Sung Ji Nam : Hi. Thanks for taking my question. So Christian, you mentioned your outlook for this year, obviously, is much higher than kind of the overall sequencing market growth. Just kind of curious, I don’t know if it’s too early to tell, but just how much of that growth do you think for you guys this year is coming from potentially taking share from the short-read sequencing market versus kind of expanding into new territories with long-read sequencing, given the new library prep launch recently, the HiFi consortium you talked about in all these large-scale studies that you are 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 carry might be taking from the short read versus creating new markets?
Christian Henry: Yes. I think it’s a great question. I think that most of our new customers are already doing short-read sequencing. And so you can imagine that they’re generally allocating dollars from short-read sequencing to long-read sequencing most of the time. But sometimes, for example, in a rare disease, short-read approaches have been used and to some success, but long-read sequencing gives you so much more information, dramatically increases the solid rates, decreases cost. And as a result, the question is, are you building a new market there? Or are you just — are you replacing and being additive to short reads. And I think it’s a bit of a bit in the eyes of the beholder. But I also think that what we see is that at a high level, we are winning projects that were slated for short reads.
And what’s happening is exactly how we outlined it would happen. At first, it would be we win a portion of a project and long reads would do a portion and short read would 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, it’s totally plausible; I can do a 10,000 sample project entirely on revenue or even more. 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 reads. And I think that’s really, really exciting. And I’m looking forward as we get deeper into the year and some of these projects get going to sharing that with you guys.
Operator: The next question is from Eve Burstein with Bernstein Research. Please go ahead.
Eve Burstein: Hi, there. Thanks a lot for the question. We talked about gross margins in 2024, but 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, we still get to about 35%, and we know that ASP was unusually high for Revio. 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 if 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 Revio versus Sequel?
Christian Henry: Yeah. So just to try to clarify the question, trying if you — I’ll just trust your math. I didn’t redo your math. But 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 calculation. So even with consumables being higher, we did have some yield challenges in the fourth quarter, nothing that significant, but probably had some impact there. Looking — 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: The next question comes from Ross Osborn with Cantor Fitzgerald. Please go ahead.
Ross Osborn: Hi. Thanks for taking the questions. So on the call, you mentioned consumables stocking in APAC. 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, fourth quarter, we didn’t have that much stocking. There’s always a little bit in the fourth quarter. And APAC, for example, because they have holidays in Q1, they may be ordering 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, 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 I think on balance, it wasn’t a super heavy stocking quarter for the company. Ready for the next question.
Operator: Thank you. The next question comes from Matt Sykes with Goldman Sachs. Please go ahead.
Unidentified Analyst: Hi. This is Avi [ph] on for Matt. Thanks for taking my question. So 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? And 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. 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 the reality is that we are prepared to manage through longer sales cycles 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 try to execute accordingly. Now things get a lot worse. Of course, things could change. If things get better, 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 — even if you take, for example, in the United States, we’re still operating under continuing resolutions, and we still don’t really have a budget. There’s all kinds of noise about where the NIH budget will end up, which obviously NIH funding is an important part of our business. And so I’m sure that creates some friction in the sales selling process. We talked about outside the United States. We talked about China a lot already today, and we’ve emphasized that, but also even in Europe, interest rates and the funding environment still continue to be challenged. Europe had a great year last year for us. And we expect to have a good year in Europe and continue growing, but there is that friction in the system. The good news, as I said in my prepared remarks, is there is no shortage of interest in for Revio and for HiFi sequencing in general.
In fact, at AGBT last week, our social teams track social impressions. And I was told we had 2.3 million social impressions and the next highest person was like almost 10 times lower than where we were. And so — what does that mean? And how does that translate into sales? Well, I think what it does mean is there’s a lot of interest in which is helping build our funnels, which gives us opportunities to execute, which we’re going to be focused on this year.
Operator: The next question is from Tejas Savant with Morgan Stanley. Please go ahead.
Tejas Savant: Hey, guys. Good evening. Christian, I want to follow-up a little bit on that question, take a slightly different tax. So as you think about the low end of the guide, right, I think it probably makes in around 60-odd sort of Revios at the low end. Can you just walk us through what you see — 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 Onso, my question there is really related to the value proposition and the product market fit, given some of your — the emerging sequencing vendors bumping up their Fred scores as well on the bench tops and you’ve got the [indiscernible] coming out on the NextSeq. 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, Tejas. So, thinking about — obviously, when we put the guide together at $230 to $250 million, where we’re talking today, we considered — we certainly consider the quality and strength of our sales funnel for Revio and for Onso 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 — 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 really try to think through all of those different things and give a responsible range 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 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 Onso, I would argue that the first thing I’d want to say is that the reality is most of the bases that come off the sequencer off of the Onso are actually over Q50.
Now, we expect it at 90% of the base is over Q40, — and I would submit to you that our competitors have 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. 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 TG 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 — the market for those mid-throughput sequencers, is a huge market.
And there — and every year, 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 Onso 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. What’s been interesting to us as we see the funnel for Onso grow and as we see customers using Onso is that they’re using it in 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 obviously has benefits for the community.
