software and launching new library prep and sample prep solutions to make PacBio sequencing more accessible and efficient than ever before. These new products not only enhance the sequencing process but also contribute to a recurring revenue stream outside of our core products. One of our recent successes includes the Kinnex full-length RNA kits, which garnered orders from 160 customers totaling over $1.5 million. Additionally, the PacBio PureTarget panel, launched in late March, allows for comprehensive characterization of repeat expansions, which have been linked to various disorders and cancers.

Our HiFi prep and plex library prep kits, launched in the first quarter, enable customers to automate and scale their sequencing projects on the Revio system. These kits are particularly beneficial for microbial genome and low-pass large genome sequencing, helping to reduce overall workflow costs. The Nanobind PanDNA kit, developed from Circulomics technology, supports high molecular weight DNA extraction from various sources, consolidating our sample-specific offerings into a single solution. Since its acquisition in 2021, over 1,000 customers have ordered Circulomics kits, expanding our reach to lower throughput long-read users.

Furthermore, our V13 software continues to enhance the user experience on the Revio system, with features like adaptive loading improving yield and consistency. We have seen a significant increase in mean yield per SMRT Cell for whole genome sequencing runs in 2024 compared to 2023. Our Onso platform has also seen success, with instrument shipments growing in the first quarter and a global installed base. By consolidating manufacturing into our Menlo Park facility, we can optimize operational efficiency.

Looking ahead, we have identified four strategic priorities. First, we aim to drive adoption of both Revio and Onso through improved commercial execution and customer collaboration. Second, we are developing new platforms to expand our product offering and revenue growth, including a long-read benchtop system and a high-throughput short-read platform. Third, we are focused on improving gross margins and manufacturing efficiencies to achieve cash flow breakeven. These initiatives will further solidify our position as a leader in the sequencing technology industry. Apart from our next-generation platforms, we are prioritizing research and development efforts as well as operational investments. We are committed to continuing to invest in these areas to drive innovation and growth within our company.

In addition, we have taken steps to reduce our annual operating expenses. Recently, we initiated a restructuring plan to lower our operating costs. As part of this plan, we unfortunately had to make the tough decision to reduce our workforce by approximately 25%, resulting in the layoff of 195 employees and the closure of our San Diego office. This decision impacted nearly all functions within the company and was based on our revised priorities.

The reductions we have made, along with other cost-saving measures, are expected to decrease our non-GAAP operating expenses by over $75 million on an annualized basis by the end of the year. This surpasses the range we previously projected in our April 16 pre-announcement. We believe that these cost reductions will enable us to achieve our short-term goals and work towards our objective of becoming a sustainable, cash-flow-positive company by the end of 2026.

Despite these changes, we remain committed to providing scientists with cutting-edge technologies that advance biological discovery. We are confident that our strategic decisions will position us for success in the future.

In terms of financials, we reported $38.8 million in revenue from products, services, and other sources in the first quarter of 2024. While instrument revenue declined by 8% due to lower Revio unit shipments, consumables revenue increased by 15% compared to the previous year. Service and other revenue saw a slight decrease, primarily due to customers transitioning to the Revio system.

Regionally, revenue in the Americas decreased, while revenue in Asia Pacific and EMEA saw growth. We are optimistic about future opportunities, particularly in China, where new initiatives are expected to drive R&D spending and instrument purchases.

Overall, our gross margin improved year-over-year, driven by operational efficiencies and cost-saving measures. We have also made changes to our manufacturing processes to further reduce production costs and overhead expenses.

Despite challenges, we remain focused on our long-term goals and are confident in our ability to navigate the evolving landscape of our industry. Thank you for your continued support. In April, we started reducing our headcount by approximately 195 employees, with plans to have less than 600 employees by the end of the second quarter and full-year 2024.

In the first quarter of 2024, our GAAP net loss was $78.2 million, or $0.29 per share, compared to $88 million in the first quarter of 2023. Our non-GAAP net loss was $71.4 million, or $0.26 per share, in the first quarter of 2024, compared to $75.5 million, or $0.31 per share, in the first quarter of 2023.

We ended the first quarter with $561.9 million in unrestricted cash and investments, and our inventory balances increased to $67.3 million, primarily due to purchases of Revio and Onso instruments and consumables inventory.

Accounts receivable decreased to $30.3 million in the first quarter compared to $36.6 million at the end of 2023. Our full-year 2024 revenue is expected to be between $170 million and $200 million, with a focus on instrument and consumable revenue from the Revio platform.

We have made progress in improving the cost of Revio instruments and consumables, with plans to lower costs even further by the end of the year. Operating expenses are expected to decline year-over-year, with a focus on research and development expenses and selling, general, and administrative expenses.

We are committed to achieving positive cash flow by the end of 2026, despite short-term challenges in the industry. We believe in the potential of our technologies and remain optimistic about the long-term growth opportunities ahead.

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