Pacific Biosciences of California Inc (PACB) 2024 Q4 法說會逐字稿

Good day, and welcome to the PacBio fourth quarter 2024 earnings conference call. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Todd Friedman, Senior Director of Finance and Investor Relations. Please go ahead.

Good afternoon and welcome to PacBio's fourth quarter 2024 earnings conference call. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or is furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. A copy of our earnings presentation is also available on the Investors section of our website.

With me today are Christian Henry, President and Chief Executive Officer; and Michele Farmer, Chief Accounting Officer. On today's call, we will make forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, guidance and the amount of the preliminary estimated noncash impairment charges.

You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Forms 10-Q and 10-K and our press release to better understand the risks and uncertainties that could cause results to differ.

We disclaim any obligation to update or revise these forward-looking statements, except as required by law. We will also present certain financial information on a non-GAAP basis, which is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under US GAAP. Reconciliations between historical US GAAP and non-GAAP results are presented in our earnings release, which is available on the Investors section of our website.

For future periods, we are unable to reconcile non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year.

A recording of today's call will be available shortly after the live call in the Investors section of our website. Those electing to use the replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call.

I'll now hand the call over to Christian.

Thank you for joining us today. I'll begin by reviewing our fourth quarter and full year 2024 performance, highlighting key commercial achievements and providing insights into our outlook. Then our Chief Accounting Officer, Michele Farmer, will walk through the financials in more depth and then I'll close with our guidance and outlook for the year.

In the fourth quarter, we reported $39.2 million in revenue, driven by the shipment of 23 Revio systems. Additionally, we successfully commenced shipment of our Vega benchtop platform, delivering 7 units ahead of schedule. For the full year, revenue totaled $154 million, reflecting 97 Revio shipments.

Our customer base continues to expand significantly with the Revio platform installed at nearly 200 customers at December 31. Notably, in 2024, approximately 45% of all Revio shipments went to new PacBio instrument customers, demonstrating strong momentum in attracting users transitioning from other sequencing technology.

Meanwhile, there remains a meaningful upgrade opportunity with approximately 125 active Sequel II and IIe users in the field, many of whom could transition to Revio or Vega in the coming years. The adoption of PacBio HiFi long-read sequencing continues to accelerate. Total growth in genomic data output accelerated on our platforms with an 81% increase in 2024, up from 68% growth in 2023, highlighting broader utilization of our technology.

Since 2020, total sequencing output has expanded more than 12fold, demonstrating a remarkable increase in HiFi sequencing activity. Correspondingly, consumable revenue grew 11% year-over-year in 2024 to $70.4 million, representing a 23% compound annual growth rate since 2020. Looking ahead to 2025, we anticipate that customers will continue to navigate an uncertain funding environment, much like in 2024.

Macroeconomic pressures are expected to persist, extending sales cycles, particularly for higher CapEx life science instrumentation like Revio. Additionally, the recent announcements regarding NIH funding involving a cap on the institute's direct funding rates have increased the uncertainty in the academic environment, particularly in the United States.

Considering these factors, we expect 2025 revenue to range between $155 million and $170 million, representing 6% year-over-year growth at the midpoint and roughly in line with external growth estimates for the next-generation sequencing market in 2025. While product launches and macro factors have caused our revenue growth to fluctuate over the past few years, it's worth noting that our revenue guidance at the midpoint still reflects a 16% compound annual growth rate since 2020 and significantly outpaces the overall NGS market growth, which again demonstrates the growing adoption of our technology. I'll discuss our full 2025 financial guidance in more detail later in this call.

Over the medium term and as the macroeconomic environment improves, we believe that we can achieve sustained double-digit revenue growth as long-read sequencing continues to expand into new genomic applications. Our key priorities for driving growth include expanding the adoption of HiFi sequencing by accelerating the uptake of the Vega benchtop platform and enhancing the value and usability of Revio with Spark chemistry, leveraging recent innovations to substantially increase sequencing throughput while reducing costs.

These advances have the potential to bring long-read sequencing closer to price parity with short-read technologies, delivering end-to-end solutions focusing on clinical applications and where PacBio's HiFi technology provides unique advantages, like Connex for RNA sequencing and Pure target, a targeted approach for sequencing difficult to sequence genes.

Notably in 2024, application and extraction kit revenue grew 56% year-over-year. Our strategy also includes providing turnkey bioinformatics solutions so our customers can go from sample to answer without running complex data analysis pipelines. Lastly, as a result of the continued and recent macroeconomic uncertainty as well as the recent NIH announcements, we now anticipate turning cash flow positive exiting 2027.

We remain focused on lowering our cash burn and believe our approximately $390 million in cash and investments at the end of 2024 will bridge us to becoming cash flow positive based on our current assumptions. Notably, after our note exchange in the fourth quarter, this time frame still positions PacBio to turn cash flow positive well before our first debt maturity in August of 2029.

While we faced challenges in 2024, it was a pivotal year in strengthening our business and advancing our product portfolio. We successfully launched 2 significant innovations, the Vega benchtop platform and Spark Chemistry for Revio. With the launch of Vega, PacBio offers a suite of long-read sequencing systems tailored to different customer needs, a first in the company's history.

Vega features a smaller footprint, lower capital cost and reduced throughput compared to Revio, making it an accessible and versatile solution for a broad range of customers. Some of these customers include smaller academic labs focused on a range of applications that require less throughput, including RNA sequencing in smaller genomes, core laboratories investigating transcriptomics and RNA biology and larger clinically focused labs utilizing HiFi sequencing for targeted panels.

Early customer feedback has been strongly positive. Berry Genomics, one of our first Vega customers, reported that the platform delivers results identical to previous PacBio systems while offering notable improvements in HiFi read yield, quality values, reduced run times, greater data processing efficiency and less hands-on time.

As a result, Berry Genomics plans to purchase 50 Vega units over the coming years to support its thalassemia and Fragile X assays, underscoring the platform's value in clinical applications. Beyond clinical markets, Vega's versatility extends into biodiversity and environmental genomics. At the recent Plant and Animal Genomics Conference, one researcher highlighted how Vega offers a lower entry point cost, increased portability and a throughput so well suited for sequencing biodiversity in remote locations.

And it also noted how it will facilitate best practices in sequencing unique or difficult to access fauna in the field. Another customer from the Johns Hopkins University and Cold Spring Harbor Laboratory shared how he looks forward to using the platform for many projects spanning the entire tree of life from identifying new risk factors in human disease to diversifying and enriching the food supply with new crop species to understanding the microbial world beneath our very own feet.

Our funnel of sales opportunities continues to grow for the Vega platform, especially with potential new customers as nearly 3/4 of the customers in our sales funnel have never bought a PacBio sequencer before. This demonstrates the potential reach of the platform. While Vega delivers versatility, the Revio system is our most powerful and scalable platform.

In the fourth quarter, we enhanced the platform even further as we started shipping our Spark chemistry. With Spark, the Revio system could sequence up to 2,500 complete phase HiFi human genomes a year at a cost below $500 per genome, while significantly lowering DNA input requirements for whole genome sequencing to just 500 nanograms.

This represents a 75% reduction. This helped drive new customer adoption in Q4, like the J. Craig Venter Institute, which plans to use Revio to sequence thousands of full deployed phased genomes over the next several years to find missing heritability resulting from years of SNF studies in short read sequencing fragments as part of the institute's overall goal to advance genetic testing for women's health and genetically diverse populations.

Last month, at the JPMorgan Healthcare Conference, we shared a little bit more about our technology road map, which is focused on improving our on-market platforms and developing future platforms to expand margins and increase throughput. These programs include developing higher density SMRT cells, which reduce the cost and increase throughput.

We expect our next generation of SMRT Cells to yield multiple times the output of today's 25M Revio SMRT Cells, integrating new SMRT cell formats that make automating our technology even easier for customers, migrating to more advanced semiconductor inputs, such as the 300-millimeter wafer instead of 200-millimeter. And this can drive the cost of the SMRT Cell down, enabling us to lower our cost to customers and expand our gross margins.

Innovating on our SMART cell and reagent technologies to allow customers to sequence in a SMRT Cell more than once, utilizing faster chemistries, which are expected to enable faster run times and more throughput. And finally, leveraging our computational biology team and collaborations to offer more informatics capabilities across the end-to-end solutions to broaden customers' access to advanced bioinformatics pipeline.

We've been thrilled with how Vega and Revio have changed the paradigm of highly accurate long-read sequencing and we're inspired by the development pathway to scale this technology even further. Over the coming years, we look forward to unveiling these technologies to the research community, which is already accelerating its pace of discovery with HiFi. In fact, PacBio technology was cited in over 1,000 publications and preprints in 2024.

In particular, we are encouraged by recent publications that substantiate HiFi's ability to further our understanding of genetic and rare diseases, like Radford University Medical Center study analyzing 100 challenging patient cases where short-read sequencing failed to identify a genetic cause.

In this study, researchers used Revio and detected 93% of pathogenic variants, including complex structural variants and DNA methylation abnormality. The key takeaway here is not just HiFi's ability to improve solve rates but its potential to replace multiple testing modalities. As a result, Radford is expanding its sequencing effort to 5,000 additional samples, further demonstrating the clinical impact of HiFi sequencing in rare disease diagnostics. A unique aspect of PacBio HiFi sequencing is its multi-omic capability. That is it interrogates RNA and epigenetics in addition to DNA.

This multi-omic approach was used in a recent study to diagnose a nine month-old patient with an undiagnosed rare genetic condition. HiFi sequencing uncovered a balanced translocation between chromosomes X and 13, disrupting 4 key genes through distinct mechanisms, findings that were missed by short-read sequencing. We believe these studies highlight how PacBio's advanced sequencing technology enables groundbreaking genetic discoveries, providing new hope for rare disease patients worldwide.

In 2024, we began to see larger-scale genomic testing labs, hospitals and medical centers adopt HiFi with several implementing our PureTarget library prep kit to develop and improve carrier screening and other genetic tests. We previously disclosed labs like Myriad and Quest in the US which are developing tests on the Revio system.

In Europe, Bioesencia uses HiFi for routine testing for certain sensory disorders. As previously mentioned, Radford University Medical Center has committed to sequencing 5,000 HiFi genomes in a clinical setting focused on rare disease. With the Sequel II, Berry Genomics is in the final stages of obtaining NMPA approval for its thalassemia carrier screening test in China.

This is an important test as the prevalence of carriers of this disease represents over 10% of the population in parts of the country. With Vega, Berry plans to expand its carrier screening test to other indications.

2024 was a pivotal year in our clinical path with nearly 15% of our revenues coming from LDT labs or children's hospitals and we had even higher clinical exposure when factoring translational work at research institutes around the world.

Looking back on 2024, we also took decisive actions to improve efficiency, reduce costs and lower cash burn, which we believe will position us to continue to improve our financial profile on delivering our commercial and R&D initiatives. We reduced annualized non-GAAP operating expenses by more than $75 million, aligning spending with our strategic priorities.

As a result, we lowered adjusted cash burn each quarter in 2024. We also made progress in taking costs out of our per unit instrument and consumable manufacturing with Revio system and consumable COGS 16% and 22% lower, respectively, than where we started the year and we see a pathway to further reduce per unit COGS in 2025.

We successfully executed on a convertible note exchange, reducing our debt by $259 million and extending the maturity of our 2028 notes by 18 months to August 2029, strengthening our financial flexibility. Finally, we're pleased to announce that Dave Ruggiero has joined as Global Head of Sales and Service.

David brings deep experience and sales leadership across technology and life sciences and his expertise will be instrumental as we expand our global reach and scale our sequencing solutions. We're also delighted to share that Chris Smith has joined our Board of Directors. As CEO of NeoGenomics, Chris brings extensive expertise in the diagnostics and laboratory testing markets, and we look forward to his insights as we advance our clinical strategy.

We thank David Meline for his service on our Board as he steps down and wish him the best in his future endeavors. We are also continuing our search for a new Chief Financial Officer. We're focused on identifying a leader who will help drive our next phase of growth and champion operational efficiency throughout the organization.

Now I'll pass the call on to Michele Farmer to discuss our financials. Michele?

Thank you, Christian. I will be discussing non-GAAP results, which include noncash stock-based compensation expense. I encourage you to review the reconciliation of GAAP to non-GAAP financial measures in our earnings press release.

As discussed, we reported $39.2 million in product, service and other revenue in the fourth quarter of 2024, which represented a decrease of 33% from $58.4 million in the fourth quarter of 2023. Instrument revenue in the fourth quarter was $15.3 million, a 56% decrease from $35.1 million in the fourth quarter of 2023, primarily driven by lower Revio system shipments.

We ended the quarter with 270 cumulative Revio system shipments. Turning to consumables. Revenue of $18.8 million in the fourth quarter was roughly flat to $18.9 million in the fourth quarter of last year, with annualized Revio pull-through per system at approximately $240,000.

Finally, service and other revenue was $5.1 million in the fourth quarter compared to $4.4 million in the fourth quarter of 2023, driven by an increase in service contract revenue related to Revio. From a regional perspective, Americas revenue of $20.2 million decreased by 41% compared to the fourth quarter of 2023 as the region is most affected by academic and NIH funding uncertainty.

For Asia Pacific, revenue of approximately $8.9 million decreased 33% over the prior year, with sequential growth in consumables offset by lower Revio placements. Similar to the US several countries in the region also faced government funding headwinds with respect to capital expenditures. Finally, EMEA revenue of $10.1 million decreased 9% over the prior year period.

The region saw record consumables revenue in the fourth quarter with growing Revio utilization as key projects like Estonia Biobank, Radboud and Dubai's population sequencing programs continue to sequence at scale.

Moving down the P&L. Fourth quarter 2024 non-GAAP gross profit of $12.3 million represented a non-GAAP gross margin of 31% compared to a non-GAAP gross profit of $11.1 million or 19% in the fourth quarter of last year. Non-GAAP gross margin increased year-over-year due in part to charges for scrap inventory in the fourth quarter of 2023.

Compared to the third quarter of 2024, gross margin declined by approximately 120 basis points, primarily due to scrap inventory in the quarter related to a temporary decline in SMRT cell manufacturing yields and lower ASPs on Revio due to certain strategic deals in the quarter, partially offset by per unit COGS decreases in Revio instruments and consumables.

Non-GAAP operating expenses were $68.6 million in the fourth quarter of 2024 compared to $88.4 million in the fourth quarter of 2023. The decrease primarily reflects a reduction in R&D and SG&A related to our restructuring initiated in the second quarter of 2024.

Regarding head count, we ended the quarter with 575 employees, which was flat to Q3 2024 and 28% lower than the 796 employees at the end of the fourth quarter of 2023. Operating expenses in the fourth quarter included noncash share-based compensation of $14.8 million compared to $15.4 million in the fourth quarter of last year. Non-GAAP net loss was $55.3 million, representing $0.20 per share in the fourth quarter of 2024 compared to a non-GAAP net loss of $72.5 million, representing $0.27 per share in the fourth quarter of 2023.

We ended the fourth quarter with $389.9 million in unrestricted cash and investments compared to $471.1 million at the end of the third quarter of 2024. Cash outflow in the quarter included approximately $54 million in debt repayment and associated fees related to the convertible note exchange with SoftBank.

During the quarter, we conducted an interim goodwill and intangible asset impairment test following a sustained decline in our stock price and market capitalization. Based on the preliminary results of this analysis, we recorded noncash impairment charges totaling $90 million, which includes approximately $55 million related to goodwill and approximately $35 million associated with an in-process research and development asset.

The impairment was driven by macroeconomic headwinds and a revised outlook on future cash flows and is excluded from our previously discussed non-GAAP results. It is important to note that these impairment charges are noncash accounting adjustments and do not impact our liquidity, operations or ability to execute on our long-term strategy.

I'll now return the call to Christian to discuss guidance and provide closing remarks.

As discussed earlier, we expect full year 2025 revenue to between $155 million and $170 million. At the midpoint, this represents a growth rate of approximately 6% compared to 2024. At the midpoint of our guidance range, we expect instrument revenue to grow modestly with growth in Vega shipments offsetting a year-over-year decline in Revio system shipments with annualized pull-through for Revio system in the low to mid $200,000 range.

As a reminder, our guidance anticipates that customers will continue to navigate an uncertain funding landscape, much like in 2024 and the macroeconomic environment is consistent with what we've experienced over the past few quarters. When looking at guidance from a regional perspective, the change in administration has added further uncertainty to the funding environment in the Americas.

In the near term, based on our initial conversations with customers, recently announced federal funding freezes, particularly with NIH intramural spending, have added significant uncertainty in the broader academic research community. Our guidance considers this uncertainty, especially in the near term. On a more positive note, accelerating activity in the clinical market is anticipated to offset some of those potential headwinds.

For Asia Pacific, while we anticipate growth in the region in 2025, the funding dynamics in several countries continue to affect capital purchasing timelines for the Revio platform. Additionally, our guidance does not consider the impact of tariffs or other activity that would impact our ability to export products to the region.

We expect EMEA to be the fastest-growing region in 2025 as population sequencing programs scale, whole genome sequencing in the clinical setting grows and we expand our customer base with Vega. Looking at Q1, specifically, we anticipate typical seasonality. And as a result, we expect revenue in the first quarter of 2025 to be lower than the fourth quarter of 2024, with Revio systems and consumables revenue partially offset by increased Vega system revenue.

Moving down the P&L, we expect the 2025 non-GAAP gross margin to be between 35% and 40%, representing over 400 basis point improvement compared to 2024, and we expect to exit the year above 40%. We expect to continue removing costs from the Revio system and consumables and the Vega cost of goods sold per unit is expected to improve as the platform moves from pilot manufacturing line to the full production line.

We expect non-GAAP operating expenses to decline 3% to 7% compared to 2024 and be in the range of $270 million to $280 million, reflecting in large part the annualization of our restructuring in the second quarter of 2024. We expect interest and other income to be between $5 million and $7 million in 2025 and the weighted average share count for EPS for the full year to be approximately 299 million.

We expect to end the year with cash and investments balance of approximately $260 million, implying a $130 million cash burn in 2025 or an improvement of $57 million in adjusted cash burn compared to 2024. Finally, as discussed, with our current expectation for 2025 revenue growth, we now anticipate turning cash flow positive exiting 2027 as a result of the continued and recent macroeconomic uncertainty as well as the recent NIH announcements.

We remain diligent in lowering annual cash burn and believe our approximately $390 million in cash and investments will bridge us to becoming cash flow positive. Importantly, after our note exchange in the fourth quarter, this time frame still positions PacBio to turn cash flow positive with meaningful time before our first debt maturity in August of 2029.

Looking ahead, I want to reiterate that our primary objective in 2025 is to grow revenue and expand gross margins through four main activities. First is enabling the full-scale release of Vega, which we expect will broaden the reach of our technology in the market and bring more new customers to HiFi sequencing.

Second, we aim to accelerate the number of samples on the Revio platform through the launch of the Spark chemistry and application kits. Revio has the potential to drive further growth in long-read data. Third, we will continue to invest in future product launches to both amplify and diversify our offerings. I mentioned several of the exciting initiatives that we're currently working on earlier in this call. And finally, to progress our clinical strategy to improve outcomes and create durability.

With these activities, we believe we can drive growth and market expansion in 2025 while continuing to improve our financial profile. I look forward to connecting with many of you this quarter at the annual AGBT meeting and investor conferences.

We will now open up the call to questions.

(Operator Instructions)

Tycho Peterson, Jeffries.

Hey, thanks, Christian, I think you talked about an uncertain funding environment, much like 2024. I'm going to take the other side and say it's a lot different right now. So what specifically have you baked in for NIH disruption in the near term? It sounds like you baked some of it in. Did you bake down kind of the full freeze on the 15% overhead?

Well, I think that, so thanks, Tycho, for the question. Of course, the funding environment is very dynamic in the United States right now. There's no question about that. But we fully contemplated some pretty significant headwinds, particularly in the first half of the year. And you saw we said in our guidance a bit of typical seasonality but we expect revenues to be down in Q1 versus Q4, partially because of that uncertainty, partially because of kind of typical seasonality.

And so, I do think we have, to the best of our ability, kind of baked in what could be a real challenging time into our guidance. One thing we've done, of course, since the 15% came out over the last week is we looked at every single opportunity. I actually personally went to each member of the Americas sales team that has an opportunity closing this quarter to try to get an assessment of each instrument opportunity in particular.

And the feedback was there's still some uncertainty, a lot of positivity about getting the deals done that we forecasted, but we still have to get them done. I think, Tycho, one area where you may look where we've been really thoughtful here is we've lowered kind of the pull-through expectations. So, we did 240,000 or so in Q4. We gave a pretty broad range of low 200s to mid-200s. And that's an area where you could see some funding freezes or pauses slow activity.

And so, we're monitoring the situation. We think we've given a responsible guidance here. The other thing on the positive side, I'd say, is we're seeing very exciting growth in Europe that is offsetting some of the risk in the Americas.

And we're also seeing a pretty significant expansion in the clinical side of our business, which isn't funded by NIH sources. And then finally, we also see Vega really the sales funnel for Vega, as we talked about, we talked about this at JPM, continues to grow. The quality of the opportunities are strong. And I think that is the right product in a situation where the capital environment is tough. So hopefully, that helps a little bit.

It does and on Vega, I think at JPM, you mentioned you'd only shipped 7 units because that's all you had available. Can you maybe just talk on anything you can say on backlog? And when do you expect to kind of scale up shipments more meaningfully?

Yeah, so, I mean, we certainly have some backlog and we will ship over the course of the quarter. We're scaling up. And really, what we're doing is the first half of the year, we're producing on the R&D, so to speak, pilot production line. And then in the second half of the year, we'll be on the full production line.

So, the inventory situation or ability to deliver will improve each quarter here. And by the time we get into the back half of the year, I suspect we should be able to fulfill the majority of the demand.

Last one, just you pushed out cash flow breakeven by a year. I just want to make sure. I mean, I know you're guiding below consensus here, just over $20 million, but are there other levers you could pull if you need to pull that forward?

There certainly are. Look, obviously, our focus is on driving growth and gross margin expansion, those are the obvious key levers. But we certainly are focused on making sure that we're diligent with how we utilize our resources, saving wherever we can. And so, there are other opportunities, if necessary, to further reduce burn.

All right, thank you.

Yeah.

Kyle Mixon, Kintacord.

Hey guys, thanks for the questions. Just to kind of follow up on the guidance. Why are Revio shipments expected to decline this year if '24 placements were already about half of that of '23? Like why is that product fading? Is that macro related, market related or just cannibalization from Vega so far? And is there further downside to the guidance?

I know you baked in the challenges to your ability, but could you just provide like quantifying what's in there for NIH? Is it like $5 million or so? Is it $10 million or so? Just would be helpful to kind of quantify that.

Yeah. So, first of all, I would argue that Vega is not significantly cannibalizing Revio at all. And I would also argue that Revio is not fading at all. We are really in one of the most unprecedented macroeconomic times, at least in my career and at least in this space. And so, when we think about the challenges we're having with respect to Revio and accelerating shipment volume, it really is driven by funding concerns.

We're seeing all over the world, customers publishing more and more using HiFi, needing more scale. We're seeing customers extol the virtues of HiFi specifically as a long-read platform. We're winning projects like we've won last year in Estonia, et cetera. But the reality is that the macroeconomic environment is really tough and that continues to be an important driver for more expensive capital equipment.

And so when we put our guidance out for 2025, we are considering that it's going to continue to be just as tough a macroeconomic environment, maybe even tougher. And so I would argue that we said we expected Revio shipments to be modestly down from 2024 levels. They could easily turn the other way if some of the macroeconomic headwinds aren't as bad as we think.

So that's how I would comment on Revio and Vega. With respect to the funding itself and is there further downside to the guidance, I think what we've done is we've really taken our best look at the funding environment, our sales funnel, our opportunities and tried to put together guidance that we felt was very responsible.

One of the things that's working in our favor, Kyle, as I talked about before, is that Europe is actually growing really strong and is expected to grow really strong this year. And that will drive, and that will help our growth. Asia Pacific, we do have country-specific challenges, Vega is a very strong platform for that part of the world and we expect to see a strong demand there for Vega.

And then we talked about some of our clinical customers like Myriad and Quest and others they are scaling up and in carrier screening and other assays. And as those become routine, those are completely additive to growth.

And so I think we have a lot of positive areas where we can grow. But of course, we have this significant headwind, I think, that pretty much everyone in our industry has been talking about at some level.

Dan Brennan, TD Cowan.

Great, thanks for the questions maybe just to start off, just one more on NIH, if you don't mind. So your exposure, what Christian, is around 28% or somewhere in that ZIP code. I'm just trying to get a sense of like the kind of what's baked in? Is it like a 15% kind of 28%, so like a four point headwind? Is there something greater than that?

Just kind of wondering like the magnitude of kind of what you've assumed?

Well, I think our total NIH revenue is roughly 20% of revenues, historically. And I do think you can work, I do think it's difficult to game out down to $1. I know you're looking for, well, it's X million dollars exactly of risk. But the reality is that it's a lot more complex than that. And I think some of our peers were helping to try to explain that to the Street.

I think from our perspective, what we're seeing is it's really a deal-by-deal institution by institution. Some institutions have funded their instrumentation out of different pools of money. Other institutions have the significant overweight that they're going to absolutely apply. And I think it's too early to really game out dollar by dollar. So what we've done is we've taken a look at our sales funnel and taken a look at our opportunity set, particularly in the Americas and evaluated that in its totality to try to come up with guidance for what we thought here's what Americas is going to do, here's what Europe is going to do and here's what Asia is going to do.

And that's why, this year, we gave a little more color region by region in our guidance so that you could get some perspective that, yes, it's an important part of our business, but it's not our whole business.

Thanks Dan. You have the next question, [Rocco].

Doug Schenkel, Wolf Research.

Hey, good afternoon guys. I have, Let me just throw out I think it's two or three quick questions. Actually, I'll keep it to two. One is, on gross margin, you are targeting an exit rate above 40% this year. We were above consensus and your exit rate is actually higher than our estimates. So there's some sunshine on a rainy day.

Can you talk about the progress you are making on gross margin? And how much gross margin can you get to this year if you say revenue comes in closer to where consensus was versus where you're targeting as we start the year? So that's the first topic.

And then the second is, acknowledging there's a lot of things happening outside your control. In terms of what you can control, are there things that you are moving forward with as we sit here today to reduce friction to adoption of your instruments, maybe more things like reagent rental type things or other initiatives that could make it easier for customers to bring in instruments in what could be a tougher environment for capital demand? Thank you

Yeah, Those are great questions and I appreciate the sentiment on gross margin because I do think it is an area where we're going to see significant opportunity this year. What's really happening in gross margins in Q4, we had some yield issues which drove some impact to our GM. Those have been largely resolved and we're on our way back. We continue to make progress in terms of lowering the per unit cost of both the chips our SMRT cells as well as the instruments themselves.

We've in-sourced a lot more of our instrument manufacturing, which is driving pretty substantial savings. And as those instruments go into inventory and then get sold through, we'll start to see the benefit of that as well. So we do have a very strong path to exiting over 40% and actually nicely over 40%.

Your point about relative to prior consensus is actually an interesting one because, you're right, it's likely that gross margins would be higher if the more revenue we do, the more likely the gross margins are going to be higher. And the reason for that is because you're going to see a greater push of consumables, which generally carry higher gross margin. And as that mix shift occurs, you get a substantial benefit from that. And so one of the things we were pretty thoughtful about how we thought about our consumable revenues, which on the one side being if they're lower on your revenue guidance, that hurts your gross margin. But if you end up doing a little bit better, that will help your gross margin.

So that kind of gives you some color on how to think about how we're going to move through the year with gross margin and exit the year, quite frankly, in what we believe will be a really strong position moving into 2026.

The other part of your question, there is a lot of stuff that we can do that try to combat the macroeconomic environment. And we do have programs in place. We have what we call a Run Revio program where you can put very little money down and make the cost of the instrument into the reagents and consumables. We have a similar program that we launched for Vega, although most customers so far have been pretty happy with the price of Vega and I do expect ASPs to be pretty strong for Vega here particularly in 2025. We'll see how '26 goes.

But I think we're off to a strong start there with respect to ASP. Another area where if you're thinking about how do we accelerate our business is accelerate consumable usage.

And the way we're doing that is by increasing our bioinformatics investments and capabilities. I've had the benefit of being at our sales meeting this week. So I've had a chance to talk to all of our sales reps and listen to several customer talks. And each of the customers really are driving home the point that informatics matters a lot and that our informatics capabilities were dramatically improved in 2024, and it's really accelerating the activity.

So it is a combination of financial deals that you can do that enable the customer to get into the technology, but it's also activities like improving the velocity of consumable usage by improving informatics, which then drives more requirements for capacity and ultimately more sales.

Hopefully, that helps.

One thing to add on your gross margin cadence question, Doug, we talked about Vega in the second half of the year moving into the production line. Over the course of the year, you'll see an improvement in gross margin as that gets off the development units into the full production manufacturing mode.

Yes. And thank you, Todd. That's a substantial improvement in gross margin.

Tejas Savant, Morgan Stanley.

Hello guys, good evening and thanks for the time here. Christian, I just want to get a sense for how you're incorporating some of the customer concentration risk into your '25 guide. You flagged EMEA momentum a couple of times, but it sounds like it's Estonia, Radpur, and Dubai that are certainly important there. And you've got the Berry partnership that's sort of a flagship customer for you in China. And then, as a second part of my question, just sticking on the China theme, are you seeing any concerns from your customers in the region in light of Illumina's addition to that unreliable entity list?

Or does the fact that there just aren't any great local long-read alternatives mean no impact on that count for you guys?

Yeah. Tejas, those are great questions. I'll start with China first and go backwards. We've had lots of conversations with our Chinese customers. Interestingly, there are no alternatives to what we do in China, which certainly decreases our risk of any blowback from what's going on with our competitors.

So we don't see that as a big exposure. Now, what we can't control or predict is on the export side. If the administration decides to make some changes there, that could be an exposure that we would have. Quite frankly, I'm not sure we would have a lot of mitigation to that or some retaliation from China itself. But from what we see at this moment, our customers don't see any issue and are continuing to run.

I do think there's an interesting opportunity for Vega inside China this year, too, and we'll see how that unfolds.

With respect to customer concentration risk, it's a good news, bad news story in the sense that yes, we do have some customers that are running large-scale programs. But when you talk to these customers like Estonia, they're running at full tilt, and they plan to keep running at full tilt, and the program is going exceptionally well. In fact, we had the leader of the biobank here at our sales meeting this week and she gave us a great talk and update on what's going on there. One way that risk is going to get mitigated is that we do see more customers moving into that large customer category, particularly as some of the diagnostic customers will, hopefully in 2025, advance their assays into full production. As that happens, they'll be running Revio at full tilt, which will be very durable revenue in the clinical setting.

That's what we're trying to go after so that we can balance the research population scale with clinical revenue that is quite durable and consistent.

Also, on top of that Tejas, we're seeing customers like the Sanger Institute accelerate their usage of Revio, both on the Tree of Life program, where they've been a long-time customer but now we have been able to penetrate into the human genetic side.

We're doing a really interesting collaboration with them in RNA sequencing, which will drive significant sequencing this year. The best way to alleviate customer concentration is to find more big customers, and I think that's what's happening right now.

Jack Meehan, Nephron Research.

Thank you, good afternoon. Hoping to get a little bit more color on Vega. The 7 units that you shipped in the fourth quarter, can you talk about what the initial revenue was there? And as you look to 2025, how does the order book look? What are you assuming in terms of placements?

Yeah, We haven't disclosed the ending orders for 2024 but we've developed hundreds of opportunities at this point, over 70% of them are new customers. We expect to scale manufacturing over the first half of the year. It's likely that will be more manufacturing-limited than order-limited with respect to revenue and we'll see how that unfolds. The revenue in the fourth quarter you can imagine 7 units at around list price.

The finance team confirms that's right.

Seven units in the $160,000 range.

We haven't done any discounting on the Vega system. When you see the ASPs at the end of Q1, what you'll likely see is we do sell to some distributors, and those distributors will get a discount because they end up paying for the service and installation. That's typical. But effectively, that would be the distributor list price. I think we set the price right to drive demand, and so far, we haven't had a lot of objections to the prize and so we will see how we do.

Subhalaxmi Nambi with Guggenheim.

Hey guys, thank you for taking my question. I'm curious if you're running into Roche at any of their potential beta sites? How do you think about the possibility of another long-read market entrant? And then I have a follow-up.

Yeah. We haven't really run into Roche to my knowledge at all yet, and we haven't had any deals stalled because of Roche. I don't think that's a thing. It will be interesting to see what their technology is when they launch it. My understanding is that it's a short-read focused technology but the reality is that we don't know.

We'll see when they come out. We'll all learn more at AGBT in a couple of weeks and I'm looking forward to that. But here's what I can tell you: We have built a portfolio now of sequencers and an end-to-end solution that the company has never had in its history. That is driving more excitement, more discovery, and more demand than ever before. It's unfortunate that we've been in this macroeconomic environment because I do think that's had an impact.

But when you look at the discoveries that are being made, the clinical adoption, the improvement in solve rates in rare disease, the population-scale programs like Precise and Estonia that we are winning and expanding.

We really are making a lot of progress as a leader in long-read sequencing technology. I feel very confident in our portfolio. We will certainly be watching like everyone else does when new products come out, and we'll evaluate them accordingly.

For that question. Thank you for that question. I am sure in the current environment, you're attempting to derisk guidance. On the flip side, if you were to rank order the top 3 things that could actually drive upside to your guidance, what would they be? I'm basically thinking Revio pull-through, Vega placements, or growth outside the academic market.

Yeah, I think like if you had to put the top 3 for things that would actually drive guidance to the upside, I'd say the first would be there are several PopGen projects that we are working with groups and potentially we may end up being able to get those press releases out and start the sequencing, those would drive strong Revio demand because they would be at scale.

So if the PopGen programs would drive increased Revio demand, increased Revio demand would certainly drive the guidance up towards the higher end. The second would be the timing of clinical adoption and broader clinical adoption.

So we saw Radboud commit to 5,000 more genomes in rare disease. There's similar kinds of projects going on in Sweden, for example. As they continue to scale, that will be another source of potential upside. And then I mean, the last one is perhaps the most obvious, right, is that if the macro environment improves even a little bit, and we have more certainty around NIH funding, perhaps that would certainly drive our guidance in a more positive direction. So those are my top 3, I would say.

Next, we have Sung Ji Nam with Scotiabank.

Hi, thanks for taking the question. Christian, I was just wondering the 15% revenue coming from clinical, do you have a sense of where that could go over the next few years? And I was wondering if the kind of the growth outlook is pretty broad-based geographically? And in terms of the types of applications, are they pretty similar in terms of what the demand you're seeing in the US versus ex US?

Yeah, that's a really great question. And I don't have a perfect crystal ball there but I do believe that if that revenue from clinical over, say, over the next three years could actually represent, it could easily double from where we are now, 15% to 30-plus percent of our total revenue. And it's going to come from several different areas. It's going to come from whole genome sequencing in a rare disease context as a frontline test as we expand further into children's hospitals in the United States and into national programs around the world for perhaps like the Netherlands. It's going to come in panel testing.

Our Pure Target panel has really inspired the large clinical testing labs because with Pure Target, they can eliminate their legacy tests and operate at much higher multiplex, with much better and easier answers to get and therefore, save money and help more patients.

And so Pure Target, and that will be things like carrier testing, looking at ataxias, anything where you have complex germline-driven disease. And then the last area will be in oncology, both on the long-read side, looking at being able to look at methylation profiles, being able to look at both asset types and start to understand more about a tumor.

That will be and it's in clinical research right now. But over time, say, in this three year window, I do think there's going to be opportunities for us to penetrate parts of that market and grow our revenue. So all in, I think it will be one of the fastest-growing areas of our business, and it perhaps could be at least double what we're doing now in terms of percentage of the total.

Matthew Sykes, Goldman Sachs.

This is Eve on for Matt. So my first one is what trends are you seeing in the reagent rental models placement versus like what percent of instruments you're seeing through CapEx placements?

Yeah. The reality is we still see the majority of our sales as straight CapEx placements. We do a few reagent rentals or unique financing type deals each quarter. We do have a very strong leasing partner that will do leases. And typically, we get a few of those leases done every quarter as well.

It really depends on the situation. But the reality is the vast majority are still CapEx purchases. That's right.

Okay. Great. And then can you talk through the margin contribution from Revio versus Vega? I understand this might improve throughout the year as you move to production manufacturing but any numbers you could put around that would be great.

I'm sorry, you're looking for the comparative margins of Revio and Vega?

Yes, the contribution margin.

It's a little too early to disclose that on Vega yet. We need to get through at least a full quarter of production to start really understanding that. But the fact that the Revio has been in production, we've been able to in-source a lot of it and we have taken a substantial amount of the compute cost through down and out through innovation makes the Revio gross margin higher at first here.

The challenge on the Revio side, of course, is managing the ASPs and so making sure the ASP stays in a range. On the Vega side, we've positioned it to be a nice gross margin product for us, particularly as we exit, as we kind of get to the back half of '25 and beyond.

In the front half, it will be lower, in the back half, it will start to approach or perhaps even exceed the margin on Revio. And so we'll see how that goes.

Yes. We're already looking at '26 and beyond how we could even take further costs out of Vegas. So beyond this year, moving into production, there's a pathway beyond that to reduce cost even further for the platform.

Yeah, I think this is one thing that maybe people don't appreciate as much because most instrumentation companies don't take so much cost out of their instruments after they get on market. But because so much of our technology is compute-driven.

And when you think about the cost of the instrument. As we improve our algorithms, as we improve our SMRT cells, we're able to take substantial amounts of cost out of the instrumentation and that will apply whether it's Revio or Vega.

One of the things we did with Vega is, of course, we designed it for higher gross margins, we miniaturized things. We innovated in some of the areas where there's core expense so it has the opportunity to be a very strong gross margin product. But before we start putting a bunch of numbers around it, I want to see us get a few quarters under our belt of production to see how we really do at scale.

Mason Carrico with Stephens.

Hey guys, thanks for fitting me in here. I'll keep it to one. On the cash flow breakeven time line change, could you just provide some additional detail around what assumptions did change? Any color on the run rate for revenue margins that are required to get there?

Well, I think, sure. And thank you for the question. I mean, I think realistically, right, we certainly didn't perform as expected in 2024, which lowered our revenue trajectory. And in 2025, given the uncertainty in the guidance we gave, we wanted to make sure that we are responsible in thinking through the whole equation to get to cash flow breakeven.

And so the core assumptions you think about are kind of thinking about the midpoint of our guidance right now, both on the revenue growth and the gross margin and then starting to think about modest growth up from there in '26 and '27.

So that by the time we're getting out of '27, we're exiting cash flow positive basically as if we were thinking with 2026. And so the key is we do believe you're going to see gross margins expand over the course of the year so that we exit in the 40s.

We still believe we can get into the 50s and beyond in gross margin. And as we continue to scale our business, drive consumables become a greater proportion of the total revenue, you start to see that uplift and the combination of those things, along with disciplined expense management gets you to cash flow breakeven.

Luke Sergott with Barclays.

This is Salem on for Luke. Just on Revio pull-through, it took a small step down in 4Q. How much of that came from maybe an air pocket from Spark and or Vega? And then just looking ahead at the new guide, low to mid-200,000 pull-through. What does that kind of imply from an instrument capacity utilization perspective now that Spark enters the equation?

And I know you're embedding some of the NIH risk in there, but the pull-through, is that reflective of the lower sequencing costs, not offsetting the demand this year? I'll leave it there.

Yeah. So with respect to was there an air pocket in Q4, I mean, any time you announce a change in reagents, you are going to have customers using their existing inventory before shipping more product. And so we didn't start shipping the Spark reagents until basically the last, what, two weeks of the quarter. We also did have some back order for some of our application kits. And that back order, that was a pretty reasonable amount of back order and so that hurt us as well.

And so yes, there was certainly a bit of that. You're right, it was $240 versus what, $253 or $254 last quarter. So I think Todd was at JTM, was saying that's like half a run. And so there was certainly some of that.

When you think about the guidance for the low to mid-200s, our first priority is thinking through NIH exposure, any potential funding freezes that we see with intramural. Even the perception of that certainly creates anxiety with our customer base and so we're monitoring that.

But I don't really think the Spark reagents, in other words, the increase in throughput because of the reagents creates that air pocket. In fact, most customers that we've spoken to so far, they're excited about implementing Spark and they're typically not doing more multiplex onto the same runs, particularly in whole human genome applications. And so I think they're getting the benefit of more data.

And so I don't think it's going to have a big impact from that perspective, kind of that elasticity equation that you kind of talked about. So yes, I think that it's really we're being thoughtful about the funding environment and the timing of when studies get started.

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

Thank you, Rocco and thank you for everybody joining today. Thank you all for the questions and staying a few minutes late with us. As Christian has mentioned, we look forward to connecting with a lot of you at AGBT and other investor conferences throughout the quarter. Take care.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.