Q4 2023 Pacific Biosciences of California Inc Earnings Call

Participants

Todd Friedman; IR; Pacific Biosciences of California, Inc.

Christian Henry; President & CEO; Pacific Biosciences of California, Inc.

Susan Kim; CFO; Pacific Biosciences of California, Inc.

Dan Brennan; Analyst; TD Cowen

Kyle Mikson; Analyst; Canaccord Genuity

John Sourbeer; Analyst; UBS

Jack Meehan; Analyst; Nephron Research LLC

Doug Schenkel; Analyst; Wolfe Research, LLC

Sung Ji Nam; Analyst; Scotiabank

Eve Burstein; Analyst; Bernstein Research

Ross Osborn; Analyst; Cantor Fitzgerald

Matt Sykes; Analyst; Goldman Sachs

Tejas Savant; Analyst; Morgan Stanley

Subbu Nambi; Analyst; Guggenheim

Rachel Vatnsdal; Analyst; JPMorgan Chase & Co.

Mason Carrico; Analyst; Stephens Inc.

Presentation

Operator

Hello, and welcome to the PacBio Fourth Quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask Quest. If you ask a question, you may press star then one on your telephone keypad. And to withdraw from the question queue, please press star then two. I would now like to hand the call to Todd Friedman, Senior Director, Investor Relations.
Please go ahead.

Todd Friedman

Good afternoon, and welcome to PacBio Fourth Quarter 2023 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 www.pacv.com for us furnished on Form eight 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. At today's call, we will make forward-looking statements, including statements regarding predictions, progress, estimates, plans, intentions, guidance and others, including expectations with respect to our growth, potential instrument and consumable sales and GAAP to non-GAAP guidance. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially than those projected or discussed, we refer you to the documents that we file with the SEC, including our most recent Forms 10 Q and 10 K and our press release.
Our recent press release to better understand the risks and uncertainties that could cause actual results to differ. We disclaim any obligation to update or revise these forward-looking statements, except as required by law and we will also present certain financial information on a non-GAAP basis.
Non-gaap information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the Company's operating results as reported under US GAAP and Management believes that non-GAAP financial measures combined with U.S. GAAP financial measures provide useful information to compare our performance relative to forecast and strategic plans and benchmarked our performance externally against competitors.
Reconciliations between historical U.S. GAAP and non-GAAP results are presented in the tables within our earnings release for future periods. We are unable to reconcile the non-GAAP gross margin and non-GAAP operating expenses without unreasonable efforts due to the uncertainty regarding, among other matters, certain acquisition related items it may arise during the year, including future changes in fair value adjustments of contingent consideration and allocation of amortization expense attributable to certain acquired intangible assets.
Please note that today's call is being recorded and will be available for replay on the Investors section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after completion of the live call.
Finally, we will be hosting a question and answer session. After our prepared remarks, we ask the analysts, please limit themselves to one question only so that we can accommodate everybody in the queue. I will now turn the call over to Christian.

Christian Henry

Thank you. Thanks, everyone, for joining our call today. I'll start by recapping our results for the year and the quarter, then I'll discuss our commercial activity around Revio. And also, finally, I'll discuss our latest product launches that we believe will further create value and differentiation around PacBio sequencing. I'll then pass it to Susan to discuss financials and guidance in more detail.
2023 mark PacBio, most transformative and successful year in our history, our team executed aggressive goals to ramp Revio , manufacturing and scale the installed base, which enabled PacBio to grow revenue 56% in 2023 to $200.5 million, which was ahead of our expectations. For the quarter, revenue grew 113% year over year to $58.4 million, and we shipped 44 Revio instruments in the fourth quarter, bringing our installed base as of December 31, 2023 to 173 Revio systems.
We also grew consumable revenue in the fourth quarter to $18.9 million, which included Revio consumables of approximately $12.4 million and represented an annualized consumable pull through of around $385,000. The demand for long-read data continues to grow as total gigabases output on-pack bio sequencers grew 68% in 2023 compared to 2022.
We believe this momentum sets us up for another year of growth as we continue to see growing interest in hi-fi for larger-scale human genomics and see it becoming more mainstream in genomic testing. The market clearly demonstrates a shift towards long-read sequencing in a growing number of major applications. And I'll share some of the specific examples showing this shift today. With that, our initial view on 2024 is that revenue will be between $230 million and $250 million, representing 15% to 25% growth compared to 2023.
At the midpoint of this range, we expect Revio system shipments to be roughly flat to slightly up year over year as we have previously communicated, customers have lengthened their capital purchasing time lines, which impacts the timing of instrument orders and the pace of revenue adoption. We do not anticipate these current macro trends to fundamentally impact customers' desire to sequence with high long reads. Susan will touch more on our guidance later.
Now turning back to 2023, Revio, our flagship long-read sequencer launched early last year is making significant progress in transforming how researchers look at the genome. And we're still in the early adoption curve. We've been especially pleased with the number of new customers adopting revenue as nearly 30% of Revio systems ordered in the fourth quarter were from new PacBio customers and almost 40% of Revio systems ordered in 2023 were from new PacBio customers.
New customers in the fourth quarter included Karolinska University Hospital in Sweden, a high salt consortium member planning to use Revio to address the limitations of short reads on structural variation, Tandem repeats and phasing to find more answers for genetic disease.
Hi-fi solves consortium was just announced last quarter and by creating this collaboration of 15 leading genomics research institutions across 10 countries. We expect best practices sharing to accelerate the impact hi-fi can have on human health. We're also making solid progress on converting existing PacBio customers over to revenue as about one-third of our Sequel two and two e. customers have now ordered a revenue. We are still in the early product transition cycle and expect most Sequel two or two users to migrate over to Revio over time.
Additionally, we expect customers who have adopted Revio in 2023 to continue to expand their fleets as they fill their Revio s to capacity. We're already starting to see this with some customers ordering their second or third Revio s in the fourth quarter like Radvision University, which took its second Rovio, expanding its fleet to ramp up its efforts in Rare Disease Research.
Additionally, Children's Mercy Hospital in Kansas City ordered its third Revio to continue its effort to consolidate tests for genetics and epigenetics, increase efficiency and improve solve rates while accelerating turnaround time. These fleet expansions demonstrate the elasticity and the demand to move samples over to Hai Long reads. 2023 was also a landmark year for PacBio as we launched on. So our second major sequencing platforms just months after we started shipping revenue, enabling us to address a multibillion short-read sequencing market.
With Ansell, we've gradually ramped up manufacturing capacity and grew shipments sequentially in the fourth quarter. We have now received orders from a wide range of customers who plan to use it in applications ranging from oncology, including research into fragment, omics and targeted cell-free DNA panels to exome sequencing and meta genomics. One also customer is Tiguan, which is taking advantage of the platform's accuracy to detect rare populations associated with disease in a high background of non diseased material for applications like early cancer detection and infectious disease research.
Last month, researchers from the Institute presented data that shows onsite was achieving well beyond its Q40 specification on customer liquid biopsy samples with the majority of bases over Q50 or one error in 100,000 bases of sequencing. Since the Antares launch peers in the industry have been increasingly discussing the value of accuracy, which we believe underscores accuracy as an unmet need that PacBio is differentially positioned to address with our sequencing by binding chemistry.
Moving on as we do every year, I wanted to share an update on our internal market segmentation from the previous year, our customers use our products across a diverse set of sequencing applications. In 2023, human genomics was the largest portion of our business accounting for approximately 40% of our revenue. This includes a wide range of customers like UC Irvine and the Gregory consortium. Looking to run a multi thousand sample project in rare disease or by Ascensia who is now using hi-fi for routine testing for certain sensory disorders.
Plant animal and aggregate genomics again was the second largest part of our customer base, making up approximately 25% of our revenue as long reads have been well positioned to interrogate these often large and complex genomes. This includes agricultural companies that are adopting Revio to incorporate low pass genome sequencing to improve their workflows and get better insights into crop development and production. Microbiology and Infectious Disease makes up about 20% of our business and include a wide array of customers across public health labs, research institutes and academic labs across a dynamic range of applications from pathogen surveillance to biology of host pathogen dynamics, drug resistance and more cancer genomics was roughly 10%. And this is really an application that we believe can be further addressed with answers accuracy. For example, McGill University researchers used on. So and preliminary results presented at the early detection of cancer conference in October indicate that Anthem's ability to accurately sequence through home and polymer regions has the potential to increase the detection of microsatellite instability.
The remaining approximately 5% of our revenues from other and emerging markets, including biopharma and in the fourth quarter included a new gene editing customer planning to implement Revio as part of its cardiovascular disease therapeutic development.
Turning to product launches, last week at AGBT, we announced new library prep kits that eliminate bottlenecks in the high fly workflow and make PacBio long-read library prep on par with that of short-read sequencing, making it easier for our customers to make the most of their Revio systems. Our high prep kit and high five Plex prep kit 96 offers customers the potential for up to a 60% decrease in workflow time and up to a 40% reduction in costs and further lowers the DNA input requirements It also allows customers to automate the sometimes tedious library prep process by integrating with the Hamilton NGS star system with other automation platform partners to be announced in the future in the fourth quarter, we launched our Connex kits for scalable, cost-effective RNA sequencing.
We've been extremely pleased with our customer enthusiasm and uptake for these kits, and we now have orders from over 115 different customers. An early adopter at UCSD Sandford consortium commented on how demand for the full-length RNA sequencing is outpacing genomic DNA sequencing and the customer share that the Connex kit enables competitive pricing, high throughput, ease of use and automation. And as provided for consistent sequencing yields across various samples. Connect can also help researchers glean more insight into RNA across various applications. For example, another early user from a leading pediatric hospital in Columbus, Ohio used connect to study somatic mosaic diseases like cancer and epilepsy. And with kinetics was able to pinpoint specific cell types harboring disease causing genomic variance from single cell data.
The customer explain that connects can help identify cell types, harboring the mutation and then understand the mutations influence on the transcript Dome, which could lead to a better basic biological understanding of how the disease occurs, but can also give clues into the timing of disease occurrence and the onset in children. These are just a couple of examples, and we believe Connext will continue to accelerate long-read sequencing as the preferred method in several RNA seek applications.
Lastly, we rolled out our V13 software for revenue last quarter and 93% of our Revio runs are using the new V13 software. As a result, customers are getting a better user experience. We've seen over a fourfold decline in overloading and customers are starting to realize increased yields on their smart cells.
Finally, to wrap it up last week was the annual Advances in Genome Biology and Technology Conference or AGBT. And it was encouraging to see the impact that high long-read sequencing had on the research community and the desire for researchers to look deeper and assemble more information from the genome than ever before. Our team walked away from the conference feeling like an inflection point for hi-fi sequencing has truly just begun. And with that, I'll pass the call to Susan to discuss our financials. Susan?

Susan Kim

Thank you, Christian. As we discussed, we reported $58.4 million in product service and other revenue in the fourth quarter of 2023, which represented an increase of 113% from $27.4 million in the fourth quarter of 2022. Instrument revenue in the fourth quarter was $35.1 million, an increase of 475% from $6.1 million in the fourth quarter of 2022, driven by continued adoption of the Revio platform. We ended the quarter with an installed base of 173 Revio system.
Turning to consumables. Revenue of $18.9 million in the fourth quarter increased 13% from $16.7 million in the fourth quarter of last year and was a record for PacBio, with approximately $12.4 million of consumable revenue coming from Revio systems, reflecting an annualized pull through for the Revio system of $385,000. and the remainder from other systems and other consumables. Finally, service and other revenue was $4.4 million in the fourth quarter compared to $4.6 million in the fourth quarter of 2022.
From a regional perspective, Americas revenue of $33.9 million grew 182% compared to the fourth quarter of 2022. The region's record quarter was driven by continued growth in instruments and consumables from both new and existing customers. For Asia Pacific, revenue of $13.4 million grew 31% over the prior year, with consumables in the region growing nearly $2 million quarter over quarter, which was in part due to stocking orders and year-end budget spend. Finally, EMEA revenue of $11.1 million grew 114% over the prior year period.
Moving down the P&L, our GAAP gross profit of $9.6 million in the fourth quarter of 2023 represented a gross margin of 16% compared to a GAAP gross profit of $5.1 million in the fourth quarter of 2022, which represented a gross margin of 19%.
The GAAP gross profit in the fourth quarter of 2023 includes the amortization of acquired intangibles from the acquisition of Omniome as we allocate some of the amortization expense to the cost of goods sold. Now that we are generating revenue from the on-sale products. Fourth quarter 2023. Non-gaap gross profit of $11.1 million represented a non-GAAP gross margin of 19% compared to a non-GAAP gross profit of $5.3 million or 19% in the fourth quarter of last year.
Gross profit in the fourth quarter of 2023 and fourth quarter of 2022 included inventory reserves and loss on purchase commitments totaling approximately $9.3 million and $7.1 million, respectively, primarily due to the continued decline in Sequel two to a consumable demand in the transition to the Revio platform as well as a decline in Sequel two instrument demand from data from predominantly one customer in China. Gaap operating expenses were $97.1 million in the fourth quarter of 2023 compared to $92.2 million in the fourth quarter of 2022. Excluding the change in fair value of contingent consideration, amortization of acquired intangible assets and merger related expenses and restructuring costs. Non-gaap operating expenses were $88.4 million in the fourth quarter of 2023 compared to $87.6 million in the fourth quarter of 2022.
Regarding headcount, we ended the quarter with 796 employees compared to 844 at the end of Q3 2023 and 769 at the end of the fourth quarter of 2022. Headcount declined following Q3 2023 due to a reorganization primarily within our R&D organization, which resulted in a reduction of approximately 55 positions in the fourth quarter.
Operating expenses in the fourth quarter included noncash share-based compensation of $15.4 million compared to $16.8 million in the fourth quarter of last year. GAAP net loss in the fourth quarter of 2023 was $82.0 million or $0.31 per share compared to a GAAP net loss of $84.4 million in the fourth quarter of 2022 or $0.37 per share. Non-GAAP net loss was $72.5 million, representing $0.27 per share in the fourth quarter of '23 compared to a non-GAAP net loss of $79.6 million, representing $0.35 per share in the fourth quarter of 2022.
Turning to our balance sheet items. We ended the fourth quarter with $631.4 million in unrestricted cash and investments compared with $767.8 million at the end of the third quarter of 2023. The decline reflects approximately $95.8 million in cash paid to the former Omniome shareholders in connection with the milestone achievements.
Inventory balances decreased in the fourth quarter to $56.7 million, representing 2.9 inventory turns compared with $68.3 million at the end of the third quarter of 2023, representing 2.2 inventory turns. Accounts receivable increased in the fourth quarter to $36.6 million compared with $30.5 million at the end of the third quarter of 2023.
As of December 31st, 2023, our total product backlog was approximately $18.7 million compared to $51.5 million as of December 31 2022. The decline was primarily related to our record starting backlog in 2023 and the ramp up of manufacturing to deliver revenue to customers throughout 2023. As we've communicated before, we expect to share this backlog figure on an annual basis in our Form 10-K.
Now to expand a bit on financial guidance. As Christian indicated, we continue expect revenue to drive growth in 2024 and expect full year revenue to be between $230 million to $250 million compared to 2023. This represents a growth rate of approximately 15% to 25%, which we believe will be well above the sequencing market growth rate. At the midpoint of our guidance range, we expect revenue of system shipments to be flat to slightly higher compared to the 173 units shipped in 2023.
Our growth expectations consider several macro factors that are impacting purchases of capital equipment. For example, the funding environment in China is impacting our ability to further expand our revenue installed base in the country, specifically with smaller volume, academic labs. Additionally, persistent inflation and high interest rates are lengthening sales cycles globally.
In terms of linearity, we expect approximately 45% of revenue in the first half and 55% in the second half. Based off what we've seen quarter to date, we expect the first quarter revenue to be lower compared to the fourth quarter of 2023, with Revio system shipments flat to slightly down sequentially with lower ASPs and total consumable revenue approximately flat. As we continue to expect Revio instruments and consumables to make up the majority of revenue. We do not expect to share Sequel two, we are on some placements or pull through on a quarterly basis for these platforms this year.
Moving down the P&L, we expect the 2024 and non-GAAP gross margin to be in the range of 36% to 39%. We do believe that gross margins will improve over the course of the year. As a reminder, inventory reserve charges associated with the decline in sequel to a demand in place of higher revenue. Demand represented a headwind of approximately 700 basis points in 2023.
Additionally, compared to the 2023 non-GAAP gross margin. We expect improvement driven by a mix shift toward higher margin consumables and higher consumable manufacturing volumes as well as instrument manufacturing optimization, helping to drive lower manufacturing unit costs, we expect non-GAAP operating expenses to grow less than 5% compared to 2023, which is consistent with our long-term guidance. We expect interest and other income to be between $5 million and $10 million in 2024 and weighted average share count for EPS for the full year to be approximately $273 million. I'll hand it back to Christian for some final remarks. Christian?

Christian Henry

Thank Susan. As we move forward in 2024, I want to reiterate our strategic priorities that I laid out last month. Our top priority is increasing the adoption of our technology by driving more Revio placements at new customers, converting existing Sequel two and two accounts and expanding revenue. The revenue of fleets at current customers. Additionally, as we expect to complete our scaling of on-site manufacturing this quarter, we will aggressively drive placements of the auto platform so that our leading STV. chemistry can get into the hands of more customers globally.
Another important priority is continuing to build the momentum for sales into the clinical and translational market earlier in the call we discussed a few of our customers who are starting to use their Revio s in this setting, including BioZ, Sensia and Children's Mercy, Kansas City. And we aim to expand our support in this market in 2024.
Additionally, we are progressing the development of our groundbreaking technologies. We launch two transformative platforms in 2023, but our work is far from complete. I previewed three other instruments.
e're working on that.
We plan to launch over the coming years, and we expect to make meaningful progress on all of these this year. I look forward to sharing more about these instruments when they near their completion.
Finally, we intend to continue building our business with the goal of becoming cash flow positive during 2026. On top of our long-term revenue target of reaching at least $500 million in 2026, we have several gross margin initiatives that are expected to lower production costs, better utilized manufacturing overhead, and improve our supply chain efficiency. These programs, along with the product mix shift towards consumables, are expected to improve our gross margins.
Further, we expect to continue to be disciplined on how we deploy our operating expenses and make investments in the future of our business. I continue to be encouraged by our investor, our customers' enthusiasm for our products and look forward to updating everyone on our progress as we continue to drive adoption of our technologies this year. So with that, let's start the Q&A.

Question and Answer Session

Operator

(Operator Instructions) Dan Brennan, TD Cowen.

Dan Brennan

Great. Thanks thanks for taking the questions, guys. And Susan, maybe just on the headwind that you talked about implicit in the guidance, you talked about China and kind of close rates again. Can you give some more color on China and what you're trying to do in the quarter on what are you kind of baking in for China for '24 on the funding side, is that worsening? Is it stable in terms of these close rates? Have you seen any change?

Christian Henry

Yes, Dan, thank you for that. We will talk about the Q4. China is break that out separately, but we actually had a decent Q4 in China.
We had some of our large service providers go with more new multi-system orders, some of which were delivered in Q4. Some will be delivered over the course of the first half year. But what we see in China is we do see funding challenges in China that are making it difficult for the smaller, the smaller labs to drive into revenue. And as a result, they're sending out their samples to the large service providers can and driving the business that way and so although the consumables will be strong, the instruments are not as strong in China as perhaps we would be hoping for. And as a result, in our guidance, we significantly took down our forecast for China for the year to actually one of the biggest areas of and the challenge for us as we look into 2024.

Operator

Kyle Mikson, Canaccord.

Kyle Mikson

Yes, yes. Hey, guys. Thanks for the questions and congrats on the year. Maybe just, Susan, could you talk about the gross margin cadence in '24 as you reduce production cost for the Revio increase revenue, consumables revenue as well, given the expanding installed base and how does this kind of funnel into cash burn this year? As well, just given you have that '26 target. Thanks.

Susan Kim

Yes, thank you for the question, Kyle. So you're right, and what's implied in our guidance is that our gross margins will improve this year. And our gross margins this year will come from a combination of activities, some of which we've actually already initiated, which is going to help to reduce the not only the interest instrument costs, but also the consumable costs.
These initiatives include and include consolidating manufacturing facilities such that we have better overhead allocation across more products, which helps to lower the unit costs initiatives such as better balancing of insourcing and outsourcing, which will help to lower the cost on the instrument and of course, improving manufacturing yields and value engineering to drive down the bill of materials further for especially on the instrument side, but also on the consumables, side
We're going to start to see some of these cost reductions as early as Q2 and then will continue to improve even in the subsequent quarters, such that the second half, our gross margins continue to improve relative to the first half and this is a key part of our path to getting to cash flow positive, as you had alluded to, Kyle, on improving gross margins and also being very disciplined with respect to our OpEx. So as part of our OpEx, we do not expect our OpEx to grow more than 5% this year, which is part of our journey to get to cash flow positive out in 2026, which is what our long-term guidance we had indicated.

Operator

John Sourbeer, UBS.

John Sourbeer

Good evening and thanks for taking the questions. Maybe just digging in a little bit further on maybe some of the assumptions that changed on Revio placements being up versus the BidPay point being roughly flat here you beyond China? And any other color you can provide on that and insight that gives you confidence into getting that flat placements for the year.

Christian Henry

I think -- John thanks for the question. One of the things we're seeing is we're seeing a lot of a lot of opportunities, particularly for larger sized projects, and those will drive those will drive not only consumable demand, but also increased unit placements. And so as those projects get started and get going, we would expect to see either those being truly incremental to what we've seen in the past and therefore additive to the Revio placements. Of course, China is challenged. We've talked about that. We've been talking about this for several quarters now. It has gotten a little bit worse?
I would, I would say, -- and so when I when I think about 2024, can we can we get back to the placement rate of what we were seeing in 2023. I absolutely think we can I think at this point where we're very focused on driving adoption and kind of taking a balanced perspective because the macro conditions have been pretty tough.

Operator

Jack Meehan, Neffron Research.

Jack Meehan

Thank you. Good afternoon. Christian or Susan, was wondering if you could lay out for us what the assumptions are for consumables in 2024? And just as you kind of visibility into that as you sort of add up the different projects you see going on? Thanks.

Christian Henry

Yes, when I think about the consumables -- thanks for the question. When you think about consumables, we're going to be growing consumables this year pretty significantly and the reason for that, of course, is we first of all, we shipped a lot of systems in 2023, and we're going to get the layering impact of those systems as they get up to full utilization or their planned utilization, I should say. And then as we ship new systems in 2020 for those as they scale up.
So that's how you start to see truly the mix shift the growth in consumables because you're layering on new system placements from one year and now are now are moving towards the second year at by the end of this quarter, we'll have been shipping the Revio system for one year. And so that's how you're going to see that.
The other thing is we also are adding consumable kits. And so you saw we just recently, we just recently launched some new kits, and those kits are additive to the consumable revenue line and we've seen strong uptake on particularly the Connex kit, which we've talked about over 115 customers have ordered from us at this point. And so that's another positive factor that drives consumer drives consumables up. And then finally, the large projects, when you start to see some of these larger projects, for example, in Q2, I would expect us to start seeing the Singapore population project that were part of start to do their sequencing. So you'll see a ramp in consumables there, which be additive. So there's several factors that are driving the positive side of it that consumable growth explicitly in 2024.

Operator

Doug Schenkel, Wolfe Research.

Doug Schenkel

Good afternoon and thanks for taking the question. So I guess just a couple of loose ends. I want to click through on First a follow up on the gross margin question from earlier. It seems like you're assuming an exit rate in the mid 40s for gross margins, just doing some math there, which is obviously important in the context of building confidence in the trajectory of your long-term target and then also doing some math, recognizing the placement numbers you gave out for revenue.
It's not clear to me that your guidance embeds an assumption for a big jump in consumable growth per box consumable I'm sorry, consumable revenue per box. And I just want to make sure that's the case because typically there's a toggle, right. If you're placing a lot more instruments and going deeper into the customer pyramid on the pacing of that. And the types of customers are probably going to spend less at least initially on. But if you're placing fewer boxes year over year. I'd assume the consumables per box to go up. So I just love to understand the logic behind that, just to make sure we're looking at this as a potential source of upside for the year? Thank you.

Christian Henry

Yes, sure. Thank you, Doug. Okay. So first, with gross margins, you know, I do I do expect over the course of the year. As you know, we are going to see gross margins improving and therefore you get into exit rates. We gave our guidance at 36% to 39%, which means we're certainly moving towards the 40%, whether we get there. Not this year, we'll see, but Tom but worse. But we certainly see the opportunity to keep moving up on gross margins for lots of all the reasons that Susan outlined.
One thing she didn't mentioned, but I also wanted to really point out we're actually innovating a lot. And that innovation is getting translated into reducing costs five, in particular, decreasing the compute costs associated with revenue. And that's a big source of opportunity that's in out tens of thousands of dollars per system kind of opportunity for for gross margin improvements. So you couple those things along with and consolidate factory consolidation and product consumable mix changes. That's how you start to move towards those 40% or 40% and beyond. And of course, our objective is to get it get up to up to 55% to 60% as we said for 2026.
And I do believe we still see a pathway to get there in with respect to the placement numbers and the relationship between that and consumable pull through, as you know, it's a compound, a compound problem. There's lots of variables on one hand, you are right, as you place more systems, you think you're placing of them to the to deeper into the market and therefore to lower utilization customers. However, we're still early in the adoption of Revio, particularly with respect to the larger projects, right projects from our you know, anywhere from 1,000 to 10,000 sample projects.
And quite frankly, what we've seen from the conferences from SHG. and from recently from AGBT has been there is more interest in large scale projects than ever in the history of the Company. And so as those projects, you know, it takes long time for these projects to get get funded and then one and then started with as those projects get going, we fully expect to see people utilizing their systems at a very high clip in those projects because they're usually scaled laboratories and they're used to operating at high sample volumes. So that so they're kind of competing.
Those two factors are competing at some level, as I said last week, at AGBT. We still believe we still really are we don't really know where consumable pull through is going to shake itself out here. We we've said that we think it's kind of in the $300,000 to $400,000. range where it fits. I think we still we still don't know that answer. I think it will be several several quarters yet before you really know know that answer definitively, but there's lots of different competing forces here. So it is a compound problem that compound puzzle we're trying to unravel just like you guys are.
But what I do know is the number of samples coming onto this system is accelerating and it's more than ever in the history of the Company. And I think that's at a fundamental level that bodes well for driving revenue growth, driving adoption, driving gross margin expansion and then driving really ubiquity in the market and which is really our core objective in this stage of our strategic plan, right, driving adoption, building the confidence in the data type and demonstrating why hi-fi is really the way to go with respect to germ-line genome.

Operator

Sung Ji Nam, Scotiabank.

Sung Ji Nam

Hi. Thanks for taking my question. So Christian, you mentioned, you know, your outlook for this year. Obviously, it's much higher than kind of the overall sequencing market growth. I'm just kind of curious, I don't know if it's too early to tell, but just you know how much of that growth do you think for you guys this year is coming from, you know, potentially taking share from the short read sequencing market versus on kind of expanding into new territories with long read sequencing, you know, given the new library prep launch recently and the high falls in open-source you talked about and all these large scale it is that you're saying that there is more interest than ever. So I'm just kind of curious, do you have a kind of a sense at a high level kind of how much Gary might be taking from the short read versus creating new markets?

Christian Henry

Yes, you know, I think it's a great question. I think that, you know, most of our new customers are already doing short read sequencing and so you can imagine that they're they're generally allocating dollars from short-read sequencing to long-read sequencing most of the time. But sometimes, you know, for example, in rare disease, our short read approaches have been used and to some success, but long-read sequencing gives you so much more information.
It dramatically increases solid rate decreases cost and as a result, it out are the question is, are you building a new market there or are you just or are you replacing and being additive to short reads? And I think it's a bit of and you know, a bit in the eyes of the beholder, but I also think that what we see is that at a high level, how we are winning projects that were slated for short rates and and what's happening is exactly kind of how we outlined it would happen at first, it would be we win a portion of a project and long reads would do the ramp our long reads or do a portion in short reads to do the remaining.
But now we're actually seeing accounts. I believe that with Revio now there's enough experience in the market of the scale. We've launched the automation with these new kits. We're seeing customers that say, hey, you know, it's totally plausible. I can do a 10,000 sample project entirely on revenue or even more and on. And so as a result, we're actually starting to see customers saying, hey, if you can fit within this economic envelope, we are transferring our entire project to long rates. And I think that's really, really exciting. And I'm looking forward to as we get deeper into the year in some of these projects I can't go into sharing that with you guys.

Operator

Eve Burstein, Bernstein Research.

Eve Burstein

Hi, there. Thanks a lot for the question. And we've talked about gross margins in '24. About one clarifying question on the gross margin for this quarter. If I'm doing the math right, even if we account for the charges on inventory reserve and loss on purchase commitments and amortization, you still get to about 35%. And we know that ASP. was unusually high for revenue. So if you normalize for that. It looks like a normalized gross margin this quarter of about 32%. So why is this flat? First last quarter, the consumables went up as a percent of revenue? And then is there any color you can give on gross margin for consumables versus instruments or for revenue sequel?

Christian Henry

Yes. So so just to kind of tried to clarify the question on China, if you I'll just trust your math. I didn't I didn't redo your math, but but really what were in the fourth quarter, we have had some yield challenges on the consumables, which have impacted us a little bit that wouldn't be factored into your account or your calculation. So even with consumables being higher, we did have some yield some yield challenges in the fourth quarter, but nothing that's significant, but probably had some sort of impact there of looking at those things have been largely resolved. And so as you look into Q1 and beyond here, I fully expect us to start moving the gross margins up on a quarterly basis.

Operator

Ross Osborn, Cantor Fitzgerald.

Ross Osborn

Thanks for taking our questions. Answered on the call. You mentioned consumables stocking in A-Pac. Did stocking occur in other geographies and is this a normal phenomenon? And if not could you provide some more color here?

Christian Henry

So I think that -- with respect to consumable stocking in Q4, we didn't have that much stocking. There's always a little bit in the fourth quarter and a pack, for example, because they have because they have on holidays in Q1, they may be ordering some of their component, some of their consumables earlier. So they get a good head start before they go on the holidays. But there was nothing really major. We had some of our large customers put in blanket, but large blanket POs that will ship over the course of 2024, and they did take some of their they did take some of that those POs in Q4 as well and so on. I think on balance, it wasn't a super heavy stocking quarter and for the company, I think we're ready for the next question.

Operator

Matt Sykes, with Goldman Sachs.

Matt Sykes

Hi, this is Vivian from my thanks for taking my question. I have is I know you said your sales cycles are extended with general weakness in the funding environment. But is there a recovery baked into your guide for 2024? Are you expecting a continuation of the current trends throughout the year?

Christian Henry

I think we've taken a pretty moderate view towards sales cycles. You know, I suspect we're hopeful by year end that we're seeing sales cycles kind of shrink back down to kind of more normal levels. But but the reality is, is that, you know, we are we are prepared to manage through longer sales cycles and throughout throughout 2024. And we tried to give guidance that would contemplate things outside of our control are just that they're outside of our control and that we should be able to tried to execute.
And accordingly now if things get a lot worse of course, things could change. If things get better, could could we could we do better inside of our guidance range, of course. But where we sit today, we tried to kind of create a balanced set of guidance based on it's a tough funding environment across the board. We still if you even if you take, for example, the United States, we're still operating under continuing resolutions and we still don't really have a budget in others. There's all kinds of noise about where the NIH budget will end up, which obviously NIH funding is an important part of our our business. And so I'm sure that creates some friction in the sales side.
Selling process we've talked about outside the United States. We talked about China a lot already today and we've emphasized that. But but also even in Europe, you know, interest rates and the funding environment still continue to be challenged. Europe had a great year last year for us. And we we expect to have a good year in Europe and continue growing. But there is there is that friction in the system.
The good news as I said in my prepared remarks is there is no shortage of interest for Revio and for and for high sequencing in general. In fact, at AGBT last week, are our social teams track social impressions. And I was told we had 2.3 million social impressions and the next highest off in oh person was like almost 10 times lower than where we were in. So what does that what does that mean and how does that translate into sales?
Well, I think I think what it does mean there's a lot of interest and which is helping build our funnels switch. It gives us opportunities to execute, which we're going to be focused on this year.

Operator

Tejas Savant, Morgan Stanley.

Tejas Savant

Hey, guys, good evening, Christian. I want to follow up a little bit on that question. Take a slightly different tack so on as you think about the low end of the guide right at I think it probably makes and around 160-odd sort of Revio's at the low end, can you just walk us through what you see and you've talked in the past of backlog, not being the best leading indicator, but perhaps you can talk about the qualified lead pipeline or some other metrics that drive your confidence at the low end of the range.
And then on the onshore, my question that is really related to the value proposition and the product market fit given some of your emerging sequencing vendors bumping up their better friend scores as well on the bench tops, and you've got the extra leap coming out on the next week. So is the benchtop market essentially in a little bit of a frozen state at the moment?

Christian Henry

Yes, that's a good question. Thank you. Just so you know, thinking about obviously when we put the guidance together at $230 million to $250 million , where we were, you know, talking today, we considered we certainly considered the quality and strength of our sales funnel for Revio and for also and for consumables for all of our products and at the low end and even at the high end, we have coverage in our sales funnels. It just we are, though the explanation for kind of the range of possible outcomes really comes down to timing of orders, timing of when funding comes for projects. Of course, our own sales execution and the ability our own execution in terms of the ability to manufacture the products and get them out to customers on a timely basis.
So when you put the guidance together, you've really tried to think through all of those different things and give a responsible range and where you think you might end up for the year now if the funnels and the excitement is enough such that you could actually exceed the top end of the range. But of course, there could be risks that are out there perhaps outside of your control that that make it. So you end up towards the lower end of the range.
And so it is we consider all of those different factors. We certainly have a pipeline that is encouraging for us, which is how we came up with the range. Quite frankly, you start there and you work backwards to all the other areas of execution, the value proposition with respect to on. So I would argue that the first thing I'd want to say is that, you know, the reality is most of the bases that come off the sequencer off of the also are are actually over Q50.
Now we expected at 90% of the bases over Q40. And I would I would submit to you that our competitors. I've not put a formal specification in to say they get 90% of their bases over Q40 or Q50. I think what they've done is perhaps they've demonstrated a run or some runs?
Yes, I will let each of those competitors kind of describe themselves how they define their quality. But what we are seeing in actual fact is that in customers' hands. For example, like T.J. and I talked about today, they see a lot of data that's well over Q50, and that data is allowing them to see parts of the genome and see variants that have that no one else could see. And I think that's where the value proposition starts. And so I don't think the opportunity is frozen.
On the other hand, I do see the market is the market for for those mid throughput sequencers is a huge market, Hong and there and every year, you know, there's and there's many, many, many sequencers sold. And so I think for us to capture our appropriate share according to our strategy, if you remember, our strategy we're trying to make on. So a sequencer that fits into very specific needle in a haystack applications and not necessarily every application.
We think that the opportunity is very strong and what's been interesting to us in as we see the funnel for also grow. And as we see customers using on-cell is that they're using it a ways that we didn't quite anticipate. So for example, one of our customers is using it for wastewater testing, which makes total sense because that's where the earlier you detect a variant that identifies a pathogen the soon that that obviously has benefits for the community. So that makes perfect sense.
We're seeing other customers focus on on oncology research and whether it's IENOMRD. or it's actually, you know, oncology screening cause there's a lot of research going on and an opportunity there. So the combination of four on So is we have a lot of market opportunity. I feel like our quality is still the best in the market and so much so that we specify it in our specifications. I'm not sure the other customers or other competitors are doing that yet, but I do think at the end of the day, the market is significant and we enjoy competing.

Operator

Subbu Nambi, Guggenheim.

Subbu Nambi

I thank you for taking my question. Following up on Doug's question on consumables revenue for revenue, your guidance seems to imply that you're assuming $300,000 per box in a full year guidance, is that right? And if so, keeping in mind what you described on this call and at AGBT last week, are you expecting that will build momentum in the second half of the year and heading into 2025? And then I have a follow-up.

Christian Henry

Okay. So with respect to the pull through, we have we there's lots of ways to get to the guidance. And so, you know, we won't we won't comment on whether our model says [$300,000, $350,000, $400,000]. But what we've said is that we don't know where our where our pull through is going to end up. But at like, for example, last week at AGBT, I did say I believe it's going to be in the [$300,000, $400,000]. range, Tom, and there's lots of factors, of course, that would influence it one way or another that I've already kind of been through on this call. That, but I didn't explicitly I won't explicitly comment on whether it's our model to get to the guidance was [$300,000] box or not.
A more general comment, I'll make about the business in general is that we do see more of the revenue coming in the second half of the year as opposed to the first half. Now this is not an uncommon phenomenon. And we don't expect, as Susan pointed out, 45%, 55% is the split, which isn't really uncommon in Life Science business. But we do see the business strengthening throughout the year, a big because of these large projects because of the growth in consumables because of the the actual opportunity set we see for revenue and also over the course of the year. And so we're excited about our ability to grow faster than the market. We do think our competitive positioning is extremely strong right now. And we just have to go execute.

Subbu Nambi

It makes perfect sense. And on a question, like you said, there was lots of enthusiasm even in our checks at AGBT last week. That said, there was on the need for lower cost and more streamlined solution adjacent to sequencing costs came up and even the sequencing process. And you, of course, launched the high focus on the new kits that you launched last week to address that same exact friction. What else should we think about on is in the pipeline to address the same issue and how big an opportunity is this reducing reduction of friction, both in terms of reducing activation energy, but also capturing more revenue?

Christian Henry

Yes, that's a great question. Thank you for it. You know, you're right, the new the new kits, we've been really focusing on automation and at reducing the friction and costs of the upfront workflow. We continue to lower the DNA input requirements, which gives you more access to more kinds of samples, more samples, all those things.
Our critical other things that we're doing to decrease friction and enable enable revenue growth is on the bioinformatics side and so we continue to build out more applications that really highlight the benefits of high sequencing and using using long reads and the more of those applications on better out there the more we can reach more and more customers.
We're also doing things on the market development side. So we created the hi-fi solves consortium so that customers can I can work together to solve rare diseases to show how they can benefit from, you know, seeing seeing some particular variant in a particular sample because by definition, rare disease, each single one of them is rare. And so enabling that enabling the community is an important thing.
And then finally, of course, we have we have a benchtop sequencer, long-read sequencer in development now. And once that product comes to market that will, you know, that will change the capital barriers, of course, out of the system and enable us to even broaden our customer base further and we haven't given specific timing on that, but we will certainly share updates as they are warranted.

Operator

Rachel Vatnsdal, JPMorgan.

Rachel Vatnsdal

Perfect. Good afternoon, and thanks for squeezing me in. So I wanted to ask at AGBT, you talked about some of this cautious capital spending that you're seeing a customer that you noted that you're starting to or giving discounts to customers on Revio , but then requiring higher minimum spend on consumables to kind of alleviate some of that capital purchasing dollars so much more of a reagent rental model. So can you spend a minute talking about that for us? Have you started to use that go-to-market strategy this year? And then if so how should we think about that impacting AFP. as we model revenue for this year as well?

Christian Henry

Thank you, Rachel. That's a great question. Thank you. Yes, we are we are exploring alternative business models or economic economic arrangements that still get us to that same place with respect to Revio , but perhaps perhaps the customer pays more for consumables and less for their instrument. We are we last year we implemented a new leasing partner that new leasing partner gives us the ability to do more creative financing arrangements where where the leasing partner takes some of the financial exposure, but we we obviously get the benefit to our customers and we still get healthy, healthy revenue from that. And so we're managing through this period by starting to think about how we experiment with different models to see how we catalyze how we continue to catalyze and grow the market.
Now the vast majority of our our sales are still going to be traditional sales as we've as we've kind of historically done. And so I don't think anyone should be thinking that we're fundamentally altering how we think about generating revenue in the geography of revenue on the P&L.
But I but I do think at the margin, some customers might benefit from more reagent rental type programs and the implication of that would be on that you will likely have higher consumable revenues and an effectively what The Street would see is lower power, lower instrument ASP. maybe a little bit, but that but I think that when you think about 2024, the real impact to ASP.s and consumable revenue probably isn't that significant really I think it's I think at the end of the day, it ends up being much more of a a marketing tool and a way to get into customers. And then they will decide how to how to deploy whatever opportunity that we provide them. So we'll see how it goes and we'll keep you guys posted.

Operator

Mason Carrico, Stephens.

Mason Carrico

Please go ahead. Hey, guys, sorry if this has been asked already, I hopped on a little bit late here, but you guys have talked about these larger sequencing projects coming online in the back half of the year. Is there any way to frame up on the magnitude of these projects in terms of the growth implied in the guide? I mean, ultimately, I think the question is how derisked is the revenue baked into the guide related to these projects? How much visibility do you have into the timing and ramp of these customers scaling them up in the back half?

Christian Henry

Thank you, Mason, for the question. It's a good question. And the reality is anytime you have a large project, large projects are highly variable with respect to when they start. But once they start, they crank. And so, you know, watching when they actually start, of course, we are doing everything we can to accelerate them of most some of these projects that we're seeing certainly already have samples, banked and ready to go and those most likely to get going sooner than others that might be prospective kinds of studies. And when you think about, okay, what's the magnitude of any particular project?
You know, probably the best way to think about it is to apply a cost per genome, for example, and then multiply it by the number of samples that that particular project is. So if you have a 5,000 sample project at a at a $750 price per genome or whatever price you want to use, you can do the math and figure out what that looks like. And then you have to assume they have to buy capital along to run. So that can kind of give you a sense of what the magnitude of any particular project with respect to our guide, we were actually pretty of you know, because the volatility or the variability of when any particular project starts. We took a pretty conservative view as we are baking in those projects into our guide
because we really want to make sure that that we put out responsible guidance and we're not so dependent on one project or one it out as a make or break for the year, so to speak. But I do think in 2024, you're really going to start to see the turning point here where several of these projects start to get kicked off on. We already are seeing some right. All of us is moving along. We talked about the Gregory consortium project. And so we talked about Singapore starting later this year. And so there we're really seeing it. And it's super exciting because every time we go to one of these conferences, more samples get added to the funnel and significantly more samples. And so now it's it's a question of timing and execution, and we're ready to you can say be assured we're ready to go.

Operator

Yes, this concludes our question and answer session. I'd like to turn back to management for any closing remarks.

Christian Henry

All right. Well, we want to we want to thank everyone for hanging in with us. I know we're a few minutes over over time today. We expect 2024 to be an exciting year for the Company, and we appreciate everyone's support, and we look forward to seeing you at the various conferences over the course of the quarter and on our next earnings call. With that, we will end this call. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now your line.