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Good day. And welcome to the PacBio Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. 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 will be discussing on today's call, a copy of which is available on the Investors section of our website at pacb.com or as furnished on Form 8-Ks available on the Securities and Exchange Commission website at 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 Michelle 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 non-cash impairment charges. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause their actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Forms 10-Q and 10-Ks, 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 also present certain financial information on a non-GAAP basis. It 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 U.S. GAAP. Reconciliations between historical U.S. 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, Michelle 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 Brevio systems. Additionally, we successfully commenced shipment of our Vega Benchtop platform, delivering seven 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 as of 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 for Vega in the coming years. The adoption of PacBio HiFi Longreach 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 twelvefold, 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-range sequencing continues to expand 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-range sequencing closer to price parity with short-read technologies, delivering end-to-end solutions focusing on clinical applications where PacBio's HiFi technology provides unique advantages. Like Connect 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 challenges, 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 $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 timeframe still positions PacBio to return 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 two significant innovations, the Vega Benchtop platform and Spark Chemistry for Revio. With the launch of Vega, PacBio offers a suite of long-range 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. Some of these customers include smaller academic labs focused on a range of applications that require less throughput, including RNA sequencing and 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 high-value deals, 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 Animal Genomics Conference, one researcher highlighted how Vega offers a lower entry point cost, increased portability, and 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 continued to grow for the Vega platform, especially with potential new customers, as nearly three-quarters 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 days of 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.K. Gregg Center, 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 SNP studies and 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 roadmap, 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 smart cells, which reduce the cost and increase throughput. We expect our next generation of smart cells to yield multiple times the output of today's 25M Revio smart cells. Integrating new smart 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 SmartCell down, enabling us to lower our cost to customers and expand our gross margin. Innovating on our smart cell and reagent technologies to allow customers to sequence in a smart 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 informatic capabilities across the end-to-end solutions to broaden customers' access to advanced bioinformatics pipelines. We've been thrilled with how Vega and Revio have changed the paradigm of highly accurate long-range sequencing and were 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's 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 abnormalities. 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 efforts to 5,000 additional samples, further demonstrating the clinical impact of PacBio 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 four key genes, 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 PURE Target 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, Viasentia 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 was 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 LVT 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. Also made progress in taking costs out of our per unit instrument and consumable manufacturing, with Revio system and consumable costs 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 in sales leadership across technology and life science, and his expertise will be instrumental as we expand our global reach and scale our sequencing solution. We're also delighted to share that Chris Smith has joined our board of directors. As CEO of NeoGenomics, Chris brings extensive experience and expertise in the diagnostics and laboratory markets, and we look forward to his insights as we advance our clinical strategy. We thank Devon DeLine for his service to 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 Michelle Farmer to discuss our financials. Michelle?

Thank you, Christian. I will be discussing non-GAAP results, which include non-cash 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. The annualized revenue pull-through per system was 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 revenue plate. Similar to the US, several countries in the region also face 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, Radford, and Dubai's population sequencing programs continued 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 SmartCell manufacturing yield and lower ASPs on Revio due to certain strategic deals in the quarter, partially offset by per unit cost 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 reduction in R&D and SG&A related to our restructuring initiated in the second quarter of 2024. Regarding headcount, we ended the quarter with 575 employees, which was flat to Q3 2024 and 28% lower than 796 employees at the end of the fourth quarter of 2023. Operating expenses in the fourth quarter included non-cash 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 cash and investments, compared to $441 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 non-cash 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 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 non-cash 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 2025 revenue to range 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's shipments, with annualized pull-through per 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. 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 lines 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 a 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 announcement. 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 timeframe still positions us at 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 high-value sequencing. Second, we aim to accelerate the number of samples on the Revio platform through the launch of the Spark Chemistry and Application Kit. Revenue 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 the 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, 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.

If your question has already been addressed and you'd like to remove yourself from the queue, please press star then two. Once again, that's star then one if you have a question. Today's first question comes from Tycho Peterson with Jefferies. Please go ahead.

Hey. Thanks. Christian, I think you talked about an uncertain funding environment much like 2024. I'm gonna take the other side to 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 kinda 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, you know, some pretty significant headwinds, particularly in the first half of the year, and you know, you saw we said in our guidance typical a bit of typical seasonality, but we expect revenues to be down in Q1 versus Q4. Partially because of that uncertainty, partially because of, you know, kind of typical seasonality. And so I do think we have, to the best of our ability, kind of based 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 American sales team that have an opportunity closing this quarter to try to get an assessment of each, you know, each instrument opportunity in particular. And, you know, the feedback was, still some uncertainty. A lot of positivity about getting the deals done that we, you know, that we forecasted. But we still have to get them done. I think, Tycho, one area where you, you know, one area where you may look where we've been really thoughtful here is we've lowered kind of the call-through expectation. You know, so we did $240K or so in Q4. We said we gave a pretty broad range of, you know, low $200s to mid $200s. And that's an area where, you know, you could see some funding freezes or pauses, you know, 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 have we're seeing, you know, very exciting growth in Europe. That is offsetting, you know, 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, you know, we also see data really, you know, the sales funnel for Vega is what we've talked about. We talked about this at JPM, continues to grow. The quality, the after opportunities are strong. And I think that that is, you know, if that is the right product, in a situation where the capital, you know, the capital environment is tough. So hopefully, that helps a little bit.

It does. And on Vega, I think at JPM, you might

you'd only shipped seven units because that's all you had available. Can you maybe just talk on, you know, anything you can say on backlog, and when do you expect to kinda scale up shipments more meaningfully?

Yeah. So we I mean, we certainly have some backlog. And we will, you know, 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 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 you know, 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.

Okay. That's one last one, you just you pushed out cash flow breakeven by a year. I just wanna 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. You know? Look. If we obviously, if we can our focus is on driving growth and gross margin expansion, those are the those are the obvious key levers but we we 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, you know, further reduce burn.

Alright. Thank you.

Yep. Thank you.

And our next question today comes from Kyle Nixon with Canaccord. Please go ahead.

Hey, guys. Thanks for the questions. Just to kinda follow-up on the guidance why are Revio shipments declined this year if 24 places were already about half of that of 23? Like, you know, why is that product fading? Is that an act related? Market related, or just cannibalization from from Vega so far? And, you know, is there further downside to the guidance? I know you baked in the challenges to assess your ability, but could you just try, like, quantifying what's in there for NIH? Is it, like, $5 million or so? Is it $10 million or so? Just we help with kind of quantify that. Thanks.

Yeah. So first of all, I would I would argue that you know, that data is not is not significantly cannibalizing Revio at all, and I would also argue that Revio is not fading at all. We are we are really in a you know, in a one of the most unprecedented macroeconomic times, at least in my career, and in this at least in this space. And so you know, when we when we think about the challenges we're having with respect to Revio and and accelerating shipment volume it really is driven by funding concerns. We're seeing all over the world customers you know, publishing more and more using HiFi needing more scale. We're seeing customers, you know, extoll the virtues of of HiFi specifically as a long-read platform. We're we're, you know, we're winning projects like we've won last year in Estonia, etcetera. But but the reality is that the macroeconomic environment is really tough. And and that continues to be an important driver for expensive more expensive capital equipment. And so, you know, when we put our guidance out for 2025, we are considering that it's gonna continue to be just as tough a macroeconomic environment maybe even tougher. And so that I would argue that, you know, we said we expected revenue shipments to be modestly down from from 2024 levels. You know, they could easily they could easily turn the other way if if some of the if the macroeconomic headwinds aren't as bad as we think. So that's how that's how I would comment on Revio and and Vega. With respect to, you know, the funding itself and is there further downside to the guidance? Know, I think what we've done is we've really taken our best look at At at the the funding environment our our sales funnel, our opportunities, and and trying to put together guidance that we felt was very, very possible. One of the things that's working in 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 and that will, you know, that will help our growth. Asia Pacific, while it does have we do have country-specific challenges, Vega is a a very strong platform for that part of the world. And we expect to see a strong demand there for Vega. And then and then we, you know, we talked about some of our clinical customers like Myriad and Quest and others they are scaling up and and, you know, interior screening, and other assays. And as those become routine, those are completely additive to growth. And so I think we have a lot of 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.

Thanks, Kyle. Next question, Rocco.

Absolutely. Our next question comes from Dan Brennan with TD Cowen. Please go ahead.

Great. Thanks for the questions. Maybe just to start up, just one more on NIH, if you don't mind. So your exposure to what, Christian, is around 28% or somewhere in that

Well, I think our total our total NIH revenue is roughly 20% of revenue. You know, historically. And, you know, I do think I do think you can work through I do think it's difficult to to game out, you know, down to a dollar. I know you're looking for well, it's x million dollars exactly of a risk, but the reality is it's a lot more complex than that. And I think some of our peers you know, you know, were were helping to try to explain that to the to the street. Think from our perspective, what we're seeing is it's really a deal by it's really a deal by deal institution by institution. Some institutions have you know, funds their instrumentation out of different pools of money. Other institutions you know, have the the significant overrate that they're going to absolutely apply. And I think it's too early Two. 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 our opportunity set, particularly in the Americas, and evaluated that in its totality to try to come up with guidance for what we bought Here's what America's gonna do. Here's what Europe's gonna do. And here's what age is gonna do. And and that's why this this year, we gave a little more color region by region our guidance. So that you could get you know, some perspective that, yes, it's a it's an important part of our business but it's not our whole business. Thanks, Dan.

We have next question, Rocco.

Absolutely. Our next question comes from Doug Schenkel with Wolfe Research. Please go ahead.

Hey, good afternoon, guys. I have let me just draw 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, you know, 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, you know, 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, you know, maybe more things like reagent rental type things or other initiatives that you know, could make it easier for customers to bring in instruments what could be a tougher environment for capital demand? Thank you.

Yeah. Thank you, Doug. Those are great questions, and I appreciate the sentiment on gross margin because I do think it it is an area where we're gonna see significant opportunity this year. When what's really happening, you know, in growth margins in Q4. We had some yield issues on which drove you know, which drove some impact to our GM Those have been largely resolved and we're we're on, you know, on our way back. We continue to make progress in terms of lowering the per unit cost of both your the chips, our, you know, our smart cell as well as the as well as the instruments themselves. We've in-sourced a lot more of our 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 there you know, we do have a very strong path to exiting you know, over over 40 and then and actually nicely over 40. Your point about relative to prior, you know, prior consensus is actually an interesting interesting one because you're right. It's likely that gross margins would be higher if we were you know, the more revenue we do, the more likely the gross margins are gonna be higher. And the reason for that is because you're gonna see a greater push of consumables which carry generally carry higher gross margin. And as that mix shift occurs, you get a substantial benefit from that. And so know, one of the things we we were pretty we were pretty thoughtful about how we thought about our consumable revenues. Which, you know, 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 those are those are that's that's kinda gives you some color on how to think about how we how we're gonna move through the year with gross margin. And exit the year quite frankly in a in a what we believe will be a really strong position moving into 2026. The last the other part of your question, you know, there is a lot of stuff that we can do that you know, try to combat the combat the macroeconomic environment and 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 and bake it in bake the, cloth 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 pretty happy with the price of Vega and and I do expect ASPs to be pretty strong for Vega here in the particularly in the particularly in 2025. We'll see how 2026 goes, but I think we're off to a strong start there with respect to ASP. We're also you know, 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 You know, it has 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 listened to several customer talks, and each of the customers you know, really are driving on 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 you know, 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 we talked about Vega. The second half of the year moving into the production line. And so that over the course of the year, you'll see an improvement in gross margin as that gets off the development guys into the the full production manufacturing mode.

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

Hey, Doug. We have next question, Rocca.

Yes, sir. Our next question comes from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good evening, and thanks for the time here. Christian, I just wanna get a sense for how you're incorporating some of the concentration risk into your 25 guide. You flagged the MAO momentum a couple of times, but it sounds like it it is Estonia, Radbourn, and Dubai that are, you know, certainly important there. And you've got the Berry partnership, that that's sort of a flagship customer for you in China. And then as as the 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 you know, the Luminas addition to that unreliable entity list or does the fact that there just aren't any great sort of local long-read alternatives mean no impact on that count for you guys.

Yeah. Hey, Doug. Those are good great questions. I'll start with China first and go backwards. We we are you know, we've had lots of conversations with our our Chinese customers and you know, interestingly, there are no alternatives to what we do in China which which certainly decreases our risk of of any of any blowback from what's what's going on with our competitors And so we, you know, we don't see that as a big exposure. Now what we can't control or predict is on the export side if if the if the administration decides you know, to make some changes there, that could be an exposure that we would have. And quite frankly, I'm not sure we would have a lot of mitigation to that or some retaliation, you know, from China itself. But from what we see at this moment, our our customers don't see any issue at our our I do think there is a lot of I do think there's an interesting opportunity for Vega inside of China this year too, and and we'll see how that unfolds. Respect to con customer concentration risk, right, it's a it is a it is a it's a good news, bad news story in the sense that yes, you have some we do have some customers that are running you know, large scale programs But when you sit and talk to these customers, like a snowing is they're running at at full tilt and they plan to keep running at full tilt and the program is going exceptionally well. We 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 of what's going on there. One thing you know, the way that risk is is going to get mitigated is that we do more customers moving into that large customer category, particularly particularly at some of the diagnostic customers will you know, in hopefully in 2025, advanced advanced their app phase into full production. And as that happens that, you know, they'll be running they'll be running Revios at at full tilt which will be you know, very durable revenue in the clinical setting and that's you know, that's really what we're trying to go after so that we can balance the research, you know, population scale with clinical revenue that is, you know, quite durable and consistent. And also on top of that, hey, Gus, we're seeing customers like the Sanger Institute accelerate their their usage of of Revio both on the trade of life program, which they've been know, we've been long time customers. Or they've been a long time customer, but now we've been able to penetrate into the human genetic side and we're doing a really interesting collaboration with them in RNA sequencing which will drive some significant sequencing this year. So know, the best way to alleviate cost customer cost concentration is to find more big customers and and I think that's what's happening right now.

Thanks, Deja. Next, please, Robin.

Absolutely. Our next question comes from Jack Meehan with National Research. Please go ahead.

Hey, Thank you. Good afternoon. Just hoping to get a little bit more color on Vega. The seven units that you shipped in the fourth quarter, the initial revenue was there And then as you look to 2025, how does the order book look? And kinda what are you assuming in terms of placement? Thank you.

Yeah. So we haven't we haven't disclosed, you know, kind of the ending the ending orders for 2024, but we we have talked in, you know, in terms of that we've developed at this point hundreds of of opportunities over 70% of them are new customers. We, you know, we would expect to scale manufacturing over the course of the first half of the year and it's likely that will be more manufacturing limited than than order limited with respect to to revenue. And we'll see how that unfolds. But and the revenue in the fourth quarter, you you know, you could imagine yeah, it's seven units that that basically a little bit more than the around the spread. So Yeah. And the finance team's looking at me saying, yes. That's right. Seven units in the in the one b in the one hundred and sixty thousand dollars Yes. So we haven't done any we haven't really done any discounting on on the on their on the Vegas system. When when you see the ASPs, you know, kind of at the end of Q1, what you'll likely see is we we do sell to some distributors and those distributors will get you know, a distributor discount because they end up paying for the service and installation, and that's typical. But that would be effectively the distributor list price. And so I think the ASP, I think we set the price right to drive to drive demand. And so far, we haven't had a lot of objections to the price. And so we'll see how we do.

Thanks, Jack.

Thank you. And our next question comes from Subbu Nambi with Guggenheim. Please go ahead.

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

Yeah. So we haven't really run into Roche to my knowledge at all yet, and we haven't had any any deals stalled because of Roche I I don't think that that is a that is a thing. It will be interesting to see what what their technology is when they when they launch it. It's my understanding. It's a short brief focused technology, but the reality is that we don't know And so we will see when you know, when when they come out But but and I'm sure there'll be a lot more We'll all learn a lot more about it at AGBT in a couple of weeks. And so I'm looking forward to that. But here's here's what I can tell you. We have built a portfolio now sequencers and an end to end solution that the company has never had in its history, and that is driving more excitement more discovery, more demand than ever before. We it is unfortunate that we've been in this macroeconomic environment because I I do think that that's had an impact, of course. But when you look at the the discoveries that are being made, the clinical adoption the increased improvement in solve rates in rare disease, the population scale program like Precise and Estonia that we are winning and are expanding You know, we we've really we we really are making a lot of progress as a leader in long range sequencing tech so I I feel very confident in our portfolio and we will certainly be watching like everyone else does. When when the products come out and we'll evaluate it after

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

Yeah. I think, like, if you had to put a top three for for things that would actually drive guidance to the upside. I'd say the first would be there are several pop gen projects that we are you know, working with groups and and And you know, potentially, may may we may end up being able to get those press releases out start the sequencing. Those would drive strong Revio demand because they would be at scale. So You know, if the pop gen programs would drive increased revenue demand, increased revenue demand would certainly drive drive the guidance up to the higher end towards the higher end. The second would be you know, the timing of clinical adoption and broader clinical adoption. So we saw know, we saw rapid commit to five thousand more genomes. In rare disease. We have there's similar kinds of project going on in Sweden, for example. As they as they continue to scale, that will that will be another source of upside And then You know, and then if the I mean, the last one is perhaps the most obvious. Right? It's a it the macro environment improves even a little bit, and we have more certainty around NIH funding, perhaps that drives that would certainly drive our guidance in a more positive direction. So those are my top three, I would say.

Thanks, Hugo. Next question?

Next, we have Sung Ji Nam with Scotiabank. Please go ahead.

Hi. Thanks for taking the question. Christian, I was just 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 was wondering if the kind of the growth outlook It it's pretty broad based, you know, geographically, And in terms of the you know, the types of applications, are they pretty similar? It it you know, terms of what the the demand you're seeing in the US versus ex US. Thank you.

Yeah. That's that's a really great question. And you know, I don't have a a perfect crystal ball there. But I do believe that you know, 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 per percent of our total revenue. And it's gonna come from you know, it's gonna come from several different areas. It's gonna come from you know, rare disease 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 gonna come in panel testing. Our pure target our pure target panel has really inspired this large clinical testing labs because with PureTarget, they can they can eliminate their legacy test. And and operate at much higher multiplex much more with much better and easier answers to get, and therefore save money and and help more patients. And so know, pure target and that will be things like carrier testing, looking at ataxia, anything where you have you know, complex germline driven disease, And then the last area will be, you know, will be in in oncology. Both, you know, on the on the laundry side, you know, looking at, being able to look at methylation profiles, being able to look at both appetite, should start to understand more more about a tumor That will be an it's in clinical research right now, but over time, say, in this three year window, I do think there's gonna be opportunities for us to penetrate parts of that market and grow our revenue. So you know, all in, I think it will be one of the fastest growing areas of our business and it perhaps could be you know, at least double what we're doing now in terms of percentage of the total.

Thank you. And our next question comes from yes, sir. Our next question comes from Matthew Sykes of Goldman Sachs. Please go ahead.

Hi. This is Yvie on for Matt. Thanks for taking my questions. So my first one is what trends are you seeing in the reagent rental models placed in versus, like, what percent of instruments you're seeing through CapEx placements?

Yeah. You know, the reality is we still see the majority of our sales at adds straight CapEx placements. We do a few reagent rentals or or, you know, unique financing type deals. Each quarter. We do have a very we do have a very strong leasing partner that will do, you know, 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 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? Understand this might improve throughout the years you move to production and manufacturing, but any numbers you could put around that would be great.

I'm sorry. You're looking for the comparative margins of Brevio and and Vega?

Yeah. The the contribution margin.

It it's a little too early to disclose. You know, that on Vega yet, but we need to get through at least the full quarter of production. Start, you know, start really understanding that, but the 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, you know, the revio gross margin higher at first, Here? The the challenge on the radio side, of course, is managing the ASP. And and so making sure, you know, making sure the ASP stays in a range On the Vegas side, you know, we've we've positioned it to be a nice gross margin product for us. Particularly as we exit you know, 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'll start to you know, approach or or perhaps even exceed the margin on Revio. We'll see how that goes. Yeah. We're already, you know, looking at 26 and beyond how we could even take further cost out of Vegas. Now beyond this year moving into production, there's there's a pathway beyond that to to reduce cost even further to the platform. Yeah. I think this is one thing that maybe people don't appreciate as much. Because most most instrumentation companies don't take so much cost out of their instruments after they get on market. But because our technology you know, is so much of our technology is compute driven and when you think about the cost of instrument? We've been as we improve our algorithms, as we improve our our smart cells, we're able to take substantial amounts of cost out of out of the instrumentation and that will 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, you know, we innovated in some of the areas where there's poor expense. So it has the opportunity to be a a very strong gross margin product, but before we start putting a bunch of numbers around it, I wanna see us get a a few a few quarters under our belt of production to see how we really do at scale.

Thanks for the question, Phoebe.

And our next question comes from Mason Carrico with Stephens. Please go ahead.

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

Well, I think sure. And and thank you for the question. I mean, I think realistically, right, we are we we we certainly didn't perform as expected in 2024. Which lowered our revenue trajectory And in 2025, given the uncertainty and the guidance we gave, we wanted to make sure that we were responsible and thinking through the whole equation The whole equation to get to cash will breakeven And so so the core assumptions you think about are kind of thinking about the midpoint of our guidance right now both on the both on the revenue growth and and the gross margin. And then starting to think about you know, modest growth up from there in 26. And 27. So that by the time we're getting, you know, out of 27, we are we're exiting you know, cash flow positive Basically, at this week as we were thinking with with 2026. And so the the key is you're gonna see you you know, we do believe you're gonna see gross margin expand. Over the course of the year. So that we exit we exit in the forties still believe we can get into the fifties and beyond. In gross margin and and as we continue to scale our business, drive consumables become a greater proportion of the total revenue you start to see that uplift in the combination of those things. Along with disciplined expense management get to to cash flow breakeven.

Thanks, Spencer.

Thank you. And our final question today comes from Luke Surgot with Barclays. Please go ahead.

This is Sam on for Luke. Thanks for squeezing me in here. Just on Revio pull through, took a small step down in 4Q. How much of that came from maybe a an AirPacket from Spark and or Vega? And then just, you know, 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, you know, 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, you know, the lower sequencing cost not offsetting the the demand this year. I'll I'll leave it there.

Yeah. So so with respect to, you know, was there an air pocket in Q4? I mean, we did anytime you announce the change in in reagents, you are gonna have customers using their existing inventory before shipping you know, shipping more products and so we didn't start shipping the Spark Reagents until base basically, the last what two weeks of the quarter We also ended up with some we also did have some backorder for some of our application kits. And that back order, you know, that was a pretty pretty reasonable amount of back order and so that hurt us as well. And so, yeah, there was a bid. There was certainly a bit of that. You're right. It was $240 versus what? $253 or $254 last quarter. So, you know, I think Todd was was at JPM, he was saying, know, that's, like, half a run And so there were certainly some of that. When you think about the guidance for the for the low to mid low to mid $200s, We certainly are our first priority is thinking through NIH exposure, any potential funding freezes that we see with with intramural Even even the perception of that, you know, certainly a a creates anxiety with our customer base, and so we're, you know, we're monitoring you know, we're monitoring that. But I don't think it's I don't really think the Spark reagents in other words, the increase in throughput because of the reagents creates that that air pocket. In fact, most customers that we've spoken to so far excited about implementing Spark and they're not know, they're not doing they're they're they're typically not doing more multiplex onto the same ruts, particularly in human full human genome applications. And so I, you know, I I think they're just they're they're getting the benefit of more data. And so I don't think it's going to have a big impact you know, from that perspective, kind of that elasticity equation that that you, you know, you kinda talked about. So, yeah, I think that it's really we're being thoughtful about the funding environment and the timing of when studies get started. I don't think so.

Thank you. This concludes the question and answer session. Like to turn the conference back over to Todd Friedman for closing remarks.

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