Welcome to the PacBio’s Second Quarter Fiscal Year 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Mr. Todd Friedman, Director of Investor Relations. Please go ahead..

Good afternoon and welcome to PacBio’s second quarter 2022 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 Investor’s section of our website at www.pacb.com, or as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Christian Henry, President and Chief Executive Officer; and Susan Kim, Chief Financial Officer.

Before we begin, I would like to remind you that on today’s call, we will be making forward-looking statements, including statements regarding predictions, progress, estimates, plans, expectations, intentions, guidance, and others, including expectations with respect to collaborations, cash flow, and product and technology launches.

You should not place undue reliance on forward-looking statements because they are subject to assumptions, and risks, and uncertainties and could cause actual outcomes and results to differ materially from currently anticipated results.

These risks and uncertainties are – as well as other risks and uncertainties are more fully described in our press release earlier today and in our Form 8-K, Form 10-Q, Form 10-K and other filings with the Securities and Exchange Commission. We disclaim any obligation to update or revise these forward-looking statements except as required by law.

During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures, taken in conjunction with U.S.

GAAP financial measures, provide useful information to compare our performance relative to forecasts and strategic plans and to benchmark our performance externally against competitors. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release.

In addition, please note that today’s call is being recorded and will be available for audio replay on the Investor’s section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today’s call may differ or change materially after the completion of the live call.

I will now turn the call over to Christian..

Good afternoon, everybody. I appreciate you joining us today. On today’s call, I’ll provide an update on our 2022 revenue outlook, highlight our results for the second quarter of 2022, discuss some recent business and commercial successes and then will ask Susan to get into our financial results and guidance in more detail.

September will mark my two-year anniversary at PacBio, and in that time, we have undergone a remarkable transformation. First, we’ve been able to build a talented and experienced team to lead the company and execute a strategy that will leverage our technology and commercial scale to serve our customers around the globe and drive growth.

We also acquired Omniome and Circulomics adding core products and technologies to our portfolio.

As a result of these acquisitions and through our aggressive product development investments, we expect to be the first company to commercialize both highly accurate long read and short read technologies, providing our customers with the right product for their application of interest and, as a result, serving the entire genomic sequencing landscape.

Additionally, we believe that our portfolio will create significant value for our customers as we provide them with the capabilities required to discover novel biology with unprecedented detail at compelling scale and economics.

We have not only invested in developing new technologies, we’ve also continued to improve our highly accurate Sequel IIe platform to provide even more customer value. For example, just this past quarter, we launched the ability for our customers to look at epigenetic markers with each sequencing run for no additional cost.

Compared to various short read sequencing technologies, this feature dramatically simplifies the ability to see epigenetic markers because the workflow doesn’t require multiple sequencing runs with different sample preparations to capture all the data.

We’ve also collaborated with leading organizations to show how highly accurate, long reads can transform clinical research. I think you’ll agree that PacBio today looks a lot different than it did two years ago. There is no question, though, that we’re operating in an uncertain macroeconomic environment.

These macro issues do not change our, nor our customers’, enthusiasm for PacBio sequencing. However, we are finding that these factors broadly play a role in customer purchasing patterns and their ability to operate at scale, especially as our business is currently dependent on large capital purchases.

As a result, we have reevaluated our current outlook for the year to take these macroeconomic factors into account. Specifically, we expect EMEA to be lower than our original forecast as we see the region to be most affected by longer purchasing cycles.

In addition, foreign exchange headwinds and increased competition are expected to have a greater impact there than in other parts of the world. We’re also seeing that some of our larger customers in the region are ramping their utilization to pre-Omicron levels at a slower-than-anticipated pace, due to staffing shortages, among other things.

We believe this has and will continue to have an impact on our consumables revenue for the remainder of the year.

In China, the second quarter was impacted by more than we expected from COVID lockdowns, and we expect it to take longer for our customers to ramp back to pre-lockdown levels in addition to the ongoing risk of localized lockdowns that could be reintroduced.

For example, lockdowns at certain customer locations prevented us from installing newly acquired Sequel IIe systems, which had an impact on consumable revenue in China.

Excluding China, we are quite pleased with the performance of the , especially in Japan where commercial investments made in 2021 are driving significant opportunities and growth for the region. As China returns to a more normal operating environment, we believe our strength in commercial team will be able to drive diversified growth throughout APAC.

In the Americas, recession fears, volatile capital markets in a growing number of sequencing entrants are slowing purchasing patterns as well.

However, the region remains mostly resilient as it posted record revenue and grew over 50% compared to the second quarter of last year, as we’re growing in multiple markets from human genome to gene editing, to microbiome, the strength and diversity of our customers in the U.S.

market gives me confidence that other regional headwinds are only temporary and we will re-accelerate going into the next year and beyond.

Considering these broader issues, we have re-examined our full year forecast, and we are now expecting 2022 revenue to be in the range of $138 million to $145 million or about 8% year-over-year growth at the midpoint.

We expect an improving environment through the balance of the year with both third and fourth quarter growing sequentially, both in total revenue and instruments placed. In fact, consumable shipments are off to a strong start for the quarter with July being the strongest month one of any quarter this year.

While lower than previously forecasted, I want to reiterate that we believe this is primarily due to macroeconomic factors, particularly outside of the United States, which we do believe will be transitory.

Our market opportunity has not changed, and we remain committed to our strategy to become a multi-platform company, enabling the most complete and accurate view of the genome.

I am confident in our strategy and I am excited about our progress in developing revolutionary long and short read platforms, which we believe will be key drivers of our growth. Also, our balance sheet remains strong. At quarter end we had $899 million in cash and investments.

And today I’m reaffirming our belief that even in spite of the short term macroeconomic challenges, we’ve seen, we have the capital required on our balance sheet to execute on our current development and commercialization plans, which we believe will enable us to reach positive cash flow. This is a top priority for the company.

Susan will expand further on the guidance a little later. But first, I’d like to highlight the results of our second quarter. We reported $35.5 million in revenue in the second quarter, representing 16% year-over-year growth, which was in line with our guidance for sequential growth.

Q2 was the sixth consecutive quarter of double digit year-over-year growth. And as I previously mentioned, our Americas region posted record revenue. In Q2, we were pleased to see that about one third of our Sequel IIe placements were brand-new, PacBio instrument customers across all of our target markets.

This demonstrates that we continue to grow even amidst higher comps, a maturing product cycle and broader macro macroeconomic factors. We’ve continued to see momentum in human applications as well with over 40% of our revenue in the first half to customers working on human genomics compared to just over a third of our revenue in 2021.

This includes applications in genetic disease research where highly accurate long reads can help better understand complex genomic variation. For example, another top tier children’s hospital in the United States received its first Sequel IIes in the second quarter to accelerated studies into genetic disease.

Notably, the customer cited our newly released methylation detection capability as a key differentiator in deciding to purchase these systems. Additionally, we shipped Sequel IIes to multiple genome centers in the second quarter in support of whole genome research initiatives in the United States.

And in Japan, we provided Sequel IIes to a large scale service provider in support of ongoing and upcoming cancer research initiatives in the country. Our customers continue demonstrating the power of PacBio hi-fi sequencing through numerous publications and preprints.

Notably, the Human Pan Genome Reference Consortium or the HPRC posted several preprints describing the first human pan genome reference this past quarter. Hi-fi directly assembled this reference from 47 genetically diverse individuals.

The transition from the single linear reference commonly used today to a pan genome reference represents a paradigm shift in human genetics. It improves variant calling and resolution of complex regions such as tandem repeats, segmental duplications, and is more representative of a diverse population.

Before building this reference researchers first benchmarked the best sequencing approaches and determined that highly accurate long reads were best suited technology.

Further, this is a shifting of the sequencing paradigm towards a fully phased six giga-base genome versus a commonly used three giga-base genome, which the HPRC shows hi-fi is uniquely suited to assemble.

In plant and animal genomics studies show to sustained use case for hi-fi as accurate long reads are best suited for assembling highly complex genomes.

In a pre-print last month, researchers from Utah State and other universities compared long read technologies and showed that hi-fi reads and I quote “hi-fi reads consistently outperform all other data types for both plants and animals, and may represent a particularly valuable tool for assembling complex plant genomes”.

Moving to microbiology, Biopark a service provider in Korea purchased a Sequel IIe in the second quarter to advance human microbiome and drug resistance, microbial research with funding from a Korean government agency.

Other emerging applications like AAV gene vector sequencing with our latest protocol on instrument workflow, continue to drive placements as we delivered multiple Sequel IIe to customers working on vector validation and research.

In the second quarter, we’ve progressed our product development to enable more applications, better data and higher levels of automation and standardization. All while making great progress towards future product launches.

We’ve released custom targeted enrichment capabilities as part of our collaboration with Twist Bioscience, these panels can provide customers a cost effective and high throughput way to sequence particular genes of interest, delivering comprehensive detection of single nucleotide variants, structural variants, and indels for any genomic interval, including difficult to sequence or difficult to map regions of the genome.

We also reformatted and relaunched our Nanobind extraction technology from our Circulomics acquisition to be integrated with HiFi allowing for more seamless sequencing workflow. As it was only launched a few years ago, most of our instrument customers have not yet used the Circulomics Nanobind extraction.

This integration opens up the opportunity to get the differentiated product into more customers’ hands and fully recognized the synergies between the two technologies.

Also on the workflow side, we’ve partnered with iLAC and the Robotic Biology instrument to develop fully automated end-to-end workflows for PacBio Sequel II and Sequel IIe HiFi long-read sequencing systems by employing advanced robotics.

And in the backdrop of these enhancements, our field performance of smart cells continues to improve as part of our most recent chemistry and software release earlier this year. In fact, the average yield per smart cell is hitting records with over 30% more gigabases of output per cell than we saw in 2021.

This on-market improvement enables customers to do more sequencing with Sequel II than ever before. We made excellent progress towards the launch of new products, such as our Kitted MAS-Iso-Seq solution, which remains on track for commercial release in the fourth quarter.

Early access customer sites have been identified and will begin using the product later this year. The commercialized kit is expected to have higher and more robust throughput than the original MAS-Iso-Seq method outlined in a pre-print last year with reduced library preparation time and reagent use.

The solution will come with a smart link workflow to produce isoform level single cell data compatible with tertiary analysis tools and will enable the size and scope of experiments that have driven the breakout growth we’ve seen in single cell genomics.

Meanwhile, early adopters of the MAS-Iso-Seq method, particularly in the oncology and neuro disease research space tell us that they can now see critical, full length isoform information missing from their short read single cell data.

If we move to our sequencing by binding platform development, we shared some exciting data at AGBT around SBDs, exquisite accuracy in variant calling performance. After speaking with customers, we left the conference feeling even more invigorated about how SBD’s unparalleled accuracy can accelerate genomic discoveries.

Our team remains on track for commercial launch in the first half of next year. We’re in active discussions with potential beta sites and we anticipate beginning our full beta program in the next few months. We are also engaging with potential partners across the ecosystem to ensure the system is user-friendly and compatible at launch.

Meanwhile, our in-house systems continue to sequence incredibly well, achieving accuracy scores with over 90% of the bases at or above Q40. And the system has demonstrated both single end 200 base pair read lengths and 2/150 paired end read lengths.

And lastly, I’m pleased that we reached an agreement with Invitae in June that provides a roadmap and incentives for them to accelerate their sequencing on PacBio HiFi and still leverages their expertise in our development of our ultra-high throughput sequencers.

I believe these new technologies will be even more important in Invitae’s refocused business as they aim to deliver the most comprehensive genomes. Turning to other organizational updates. Today, we unveiled our first ESG highlights report.

The report showcases our approach to environmental sustainability, social justice, and responsible governance and outlines our progress in these areas. Over the coming years, we expect to continue to invest in our ESG program as a key component of our long-term business strategy.

And finally, we look forward to welcoming our new Chief Commercial Officer, Jeff Eidel later this month. I’ve personally worked with Jeff for over a decade and his knowledge and experience in genomics will drive significant value across PacBio. Now, with that, I’ll hand a call over to Susan to talk about our financial results in more detail.

Susan?.

Thank you, Christian. As discussed, we reported $35.5 million in product and service revenue in the second quarter of 2022, which represented an increase of 16% from $30.6 million in the second quarter of 2021, and 7% sequential growth compared to $33.2 million in the first quarter of 2022.

Instrument revenue in the second quarter was $15.6 million, an increase of 9% from $14.3 million in the second quarter of 2021. In the second quarter, we modified our agreement with Invitae and recognized $3.7 million in instrument revenue related to Sequel IIe delivered to Invitae in the quarter.

We delivered a total of 36 Sequel II and Sequel IIe systems during Q2 growing the install base to 460 systems as of June 30, 2022. Turning to consumables, revenue of $14.6 million in the second quarter grew 19% from $12.2 million in the second quarter of last year.

And Sequel II and Sequel IIe consumables represented approximately 86% of total consumable revenue in the second quarter, with the rest from older systems and other consumables. Annualized pull-through per system on the Sequel II and Sequel IIe installed base in the second quarter was approximately $120,000.

Headwinds from pandemic-related lockdowns in China, continued through most of the second quarter. Additionally, new customers have been taking longer to get up to full speed as supply chain constraints have affected other inputs in customers’ workflow, such as servers and automation equipment.

Finally, service and other revenue grew to $5.3 million in the second quarter compared to $4.1 million in the second quarter of 2021 reflecting our growing installed base. From a regional perspective, Americas had a record quarter with revenue of $21.7 million and grew 51% compared to the second quarter of 2021.

We shipped Sequel IIes to a growing and diverse set of customers in the quarter including AnimalBiome, which is implementing PacBio HiFi and has plans to leverage concatenation for 16S sequencing in their industry-leading direct-to-consumer pet microbiome tests.

Human germline applications, though, were the primary driver with nearly half the region’s instruments delivered to customers in this focus area. Asia-Pacific revenue of $8.0 million reflected a 18% decline over the prior year period primarily due to China, which was 30% lower compared to the second quarter of 2021.

We were pleased to see that revenue growth in other APAC countries help to offset some of the lower revenue in China. Finally, EMEA revenue of $5.8 million was 12% lower compared to the prior year period and was impacted by broader macro dynamics, which slowed customers’ capital purchases.

In addition, the region had an FX headwind of approximately 7% when compared to Q2 2021. Moving down to P&L, GAAP gross profit of $16.2 million in the second quarter of 2022 represented a gross margin of 45.7%.

Excluding amortization of intangible assets, second quarter 2022 non-GAAP gross profit of $16.4 million represented a gross margin of 46.2%, compared to a GAAP and non-GAAP gross profit of $13.8 million or 44.9% in the second quarter of last year.

The increase compared to the second quarter of last year was partially driven by a multi-instrument order at higher ASPs, as well as greater consumable and service revenue volume due to a growing installed base of Sequel II/IIe’s in Q2 2022.

GAAP operating expenses were $84.2 million in the second quarter of 2022; excluding change in fair value of contingent consideration of $5.4 million, non-GAAP operating expenses were $89.6 million.

This represents a 74% increase from non-GAAP operating expenses of $51.3 million in the second quarter of last year, reflecting growth in headcount, operating expenses related to the acquisition of Omniome, increased R&D spend, and increased travel as we transition out of the pandemic remote environment.

In terms of headcount, we ended the quarter with 782 employees compared to 728 at the end of 2021. GAAP and non-GAAP operating expenses in the second quarter included a total non-cash stock-based compensation of $18 million, compared to $13.9 million in the second quarter of last year.

GAAP net loss in the second quarter of 2022 was $71.4 million, or $0.32 per share.

Excluding amortization of acquired intangibles and change in fair value of contingent consideration, non-GAAP net loss was $76.6 million representing $0.34 per share compared to a GAAP and non-GAAP net loss of $41 million or $0.21 per share in the second quarter of 2021. Now, turning to our balance sheet.

We ended the second quarter with $899 million in unrestricted cash and investments, compared with $963 million at the end of the first quarter of 2022.

Inventory balances increased in the second quarter to $36.1 million, representing 2.3 inventory turns, compared with $29.6 million at the end of the first quarter of 2022, representing 2.8 inventory turns.

Similar to last quarter, the decline in inventory turns reflects our strategy of increasing safety stock levels to manage global supply chain risk, to continue to ensure we have the necessary materials on hand to meet our customer demand.

Accounts receivable decreased in the second quarter to $27.1 million, reflecting a DSO of 70 days, compared with $27.9 million at the end of the first quarter of 2022, reflecting a DSO of 71 days.

Long-term deferred revenue declined approximately $23 million and current deferred revenue increased approximately $21 million for a net change of approximately $2 million in Q2, primarily as a result of a multi-instrument order from Invitae in the quarter as well as future credits awarded to Invitae via the amendment to the co-development agreement.

Moving to guidance. We are updating our expectation for full year 2022 revenue to be approximately $138 million to $145 million, or 8% growth at the mid-point.

While we continue to see increasing customer enthusiasm for our technology and products, broader macroeconomic dynamics including rising inflation, global supply chain constraints, volatile capital markets, and lockdown restrictions associated with COVID-19 have lengthened customer sales cycles particularly for capital purchases.

Therefore, we expect to ship fewer instruments this year than we originally expected. With respect to consumable revenue, lockdowns in China have led to lower than previously anticipated consumable revenue in the region as customers have difficulty accessing labs as well as lower sample volume from which to sequence.

In addition, placing instruments with more new customers has lowered our average consumable pull through, and a lower than previously forecasted installed base has lowered consumable revenue estimates for the year.

On a quarterly basis, we expect the third quarter revenue to be slightly higher sequentially as we expect higher Sequel IIe placements and pull through to be partially offset with lower ASPs.

We expect non-GAAP gross margin to be 44% to 45%, slightly lower than our previous guidance range, reflecting lower revenue volume and increasing costs associated with ongoing global supply chain constraints and rising inflation.

For OpEx, we have significantly reduced the pace of hiring in the second half of the year relative to our previous forecasts. However, we continue to make excellent progress on our next generation platforms and will continue to prioritize these investments. As such, we now expect non-GAAP operating expenses to be between $350 million and $360 million.

We expect that slowing our pace of hiring will translate into lower run rate of operating expenses entering 2023 while still giving us flexibility to make the appropriate investments in R&D and commercial to fuel our growth in 2023 and beyond.

Interest and other expense is unchanged and expected to be approximately $15 million for the full year, reflecting interest expense and amortization of debt issuance costs for our convertible notes issued in 2021. We expect the weighted average share count for purposes of EPS for the full year to be approximately 225 million shares.

With that, I will turn the call back to Christian.

Christian?.

Thank you, Susan. I hope your takeaway from our prepared remarks today is that PacBio remains extremely well capitalized and well positioned to execute on our strategy despite the short-term volatility and uncertainty we see in the market.

We sit in front of a huge multi-billion-dollar market opportunity with multiple technologies that we believe will uniquely position us to provide customers with products capable of delivering genomic insights unimaginable with the current status quo of sequencing. We look forward to engaging with our customers at ASHG in late October.

And with investors, we hope to connect at the many conferences lined up in Q3 and we’re hosting our first Analyst Day in November, which we will be sharing details about next month. Now, with that, I’d like to turn it back to the operator so that we begin the Q&A..

Thank you. We’ll now begin the question-and-answer session. Our first question comes with Ross Osborn with Cantor Fitzgerald. Please go ahead. It appears Ms. Osborn has disconnected. So our next question comes with Kyle Mikson with Canaccord. Please go ahead..

All right. Great. Thanks guys for the questions. I hope you’re doing well. So just want to talk about the guidance, not a huge surprise. I thought a lot of the factors that you called out Christian make sense.

But maybe could you just break down the guidance assumptions, maybe like quantitatively, when you think about the macro factors, like China lock down, FX inflation, supply chain. Just want to understand how you’re thinking about that maybe in the near term here.

And then also, maybe for Susan, like the product breakdown, you didn’t really quantify that instruments can end up pull through. How could that really trend in the second half of the year as well? Thanks..

Sure, Kyle. So I’m not going to break down the delta and guidance based on – I’m not going to try to ascribe a value specifically to each macroeconomic factor. But qualitatively, what we’re seeing is that the Americas is actually doing extremely well.

But we did lose, in the first – if you look at back on the first half, the first part of the year we had COVID impacting consumable pull through, which we saw the numbers have been lower than what they’ve been historically.

But overall the Americas has done extremely well and compensated and will continue to compensate, primarily for the weakness in Europe. That’s actually the area where we have the most – where we’ve had the most impact. And it’s a number of different things.

It absolutely the currency headwind is significant we had – I believe over $0.5 million, like $0.5 million of currency impact in the quarter principally driven. And if you look at that on a year-over-year basis, principally driven from EMEA.

We also have COVID still being an – having an impact in EMEA and the inflation/fears of recession/kind of the situation in Ukraine, all of those different factors are just slowing the purchasing process down. The good news is that, our demand and our funnel looks very encouraging.

And so if you look at the balance of our written remarks on balance, all things considered the company is actually doing, I’m pretty happy with what the – how the company is doing. But I do think Europe is going to continue to be challenged for the rest of this year.

And I think that’s really is the big driver of why we think we wanted to reduce the guidance going forward. China continues to be, I think, a bit choppy. I do think we saw – in the quarter, we saw some – at the end of the quarter, like, we expected to see some improvement in China.

We talked about that on our last call, last quarter about the notion that we thought the lockdowns would maybe start to subsided in the Jewish timeframe. I think that’s true, but what we’re finding it is a bit lumpy. And I think that we – what’s interesting is the knock on effect of not being able to get into the labs.

I talked about it in my written remarks, the whole concept of we had several instruments that we had shipped two customers in China at the end of Q1 that we just couldn’t install in Q2, because they were lock down. Now those instruments are now installed. People are starting to ramp back up a little bit.

And so it’s I think back half is encouraging, but the balance of all these factors made it prudent for us to reduce our outlook for the rest of this year.

Hopefully that helps Kyle?.

Yes, I mean, that was a great, Christian. Susan, do you want – did you want to talk about like instruments first pull through maybe how that could trend? Or if not, it’s fine, we can just move on..

Oh, no. Happy to Kyle. I was trying to unmute. So just to give you an idea. So, we talked a lot about the fact that there’s a lot of enthusiasm by our customers in terms of our technology, which is great. Our pipelines continue to be strong. So because mostly because of the macroeconomic dynamics that we talked about, sales cycles have lengthened.

Having said that some of the orders that we have forecasted in Q2 is pushing into Q3 for capital purchases. And then in Q3, you do have the government fiscal year end, which is going to help on the back end.

So, we do see that interim placements in Q3, we expect to be sequentially higher in Q3, relative to Q2, you also have the fiscal year end associated with the calendar year end. And so we further believe that Q4 will be higher interim placements relative to what we had seen in Q2.

So, you can model that out in terms of what it means for instrument revenue. Also based of a consumable shipments, especially for what we had seen in July. We’re off to a great start while I don’t believe that consumable pull through will return to the levels we saw in 2021.

I do believe that the second half consultant pull through will be sequentially higher than what we had seen in the first half, just based off of how we’re tracking for the month of July, but again, probably lower than what you’re used to seeing at the end of 2021..

Okay. That was great. Thanks so much guys. And I guess, I guess Christian, I’m just thinking about like the issue that could be maybe internal or like specific to hack pie.

You didn’t really mention anything there, which was obviously positive, but some of your peers in this sector have had some leadership changes on the commercial team in recent quarters, those have kind of peered to lead to in inconsistent execution in some cases, your execution’s been pretty good recent recently, but I’m just kind of wondering what gives you confidence that you can like basically smoothly transition with Jeff as the new Chief Commercial Officer.

And is there any like structure or strategy change of the new kind of commercial leadership now that he’s been appoint appointed?.

That’s a great question, Kyle. And I think the one reason why I have a lot of confidence is first, I know Jeff, and Mark knows Jeff, and we’ve worked with Jeff for a very long time. So, we know what kind of leader he is, and what kind of capabilities he brings to the table.

And then on top of that, the other thing is that, I’m a former Chief Commercial Officer. Mark is a formal Chief Commercial Officer, and we’re still in, we’re about 800 people, but we’re not that big a company. We are intimately involved in all aspects of the business.

And so I think we will be important to that transition in the sense that we have been – we were very closely tied to our prior CCO, and helping to manage the activities of the business and to the point of even negotiating larger deals and really being engaged with the team. But and so that will continue with Jeff.

The other thing I would say is, Jeff also knows all of the general managers of the different regions since worked with the general managers in the different regions for many years as well. And so he comes in as a highly respected capable executive and he will come in and evaluate the organization as he sees it. And we may or may not make any changes.

I really like the fact that we have created a scaled commercial organization that can operate all around the world. We talked about, sales in Korea. We talked about expansion in Japan. Our European businesses covered better than ever, although the performance isn’t quite what we wanted.

And then in Americas, we’re growing at 50% and that’s because we have a highly capable team. And when you think about the backdrop of emerging competition, we’re extremely well positioned there because we have great products already. We have new products on the horizon.

We have a team in place and when we launch products that we can launch immediately at scale. And I just think that gives us a significant leg up and Jeff as an executive is going to fit right in..

That was great. I almost forgot Christian, your background. So, he has two great sequencing CCOs to learn from that. That’s great. I’ll ask a final one here. Just kind of lumping two thoughts in at the end here.

So the first being, you mentioned Christian, there’s a growing number of new sequencing entrances that pressured the America’s results, from what I understand, there’s no like pure-play long read companies that are going marketing time soon.

Could you just talk about that a bit? Is that more on the short read side, I guess? And then secondly, ASP was obviously pretty high this quarter in the past public labs trade in programs, those dragged down ASP, what should we expect going forward, I guess?.

Yes, those are good questions.

I think that regardless of whether the entrance or long and short reads, the excitement about and buzz about the sequencing industry and space is encouraging everyone to stop and look at the totality of what problems they’re trying to solve, and how they –what technologies can help them solve them? And so I think the emerging entrance definitely create some conversations what’s so great is that we’ve been – we have what we believe is the best lottery platform in the market, and it’s the data’s becoming more and more clear every day that our short read technology that will bring to market next year have some serious advantages over these emerging competitors and the existing incumbent.

And so we’ve – I’ve been in several sales discussions just this quarter already where we’re talking about – we’re talking about bundle sales. I want to buy the long read sequencer because I want to do a highly accurate whole genome sequencing.

I want to buy the short read sequencer because it goes, I can look exquisitely deep with exquisite sensitivity, and therefore I can find the answers, the needles and the haystack. And I think that’s going to service, I do think that’s going to service really well.

And going forward, we continue to have some trade-ins from Sequel I ones to Sequel IIs, which impact ASPs that’ll change in any given quarter. The APAC region’s been extremely successful with some promotional programs to make those conversions. And I think, EMEA and the U.S. and AMR are trying to emulate some of that.

So there’d be probably some of that, but you’re right. ASPS in the quarter were generally pretty strong. And I think that has to do somewhat with product mix as well. We’re selling to commercial customers in some places, for example in AAB they typically have more capacity to buy the equipment and so that helps.

So I think it’s the customer mix in any given quarter that will help or hurt the ASP. What’s really important is that we build the install base.

And, as Susan pointed out, we have 460 units out there now, which is I think a real accomplishment in the short time that I’ve been the CEO and I’m looking forward to cracking through the 500 barrier soon. So hopefully that helps a little bit..

Yep. Perfect. Thanks Christian. Thanks Susan..

Thank you. The next question comes with Julia Quinn with JP Morgan, please go ahead..

Hi, thank you for taking a question. This is Amy calling on Julia. So I have a couple of questions. So the first one is related to the guidance. I want to go back to the China market.

Do you guys have any idea, like what’s the outlook for the China market? Do you have any signs that when will the market be bounce back?.

Well, Julia I don’t think we have a crystal ball and so therefore we’re taking more conservative views on China as I think folks on the phone know, we historically, China’s been a significant part of our revenues.

As we grow globally, that we will be less reliant on China, but we do see lots of opportunity going forward in the second half of the year and into next year. But the timing of potential lockdowns and other fact – other macroeconomic factors, I think, we can’t predict that. And so we’ve taken a conservative view.

We didn’t break out, we’re not giving guidance to high region. And so I don’t want to move down that pathway, but we have taken a pretty conservative view on China and APAC as a whole. As we said APAC as a whole though, is getting buoyed by improvements in Japan and the rest of APAC. And what’s so encouraging about that.

If you look at the growth in the U.S., plus the growth outside of China you know, you’re really starting to see a step-up where as China improves, we can accelerate our revenue growth. And then if we can – if we can see Europe return to some sense of normalcy, then I think we’re really positioned well for long term growth.

On top of that the product just keeps getting better. And I think the sequel to me platform, although it’s been around for quite a while. As I said, we’ve improved the output of that platform with our latest release by we’re seeing what 30% improvements in the actual output and throughput of the system. So customers are getting more value.

They’re getting the methylation capability so for free with every single run, they get more data than ever before and more types of data that positions us very well against competitors and encourages others to get engaged with us on the long-read platform.

So I think overall, the outlook looks really, I think strong for the company, but we do have to, we do have to recognize that we are in a pretty uncertain environment therefore. From a guidance perspective, we would rather be thoughtful and considerate of these headwinds.

And as if we do a little bit better because the headwinds are less, then we’d be sure to tell you, but I think we’re trying to take a pretty conservative view on how we think about the world right now..

Okay. Yeah. That’s very helpful. Thank you very much. So my next question is relating to the pipeline. So first it’s for those new high-throughput platform so what kind of updates are we going to see and when, and how should we think about those updates? The second is with the short-read platform, the Omniome platform.

So the specs looks very impressive, like I’m very impressed by the accuracy. So I’m just curious, like based on your initial market research or marketing intelligence, what’s the customer’s appetite to pay a premier for this higher accuracy in their day-to-day works? Thanks..

Yeah. Okay. Well maybe I’ll address the short-read platform first and then I’ll talk about the long-read platform.

With respect to SVB, we were quite frankly enthusiastic about the response at AGBT and how customers really came up to us and really were excited about getting involved, getting into beta programs, seeing the data for themselves, because they see this as the next paradigm in short-read sequencing, the accuracy matters a lot.

And the reality is that accuracy can actually make costs more effective because it’s not about the cost per gigabase, which is the traditional way in which sequencing companies have talked about the consumable cost. What’s your cost per gig? And the reason why they’ve had that is everyone’s accuracy kind of been in the same range.

But if your accuracy is 15 fold better than the incumbents in the world, the discussion needs to turn to price per answer, because with higher accuracy, you need less coverage.

With less coverage, you can you can turn a mid throughput sequencer into a higher throughput sequencer, and therefore you can operate at higher multiplex and lower price per answer. And I think that’s going to be an important message for us to drive as we get these products into the market. And so I’m really excited about that.

I don’t – I, in other words, I don’t believe our pricing is going to be higher than others when you look at all the factors of getting to an answer, not just processing some sequencing.

So if you move to the short read side and of course stay tuned because we’ll be getting into the beta phase of our development program in the next couple of months. And so I suspect we’ll likely have some updates at ASHG, which is at the end of October and we’re well on our way to getting this product out the door.

And so I’m very excited about that. If you look at the long read side, the Sequel IIe as I said in the last couple minutes has really made dramatic improvements over the last few years. But you’re right. We do have new products and new ideas and new technologies and development.

And we haven’t said publicly when those would launch and I’m not going to do that on this call. We will do that in good time.

But what I can tell you is that when I joined the company, I said that we would embark on a strategy to drive product development, so that we could get kind of on the range of orders of magnitude of improvement in terms of throughput on long read sequencing.

So that our customers could operate at higher scale and leverage power of long read across larger sample cohorts. And I also said that we would be going for achieving the $1,000 genome or better. And I’m happy to report today that our development programs and our research is definitely showing us that we have the capabilities to do that.

And so we – at the right time, we will talk about these next generation research programs in much more detail. And we’ll share it then, but for now, we keep focused on the Sequel IIe platform. It’s a great platform. Like I said, we’re not that far away from having 500 units in the installed base. And we keep adding value to it.

And so that’s what’s – that’s going to be front and center commercially here over the next couple of quarters..

Okay. Yes, that’s very helpful. Thank you very much..

Thank you. Your next question comes with Tejas Savant with Morgan Stanley. Please go ahead..

Hey guys. Good evening. Question, just following up on your remarks there on the product pipeline, obviously, it’s a point of investor focus here. I know you don’t want to commit to specific timelines just yet.

But is there an interim instrument that you think needs to be launched before you get to that sub one K price point? Or do you feel confident just given what you said about your internal efforts that you can get there with next version of the Sequel?.

Yes, I do think at a fundamental level to just that we have the technology now to deliver the $1,000 genome and without incremental steps. One of the strategies here of course is to develop a multi-product portfolio with long – on the long read platform side that offers customers much more flexibility than we have historically.

So that, customers that are sensitive to – the capital cost offering a low capital cost offering with high value consumables. Customers that are doing extremely large cohorts, having the capability to run lots of samples with a reasonably sized lab under that $1,000 genome price point.

And then that middle ground where you’re doing a diversity of applications, or you’re looking at lots of seeds, but you have high multiplex and you can use kind of that mid throughput system. That’s still fundamental to our strategy long term. And the good news is that we are thinking much more modular than we’ve ever thought about before.

And I think that will give us a range of products and capabilities, and also improve lower the cost of the customer, but also improve the company’s ability to serve those customers and drive growth in gross margin, which ultimately drives us to cash flows..

Got it. Super helpful. And then one on the instrument and consumable side of things.

On the instrument side, Susan, just a quick point of clarification that 3.7 million you mentioned, I think on Invitae, was that for instruments placed in this quarter, or was that sort of a payment for instruments in past quarters? And then on the consumable side of things, Christian to your point around highest throughput applications coming through as you launch the new version of the Sequel here.

Do you expect sort of getting back to that 175K plus pull through range at perhaps the back half of 2023? Is that a reasonable assumption? Or do you think it’s really contingent on the new box being launched and getting some decent traction with customers?.

Maybe I can take….

Yes, maybe, Susan, do you want….

Yes..

Yes..

Real quick, on the 3.7 million for Invitae that is because of a handful of Sequel IIe that Invitae purchased in Q2 that they took delivery in Q2..

Right.

And then – and Tejas with respect to pull through expectations, it’s probably not appropriate for me to speculate on that yet, but you could imagine if we had platforms that had more, more throughput and you could do more runs per year, for example, or many more samples per year, that you would be able to drive the consumable pull through number up, but I’m not going to speculate as to the timing or the level yet, because I think it’s premature.

And with the Sequel IIe if we get specific on the Sequel IIe, we’ve been running what 115, 1 – kind of in the low 115, 120 range. We are expecting to see that improve a little, particularly as some of the instruments that have shipped in the last six months finally start getting ramped up to speed.

And some of our customers that have had significant staffing challenges are finally starting to resolve some of those.

And so I think it’ll improve, but I think as Susan said, we don’t necessarily expect it to get back to the levels that was – that was out of Q4 and that’s partially because the mix of customers, we’re reaching more customers than ever before because of our commercial scale and not every customer is going to be running the se the sequencer 24 hours a day, seven days a week.

And so it will – and as you tend to get to the – towards the end of a product cycle, you’re reaching – you’re reaching the lower edge of those customers so to speak that may not be high. They may need the technology and want to use the technology, but they may not be thinking of the same scale of projects.

And so, I do think it’s going to be – I do think it’s likely to be better in the second half than the first half, but I don’t think it’s going to return to Q3, Q4 levels of last year, anytime soon..

Got it. Appreciate the color guys. Thank you..

Thank you. Your next question comes with Dan Brennan with Cowen. Please go ahead..

Great. Thank you. Thanks for taking the questions. I had one on Europe and China and then one on the pipeline, maybe Christian, just to start on Europe and China.

So on Europe could you just unpack a little bit more of kind of what the issues are there? You kind of talked about staffing, competition, macro utilization and things like that, but could you just give us a sense of what were the kind of biggest issue if you will and I know you talked about the issues being transitory, but I believe you also talked about utilization being pressured for the year.

And then the similar question on China as well. It sounded like you’re flagging mostly the inability to get into labs to do installations. So presumably this improved someone if you can give some flavor, maybe what the exit rate is and kind of how things have paced in July and then I have a follow up on the pipeline..

Yes, sure. So with respect to EMEA, when you look at – if you just kind of dive into Q2, we had several instruments, in the near-term funnel that where you were in, what we call our commit bucket that didn’t – that ultimately for whatever reason, the purchasing cycle got extended. And as a result, the revenue didn’t happen.

The deal didn’t go away. But the deal didn’t get across the finish line in June. And so, that’s what we mean by extended purchasing cycles. And I do think that that was an impact in EMEA.

Another impact in EMEA has been in some of our flagship accounts, they’ve had significant turnover and not – and as a result, haven’t been running the sequencers as much. And so, that affects the consumables.

In other parts of both – on the continent and in the UK, we’ve had purchasing agents or tenders extend longer than we expected or purchasing folks just taking more time, because quite frankly, there is a lot of uncertainty with respect to their funding and the actual cost of the sequencer because of the FX changes.

And they have moved lot in a very short window. And so those are the things that have impacted us in EMEA. And that’s why, when you look at those each individually – don’t give me significant concern that this is a systemic long-term problem, this is a problem, because of the environment we sit in. And we think that it will resolve itself.

And in fact, the customer I was referring to with lots of turnover, they’ve actually started running their sequencers again in July. So we saw, and I said, in my general general comments, I’m not going to make, July specific comments about any particular region but we did see a strong July in consumables.

And we’re off to the best start of any first month of any point this year. So, that’s an encouraging sign that things are going okay. In China, I don’t want to give you the impression, the sole reason was we didn’t get some systems installed that that could have been running consumable.

That’s more of an illustrative example of the totality of the lockdowns, how they not only impact our customers acquiring samples, because most of our business in China is through service providers who rely on their customers to provide them with sequence, with samples so that they can sequence them.

And the lockdowns had a pretty far reaching effect. They weren’t able to get samples from their customers. They weren’t even able to go into the lab to run the sequencer. Our sales folks, weren’t able to get out into the, into the community to be selling. So the impact of COVID is pretty broad. It’s not just one little piece.

The lastly, I think, and it was either maybe it was Kyle actually talked about supply chain. The one thing, I do want to give a shout-out to is our internal supply chain folks have worked really hard to keep us with product to ship. And as you saw Susan pointed out, we have a little bit higher inventory levels than we’ve had.

And that’s because partially because of pricing of the inflationary impact on us, but also because we have really worked hard to make sure that we have product for our customers. And as a result, we’re carrying a little bit more inventory. So I said a lot there Dan, hopefully that helps you a little bit.

And then you said you had another question?.

Yes, they said, yes, no thanks Christian. That was helpful for sure. Maybe this one on the pipeline, obviously we’ll hear more about it next year. In terms of, getting below a $1000 on a long read genome how do we think about, as the pace of the price cuts on the short read side, continuum, we’ll see what happens this fall with Illumina.

Like as that gap really widens, even though you’re going to shrink it again like, is the gap still going to be wide enough such that, that dilutes, maybe the uptake or the impact of say an $800 and $900 on long read genome?.

I mean, we’ll have to see how the world unfolds, but I believe very strongly that it won’t. And the reason is today, not only is the price per genome, significantly different on our platform versus a short read platform, but also the throughput is a lot lower than, what you can do on a short read platform.

So really it’s a combination of not just the pricing, but the throughput and, as we narrow the gap on both, I do think you see accelerated adoption because one, you can do the large projects using long read.

Two, everyone is seeing now we talked about the Pangenome, the HPRC in my written remarks, the reality is that the reference genome now is changing such that, it will demonstrate that short reads are insufficient for whole genome sequencing. They just are.

And I think that as we get the economics and throughput improve, it will completely change the paradigm.

And on top of that, if we can continue to deliver epigenetic information telomere-to-telomere sequencing, with SNVs and Indels and all the structural variation at very highly accurate levels, why you would have to do multiple assays, which in the, even if the short read sequencer was charging a $100, let’s say for their sequence, you’d still have to run another sample prep to get, to get the epigenetic data, for example.

And I’ll just it, the second you do that, you’re actually more expensive than what we’re talking about here is we kind of break through the $1000 genome barrier.

And so for us, I’m very encouraged about the progress we’re making in R&D, about the state of the market and the state of the market being the proof points of why long reads matter.

One of the core strategies that I had coming into the company was to, do enough collaborations, so that everyone could see the power of HiFi sequencing and the power of long reads versus short reads. I think all of those proof statements are becoming overwhelming, quite frankly.

And now it comes, it’s incumbent for us to get the products to market that will enable, enable the scale and the economics that will, make a dent in that short read market, sort to speak..

Got it. Thanks Christian..

Yes..

This concludes our question-and-answer session. I would like now to turn the conference back over to Todd Friedman for any closing remarks. Please go ahead..

Thank you. As a reminder, replay of this call will be available in the Investors section of our website. Thank you all for joining us today. This now concludes our call and we look forward to updating you on our progress in the third quarter..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a great day..