My name is Yuko Oku, and I'm on the Life Science Tools and Diagnostic team here at Morgan Stanley. Before we begin, for important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. With that, it's my pleasure to host PacBio. I'm speaking on behalf of the company. We have Christian Henry, CEO. Thank you for joining us today. Yeah, thank you. It's great to be here, and we really appreciate the support from Morgan Stanley for this opportunity. Maybe to set the stage, it's been a challenging year for life science tools and diagnostic instrument vendors like PacBio, facing headwinds that are essentially outside your control. Could you elaborate on the key focus areas for you this year to help set up the business for hopefully a better environment next year? Yeah, I think that you said it. Things outside of your control. And so, as a CEO, what you're trying to do is you're trying to help the company understand what can we control, and how can we execute against that, what can't we control, and how do we try to mitigate any risks associated with that. And so this year, we've been focused in a few key areas. First and foremost, we've been focused on driving our gross margins up and managing our expenses because we're on a march to achieve cash flow break-even by the end of 2027, and we've made that commitment, and we're making great progress. And if you look at our cash burn in the first half of the year, it's improving every quarter. So that's an area that we're focused on. Externally, in the market, what we're really focused on is pushing our products and moving our products to customers where they have more steady demand. So that's really clinical customers. And so we're seeing in the early part of the second quarter, we had our first LDT launched by a customer, which was really exciting. We're pushing into the clinical opportunities, particularly in a couple of different areas: rare disease and carrier testing. And so we launched the PureTarget targeted sequencing panel that allows you to look at genes that are very difficult to sequence using short-read sequencers. And that's actually really driving our business in the clinical side of the house, and customers are developing LDTs based on that panel. So we're very focused there. The other place we're very focused commercially is outside the United States. And so at the beginning of the year, when we were laying out our guidance and thinking about where we thought we would have strength, it was really focused on international and particularly Europe, and that's absolutely come to pass. The first half outside the United States was very strong. In fact, in Q2, we had 53% growth in Asia, 35% growth in EMEA. And so we're trying to amplify that. And that growth is driven from growth in rare disease testing and population scale sequencing programs in Europe. And in Asia, really an expansion of the market, both from the launch of our Vega system, which we started shipping at the very tail end of December last year, but really our first full quarter of shipments was Q1. That product is perfectly suited for the Asian market in terms of it's at a fantastic price point of $169,000, and it has a lot of power, so we're seeing a lot of growth there. And then our service providers continue to scale. We've been growing into India, in fact. So we are in a tough macro environment where the U.S. funding situation is highly uncertain and continues to be uncertain. We've been focusing in areas where we see more opportunity and making that happen, meanwhile executing on the core of our business, improving gross margin, managing costs, focusing on driving cash flows, improving inventory utilization, all those different things that, as the market comes back, it will serve us well. Great. Well, that's a lot to dig into there. Sure. Okay. So starting with Americas, in the U.S., academic funding uncertainty has weighed on spending. So maybe to begin, would you tell us what you're hearing from your academic customers, and do you feel that academic demand has essentially hit the bottom at this point? Yeah, that's a great question. So I do think that we are bouncing along the bottom now. Where do we get back up to the surface, so to speak? I don't pretend that I can speculate to figure that out. But what we are hearing from our academic customers is that funding uncertainty is really in three parts. The first part is, what is the budget? What does the budget allocate? What is the budget total? So that's the NIH budget. I'm sure everyone in this room has heard as much as a 40% cut in NIH spending. That was discussed earlier this year, which sent shockwaves through the academic market and slowed everything down for most of the life science tools, if not all the life science tools companies. And then as we got deeper into the year, it does seem now that Congress is thinking about keeping the NIH budget roughly flat, maybe down a little bit, maybe up a little bit. Difficult to know. That's one part of the equation. The second part of the equation is, once there's a budget, does the funding get allocated to their projects? And so there's a lot of uncertainty about how that's working, even for money that's already appropriated to be spent in this sort of way. And then the third component is, once the money's allocated, how does it actually get released to the purchasing agents so that they can enable buying new equipment, buying consumables, making these projects happen? And I think right now, that's really where a lot of friction is in the system, is the purchasing agents are just highly uncertain. Are they going to "get paid" if they make these purchase commitments? And therefore, sales cycles get extended. There's more scrutiny at the university level, let's say, or the institutional level on whether a project gets funded, even though the money was potentially appropriated to that project in advance. And so that's really slowing sales cycles down. For a Revio, our flagship system, our sales cycle has expanded to it's just about a year now, so somewhere between 9 and 12 months is our typical sales cycle, which certainly has an impact. You did call out EMEA and APAC ex-China were standout regions for you last quarter. So given that you continue to see OUS as a source of strength, could you elaborate on the dynamics that you're seeing in those regions that will continue to support that strength you're seeing? And then also with respect to China, can you talk about what you're seeing there? Sure. Well, I think we'll start with kind of what are the dynamics that make those markets perhaps more interesting right now? For one, they are much more engaged in population sequencing scale projects. So larger scale projects, let's say 10,000 samples or more, with the objective of either understanding a pan-genome or which a pan-genome is understanding the specific genome of that population of people, and really with the eye towards implementing their findings into the healthcare system in more of a precision medicine context. Outside the United States, many of these countries have single-payer systems. Those single-payer health systems are much better suited to manage doing a large project and then getting the ROI or the benefits. And I think that some, particularly the Nordic countries, are seeing a lot of opportunity and strength in the Nordic countries. We're seeing a lot of opportunity kind of in population sequencing. There's a large project going on in Estonia that's going exceptionally well right now. There's also large projects either wrapping up or being contemplated to expand in Asia. And they're all kind of in the single healthcare system sort of framework, which will leverage the power of the genome for a much longer period and get a better ROI. So that's how you're seeing that. Moving to your question about China, it was interesting when there was the threat of "liberation day" coming; we did see some Chinese orders for consumables in particular: ship us everything you can as fast as you can. And so we, of course, were very happy to oblige, and we successfully shipped quite a bit of product, so much so that we thought in the second quarter perhaps that was going to be a "pull forward." But that actually hasn't transpired that way. What's actually happened is that customers in China have been utilizing their instruments, and really their consumable utilization has been high enough to where it absorbed all of that. And then over the course of the middle of this second quarter towards the end, some of the at least immediate fear of tariffs subsided, and we were able to ship more product in. I do think it's a highly volatile situation. I think every time there's another conversation between leaders of the nations, I do think that there's anxiety about, well, what does that mean for the tariffs and how that's working? But for now, we're seeing effectively business as usual, particularly for consumables in China, maybe a little bit of conservatism, but not substantial. Where I would say that we are seeing perhaps challenges on the higher throughput scale products. So Vega's going well, but Revio, I think that the Revio product, I do think there's anxiety about funding even in China and some of the potential aspects of long-term tariffs on consumables, which is probably having some impact, but not dramatic. Not nearly as fearful as we were back in February/March. Got it. I think one of the things that I feel is underappreciated is not only did PacBio make significant improvements in the cost to sequence the genome, but have significantly improved the workflow to drive accessibility to HiFi sequencing. Could you give us a sense for the workflow improvements that made HiFi sequencing more approachable than, let's say, five years ago? What areas of the workflow do you see with the greatest improvement versus other areas that need a little more work? Well, not to make a joke out of it, but we could use 23 more minutes that we have left to talk about the improvements we've made. But I'll kind of summarize it. When I joined the company at the end of 2020, the company really wasn't focused on building an end-to-end workflow to support customers. And so we created a new vision for the company and really strategic plan to build the complete workflow. And that really encompassed a few different things. First, we had to find ways to reduce the amount of DNA required to do a human sequence. And so when I joined the company, it would take 15 micrograms of DNA, which for those of you that don't know, that is an incredibly large amount. And it's so much that it makes large-scale genomics just not feasible. Well, we've gone from 15 micrograms down with our SPRQ chemistry release, which we launched at the end of last year, down to 500 nanograms. That opens up the market to millions upon millions of samples. It opens the newborn screening market. It opens all kinds of different markets. So we started there. Then we moved to, if you go to the next spot in the workflow, we had to, as we moved, wanted to drive higher and higher throughput. We had to automate the workflows. And so using our ecosystem partners with respect to automation tools, we've developed techniques to shear the DNA to the precise size, to make sure only long fragments of DNA happen. And it all happens ready for sequencing. And it all happens on the work deck. So we've spent a lot of effort with our ecosystem partners reducing the amount of third-party capital equipment that you would need to buy, simplifying the assay such that it's all automated and it's on the automation platform, and really simplifying as much as possible to get ready for sequencing. So we made a tremendous amount of progress there. We also launched several applications. And most exciting is our recent launch of PureTarget. Our PureTarget application is the driver of the clinical business, as I said earlier, where you have +20 genes that are just very difficult to sequence. And now it's a very simple kitted solution. We've also launched RNA sequencing so we can look at the whole transcript, all of the isoforms that are really with short-read sequencing you couldn't look at in the past. So that's all the front end. Then we also said we needed to have a portfolio of instruments so that we could meet the customer where they were, whether they had larger capital budgets, larger throughput needs. We launched the Revio platform that started shipping in, what, February of 2023. It was announced in late 2022. The Vega system, which started shipping in December and is in its early ramp phase right now. Now we're also working on our next-generation ultra-high throughput system, which in the long run, those three platforms will persist in the portfolio. We were able to, we've been able to do that. Then finally, we've implemented a whole suite of bioinformatic workflows that really enable you to get the benefits of long-read sequencing. We've been really busy. It's set us up for what I'm calling Vision 2030, where we're getting ready to move into the next phase of our evolution. Now that we really, for the first time, have the full product portfolio, we can really attack key markets like rare disease, like parts of oncology, like carrier screening, newborn screening, population sequencing. And so we're in the best position we've ever been in as a company with a complete product, very competitive pricing, and we're poised for success as this financial environment changes. Great. So one of the things you've touched on, clearly you made significant progpress in penetrating genome sequencing applications for Revio in several population-scale projects, but ultimately just a fraction of total genomes will be sequenced via HiFi reads. So what is the key hurdle in your view, cost, throughput, that will ultimately unlock a higher fraction of genomes to be sequenced from HiFi? Yeah, it's a great question. It's a great question and something we think about every day. There's really probably two or three fundamental challenges that still sit in front of us. The first challenge is getting the price closer to being more competitive with short-read genomes. Today, short-read genomes are less expensive than long-read genomes, but they're also less complete. They're incomplete genomes. They don't give you all of the information, but it's the best the community's had for a long time. And so what you're doing, what we're doing is changing the paradigm by demonstrating the comprehensive nature of a HiFi long-read genome, a new level of accuracy, a new level of completeness, the ability to get the epigenetics with every single run, looking at structural variants, looking at phased genomes with every single run. We provide so much benefit, but we're overcoming the legacy tools. We're in the process of driving the cost down. That's the first. The second is continuing to drive the scale of our platform up so that you can get more samples per year sequenced, particularly in these population-scale programs, because then the depreciation per sample goes down because you can amortize the cost of the instrument over more samples per year, which is really important, once again going back to the economics. Then also the practical logistics of if you need 50 sequencers to do a large project, probably hard to actually make that project come to fruition. So we're working hard on that. We talked about kind of the future systems. Then the third is the informatics. Like I said before, historically, all of the informatic tools were built for short-read sequencing. And folks have tried to adopt those tools for long-read sequencing, but the truth is they don't do a great job because they don't address all of the aspects of the genome that PacBio can address, and they can't. And so we've hired a 20-person computational biology team to develop all of these workflows. The next step we need to take is fully integrate those workflows so that a lower-level researcher can just press one button and go from the sample to a report that's potentially ready for a clinician or the ability to synthesize the data looking at the epigenetic status plus whatever omic status that they're interested for their science. And so we've put the tools in place. Now we're integrating them. And you think about it as developing the GUI or the UI that allows them to integrate all this without really being a hardcore bioinformatician. Those are the three things. Going back to price, this year, later this year, we will start to roll out our ability to use a SMRT Cell multiple times. And the SMRT Cell, as you know, is a semiconductor-based piece of flow cell. And by being able to use it multiple times, we'll be able to dramatically lower the price per genome. And so customers that are using Revio today will be able to get prices that will be much closer to short-read sequencing. And so I think we will have effectively solved that barrier. The barrier of scale will come over the next few years as we launch next generations of systems. And then we're investing heavily in the software side of this. I do think the software stack is going to become a key differentiating factor of these technologies over the next five years. Because our dataset is so comprehensive that we provide, we are perfectly suited for the development of large language models and other AI-type tools to assist researchers and ultimately clinicians in understanding the genome. Got it. I do want to touch on the Revio product cycle. Could you provide an update on the number of Sequel II installed bases that are still utilized today? And what proportion of Sequel II installed bases do you think will eventually upgrade to Revio? And what proportion is likely to convert to Vega? And what is the typical proportion that never converts? Yeah. It's a tough question to ask. I think our installed base, the active installed base is probably still around 100 units, give or take. Don't give me that. I'll give you that's the rough number. I don't know the exact number off the top of my head. But it's about 100 units, and my belief is that probably if I had to kind of divide that pie, 60 of the units convert to Vega, 30 of them convert to Revio, or maybe 20, and then 10 to 20 just never convert. That's based on a lot of experience. I have a lot of gray hair, so I've been doing this a long time. But I do see we are seeing right now customers, matter of fact, we just had a deal close the other day where they had a Sequel II, and rather than sign the next-year service contract, they said, "You know what? We're not going to pay the money for that service contract. We're going to take that money, buy Vega, and move forward with the new technology," which for us is tremendous because they get a lot more power with Vega. The more we can move everyone on to common platforms, the lower our cost structure is. So that was, I mean, that just happened last, I think that was last week. It was either last week or the week before. Those kinds of things are what's going to push that 60, so to speak, to go to Vega. The ones that are going to go to Revio are going to go to Revio because they have a project need where they need that scale. Okay. And then on the consumable side, we've been seeing Sequel II consumable utilization declining as people start up on Revio. Do you think that we hit steady state for Sequel II pull-through at this point? When do you think we could reach that point if we haven't already? I think we're probably in that range now, I mean, plus or minus. I think, believe it or not, it's always interesting to me that you get random orders for even Sequel I. We still get orders occasionally for in some places. But the reality is that we're probably around the steady state now. I would imagine over the next year or two, you would see it continue to trickle down a little bit further. But at some point, you'll always have some low level until we stop supporting the product. Got it. Okay. And then on Revio pull-through, you're guiding to low to mid-$200,000 pull-through ranges here. This is probably hard to tease out, but do you get a sense that uncertainty in the academic funding environment is essentially limiting the pull-through per instrument? And do you still see $300,000 to $400,000 pull-through over time as the right framework? Yeah. I think at this point, it's difficult for me to kind of put my hand on my heart and say $300,000-$400,000 is going to be the number because the reality right now is we're in the low 200s. So I don't want to perhaps set an aspirational goal. But there's a couple of things that are impacting the utilization and the pull-through. One is I do think the academic uncertainty, particularly in the United States, even though those customers are using their machines, there's certainly opportunities to improve the utilization in there for the pull-through. And so I think that will help us push it up. The second thing is, as the bioinformatic tools get more automated, you can accelerate the cycle time. We're already seeing the impact. Automation is helping. First of all, it's enabling bigger projects to get even started, but it's also helping to accelerate to the next experiment. Now we need to really focus on building out those informatics tools to do that. And then the third is really more of a blocking and tackling exercise where when you place a new instrument, really helping the customer to get going as fast as they can. It's still fascinating to me to see a customer spend $1 million with you, maybe buying a couple of instruments, and then slowly getting trained and slowly doing the validation because it's a lot of money, and you want to see them optimize it. So our service organization works really hard to get people trained and up to speed. But I think that the more efficient we can get there, that will also accelerate. My belief is that we could certainly grow from the low to mid-200s as the economic climate gets better and as we continue to make some progress in these other areas. Right. Penetration and the clinical use cases have always been a key focus for you, not only to unlock faster top-line growth, but more durable revenue streams as well. In Q3, 15% of consumables came from clinical customers. Tell us what clinical application are you seeing the greatest traction today? And looking forward, the clinical application that you anticipate will begin to be a meaningful driver of clinical penetration in them. Yeah. I think the most, -- probably the biggest by market share, quote unquote, of our consumable, of that clinical portion is rare disease work across a broad swath of customers. But very quickly coming on is carrier screening as these large corporations are validating, they're researching and validating their tests for ultimately launching those tests as LDTs. My belief is that they will be significant drivers of our revenue and probably the fastest growing segment. Over the next couple of years, you'll see rare disease continue to expand in more of the market. We're barely scratching the surface there. You'll see the carrier screening market really grow. And then you'll start to see the oncology market start to work for us. And that's really in areas like hereditary cancers, pediatric cancer, leukemias, and blood cancers. Areas where, for example, an AML structural variation plays a big impact in understanding those tumors and how to do something with those tumors. And so I think long-read sequencing has real opportunities there. It's a bit behind where rare disease and, say, carrier screening are, but it's coming on. And in our next kind of strategic horizon, that's going to be a key focus that will help drive revenue. I do think over the midterm, the clinical part of our business, that percentage that's running 15% now will double or triple over the next several years here. Right. I do want to touch on Vega. Vega placements have been strong out of the gate with 73 installed bases despite just being launched end of last year. Outside of the attractive price point of $169,000, tell us what features of Vega are resonating with customers. I think the number one feature is just the simplicity. It is the easiest long-read sequencer that we've ever launched for people to use. It gives remarkably reliable results. It's been, as far as quality goes, it's been the highest quality instrument we've ever launched. People are consistently, well over 90% of the time, getting the specified throughput out of the instrument, and we really focused hard when we were developing the instrument to make sure we could deliver the throughput every single time, and we're seeing that, and I think customers really appreciate that. I think that the throughput is in a sweet spot for looking at applications, everything from microbial applications and bacteriology and looking at small genomes, AAV, all of those where you don't necessarily need a whole genome. But because we have very strong multiplex capabilities, you could put a lot of samples on the instrument, and you get tremendous value out of the gate. And then it comes with all the software tools and the ecosystem of Revio. The data is completely compatible. We launched SMRT Link Cloud. So now there's cloud capabilities. And we're just getting started with that. I think that there's a huge. There's a lot of excitement about it. Dare I say it's a beautiful instrument. It is a striking instrument. It's maybe the first pink instrument on the market to celebrate our colors. But yeah, I think customers have been very receptive. Our close times, we're seeing lots of instruments get closed in this quarter, whereas we were talking about 9 to 12 months for Revio. We're talking, in some cases, 9 to 12 weeks for Vega. So it's a game changer for us. Given that customers tend to move higher in throughput over time as they gain experience with the platform, how should we think about the degree to which Vega could facilitate Revio placements down the road? And would you share your views as a veteran in the sequencing space? Yes. I do think an important part of our strategy was to develop a lower throughput instrument at a more accessible price point so that you can engage the community with HiFi sequencing so that they could see how powerful it is and then, over time, create upsell opportunities. Also, with some of these lower throughput customers, they're the ones that are likely to try new applications and new ideas. And so we can leverage those ideas and then bring them to the whole community through kitted solutions and really accelerate. And in my past life, that's exactly what we did. And we did see. We have seen lots of folks start from lower throughput and move up the ranks. I would fully expect that with Vega as well. And the timing is always questionable. That certainly doesn't happen the first year. But maybe by the end of year two and in year three, it is exactly the kind of thing that I would expect people to be adding. In some cases, people will be adding to their installed base and adding more Vegas because they like that unit of throughput for their application. But in many cases, rather than buying the second or third Vega, they'll put everything together, buy a Revio, or who knows, maybe even the next machine beyond Revio. It's really important to have that breadth of product offering so you can reach the entire community so that you can maximize your opportunity. I do want to touch on the guide. You've taken down the high end of the revenue guide reflecting continuation of academic headwinds, brought up the lower end of the guide to reflect lower-than-expected impact from tariffs, leading to essentially no change at the midpoint from the prior revenue guide. Give us a sense for your comfort with the current guidance range, and what do you see as representing the greatest upside and downside risk today? Yeah. Well, look, it's September. It's difficult to comment specifically on how comfortable I am with the guide. I'll just be clear about that. But I think that when you think about fundamentally what's going on, there are more customers than ever embracing HiFi and long-read sequencing than ever before. That is accelerating. The utility of a multi-omics genome coming off of a HiFi system, including the epigenetics and the structural variation, new applications like Fiber-seq, in other words, looking at chromatin and binding, all of those things are driving desire. And that desire turns into demand as funding improves. And so the one thing I will say is that the desire is absolutely accelerating. The number of applications and opportunities is growing. There's population sequencing programs that continue to be planned and, in some cases, funded and getting ready for RFPs and actually moving forward. But the timing is always. Those are large projects, and they come when they come. And you have to keep working. So with respect to the guide, I think we try to take a philosophy of being as responsible as we can with the best information we have. And then, as the results unfold, try to understand them and make sure that the information that we convey to all of our investors is well understood, grounded in facts, and then showing a vision for what the future could be. And I think we've done that so far this year. We're going to keep doing it. I think this is a really interesting time to be part of the PacBio story because all of that innovation that we've done is really starting to push us into the applications over the next five years that I think will drive our growth and drive us to sustainability and hopefully shareholder returns. Great. Well, thank you very much, Christian. Thank you. It was good to see you.