And so we still have — we are still working hard on developing lower throughput and higher throughput, long read systems. And with the acquisition of Apton, we’ve jump-started the project to work on a high throughput — very, very high throughput short read sequencing system. The good news is that if I just spend a second on the Apton acquisition, that — we’ve already integrated that team. We shut down their Pleasanton offices and moved the entire team to Menlo Park. Their alpha sequencers, our inner labs already sequencing with SBB chemistry. We’ve got the industrial design going. And so that acquisition accelerated our ability to launch that product, perhaps by years. We’ll see how we do. But my philosophy right now is to continue building out that portfolio while we continue to grow our revenues, but also be disciplined about how we manage our spend envelope, consistent with what we talked about at our Analyst Day last year.
In fact, we look back to our Analyst Day and here we are a year later, and we have met or exceeded the majority of our goals for 2023. So Susan, you can talk about gross margins.
Susan Kim: Great. Thank you, Matt, for the question. So in terms of gross margins, in my prepared remarks, we talked about the fact that in Q3, you’re right that we had some excess inventory scrap and reserve charges. This is related to previous generation products, but most notably the decline in the Sequel II consumables demand drove some of those scrap charges that we took in the quarter. There were some also warranty-related expenses on the Revio platform. Your question about Q4, as we go through the budget for 2024, there may be some additional cleanup. But for the most part, the transition between Sequel II to Revio, we are through that. And for 2024, I do expect our gross margins to continue to expand. We talked about this previously.
As revenue continues to grow, you get the benefit of higher volumes, but you also get the benefit of higher consumable revenue, which, of course, is higher gross margins. And Christian alluded to it, too, that we do have gross margin improvement initiatives that we have already started and some of which we’ve shared on the prepared remarks, but also some of which are still — that are underway that we haven’t yet shared but we’ll continue to disclose that as we get closer to realizing those benefits.
Todd Friedman: Thanks, Matt. Next one Jamie?
Operator: Next question comes from Dan Brennan from TD Cowen. Please go ahead with your question.
Dan Brennan: Great, thanks. Thanks for taking the questions. Maybe two-parter, just on pull through the first one. I know Christian in the past, you’ve talked about maybe by the first quarter of next year you’d be at a point at which you could talk about what seems like a durable pull-through to kind of model off of. It sounds like you’ve had now — last three quarters in the low-400s, last two, 450. It sounds like you were pretty constructive. Just wondering, do you think it’s fair to be thinking 400 plus at this point on pull-through from here? And then secondly, stocks traded off a little bit here despite a really good quarter, I think, on the comments on ’24. Just wondering, could you just speak to a little bit about like the types of customers, maybe where you’re seeing a little bit of elongated cycles? Is it in academia? Is it across a small mix in biopharma? I know you talked a little bit about China. Just a little bit more color there.
Christian Henry: Sure. So first of all, for next year, we’re not going to comment on the pull-through numbers yet. I’m still going to stand by the fact that it’s still early in our launch. The pull-through figures for Q3 were derived from the installed base of, what was it, 77 units in the denominator. We’ll see how we get another quarter under our belt here in Q4 with 129 systems. By the first quarter, perhaps on the call in April or May, I don’t know if it’s late April, early May, we should, I think, have a view at that point. It will vary, but I do think the numbers are above — they’re certainly above where my long-term model and thinking have been, and so that’s encouraging. But I don’t want to declare victory yet until we get a little more under our belt.
When you think about the commentary, I mean we — the first thing I want to reemphasize is we continue to — we believe we’re going to significantly grow next year, period, end of story. We are having a — so far this year, we’ve raised guidance every single quarter. And we’ve had a very strong result in Q3. Q4, we’re looking to have another strong quarter in Q4. And so from my perspective, the business is operating on all cylinders and really from a revenue and customer perspective. But it would be remiss if I didn’t acknowledge and recognize that the environment out there is certainly more challenging than it’s been in the past, certainly more challenging than it was when we put the — when we had our Investor Day last year. But — and the impact that customers or customers that are smaller one to twocie type Revio purchasers that would be in small biotech, for example.
Some of the academic funding in the United States, I think the funding hasn’t gone away and it’s still there. But the anxiety with the government shutdown that we saw at the end of the quarter, the continued rhetoric that’s going on does give us pause to be appropriately conservative. Outside the United States, I did spend a second or two talking about China in particular. China is actually — as we continue to grow, China is going to become less of a percentage of our revenues, and I think that’s already starting to transpire. So on balance, that’s good for us. Europe, we had several new customers and we have great opportunities in the funnel in Europe, but it is a tough — with high inflation, it is a tougher environment. And so what we’re doing is we’re just trying to take a responsible view here.
And if we outperform, we outperform.
Todd Friedman: Next question, Jamie?
Operator: Our next question comes from John Sourbeer from UBS. Please go ahead with your question.
John Sourbeer: Him, thanks for taking the question and congrats on the quarter. Maybe just a clarification here, just on that extension of order cycles. I guess have you seen any increase in cancellations? And then I guess, also, you’re not providing color on next year. But when you look at, I guess, the announcement of the PacBio Capital last month, I guess, can you just way to frame how you see maybe is there potentially more leasing next year versus capital purchases? How do you see kind of that shipment plays out over ’24?
Christian Henry: Yes. Thank you for the congratulations. We’re proud of the quarter to be sure. We haven’t seen any cancellations. We haven’t — the competitive environment we’ve been doing very, very well against our competitors as evidenced by the shipments in the quarter. We continue to make progress there. So we haven’t seen cancellations. When we see this, we see orders push out across a quarter or maybe perhaps three to six months, a quarter or two. And so when we don’t feel like the business is going away, we don’t feel like the business is being taken by competitors, and we don’t feel like there is any waning desire to do sequencing. So all of those things are very strong for us. But we do see the conversations — particularly where you see it is the early conversations are taking longer.
