Good day, ladies and gentlemen. Firstly, we would like to apologize to you all for the technical difficulties concerning the phone numbers today. And then we would like to welcome you to the First Quarter 2012 Pacific Biosciences, Inc. Financial Results Conference Call. My name is Regina, and I will be your conference coordinator for today. [Operator Instructions] Today's event is being recorded. I would now like to turn the conference over to your host for today, Ms. Trevin Rard. Please go ahead, ma'am.

Good afternoon, and welcome to the Pacific Biosciences First Quarter 2012 Conference Call. Again, our apologies for any technical difficulties you may have had getting into today's call. With me today are Mike Hunkapiller, our Chairman and CEO; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer. Before we begin, I would like to inform you that comments made on today's call may be deemed to contain forward-looking statements. Forward-looking statements may contain words such as believe, may, estimate, anticipate, continue, intend, expect, plan, the negative of these terms or such similar expressions and include the assumptions that underlie such statements. Such statements may include, but are not limited to: revenue, margin, cost and earnings forecast, future revenue implied by the company's backlog, expectations of future cash usage and other statements regarding future event and results. Actual results may differ materially from those expressed or implied as the result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings, including the company's most recently filed annual report on Form 10-K. The company undertakes no obligation to update, and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that today's press release announcing our financial results for the first quarter 2012 is available on the Investors section of the company's website at www.pacb.com and have been included on a Form 8-K, which is available on the Securities and Exchange Commission's website at www.sec.gov. In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of the company's website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call and that Pacific Biosciences undertakes no obligation to update such forward-looking statements. At this time, I'd like to turn the call over to Mike.

Thanks, Trevin. Good afternoon, and thank you for joining us today. During the first quarter of 2012, our team at PacBio executed well. Highlights for our first quarter results were as follows: we installed 11 new PacBio RS systems, bringing our installed base up to 59 systems in total. We recorded $10 million in total revenue, and importantly, recurring revenue continued to grow sequentially. We launched our C2 product release and recently finished upgrading all the systems in the field. The C2 release provides our customers with dramatically improved performance and greater reliability. And we had a very successful showing at the Advances in Genome Biology and Technology conference, or AGBT, with over 35 customer presentations and posters featuring our products and technology. During our last earnings call, we were preparing for the AGBT conference, and as promised, we would like to share a few of the highlights of the conference on this call. First, we held 2 user group meetings for our current PacBio customers: one, to share research highlights' key applications, and another focused on bioinformatics tools and analysis. This user group meetings were very well attended, with approximately 90 people representing more than 30 customers. Both sessions were filled with rich content, and attendees remarked that they were impressed with the progress being made across a diversified user base. At the conference itself, we were pleased to see numerous customers and collaborators present their research in conference talks and poster presentations, sharing their use of the PacBio RS system for a variety of applications, including de novo assembly, targeted sequencing and DNA base modification detection. Several presentations were from customers working on de novo genome assemblies, highlighting the importance of a finished genome to fully understand the biology of their organisms of interest. PacBio's long-read links and…

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with the financial overview for our first quarter that ended March 31, 2012 and then provide details on our operating results for the quarter, along with a comparison to the fourth quarter of 2011. I will not be providing year-over-year comparisons to our Quarter 1 2012 results as it was not until the second quarter of 2011 that we transitioned from a development organization to a commercial operating company. Given the difference in how we are operating year-over-year, detailed comparisons will provide few, if any, additional insight into the progress of our operations. And finally, I will conclude with a brief discussion of our balance sheet. Starting with our first quarter financial highlights. During the quarter, we recognized revenue of $10 million and incurred a net loss of $27.6 million while using $16.1 million in cash. Total revenue for the quarter was $10 million, a decrease of $2.4 million from the $12.4 million of revenue realized in Q4 of 2011. During the quarter, we recognized instrument revenue of $7.9 million, reflecting the installation of 11 PacBio RS machines, compared to the $10.8 million realized on 17 RS instrument installations in Q4. Our consumable revenue grew 29% to $900,000 in Q1, up from $700,000 in Q4. The increase in quarterly consumable shipments is noteworthy, considering the fact we were taking down systems in the field to install the C2 release upgrade starting in early February. In spite of this interruption, our customers were able to get back online quickly, and the utilization rates across a number of customers picked up after their upgrades were completed. As a result, our consumable sales in March were much stronger than those in January and February. Service revenue increased 38% to $1.1…

Thank you, Susan. As we have said in previous calls, our intent is to provide transparency in what financial results we can reasonably expect in the near term. To the extent we have visibility, we provide guidance. With that in mind, I will be providing an updated forecast for the second quarter of 2012. Starting with revenue. As a reminder, last quarter we provided a forecast of between $7 million and $8 million for each of Q1 and Q2 this year. We ended up installing more instruments in Q1 than we anticipated, which drove our revenues up to $10 million for the first quarter. Remaining in our instrument backlog are 7 units, representing approximately $4.7 million in system revenue. Assuming we complete the installation of all 7 units in the second quarter and assuming that any new system orders we receive in Q2 are not installed until the following quarter, we would expect to record approximately $7 million in total revenue for Q2. This estimate includes our consumable and service revenues, which we expect to go sequentially from a combined quarterly revenue base of just under $2 million in Q1. Moving now to gross margin. As Susan mentioned, we incurred certain expenses amounting to approximately $700,000 during the first quarter in connection with the C2 product release and system upgrades. If not for those charges, we would have recorded positive gross margin in the first quarter on revenues of $10 million. For the second quarter, we expect to be approximately at breakeven gross margin on revenues of $7 million. Our operating expenses in the first quarter of $27.4 million included legal expenses that were higher than normal stemming from litigation activities associated with Helicos, Life Technologies and class-action shareholder lawsuits. We're glad to report that we have reached agreement with…

[Operator Instructions] And your first question today comes from the line of Bill Quirk with Piper Jaffray.

It's actually Dave Clair here for Bill. I guess the first question for me. I was just hoping to get some color on the strategy to really kind of improve instrument orders going forward.

This is Mike. So the strategy is kind of what we outlined. It's basically to get our existing customer base to the point where they're -- and I just reference has been enthusiastic references. And our first effort to do that is to get their reliability -- their systems up and we've, I think we've made a lot of progress on that. We probably still have some to go. And when you get them to the point that they can tell their colleagues that this is ready for prime time, then it's much easier to do selling. And so our focus is really on getting them as the proof statement for the technology that we have, both in the form of their positive references, certainly in terms of publications and presentations at meetings and so forth. We have independent sales efforts independent to them, obviously, but that's really the key to our success. So that's been our focus, particularly in this last quarter. That would lag between when you get that sort of reputation rebuilt and when things get converted into orders, but you've got to do that first.

Sorry, I think in the prepared remarks, you said kind of in the near term, it'll likely be modest in terms of instrument placements. I mean, how long do you think until kind of the reputation build, kind of it gets to where you want to be and instruments kind of spike?

Well, I think that's always difficult to forecast ahead of time. Part of it is building the reputation back, and I think we've made a lot of progress there, recognizing that we only started the C2 upgrades and reliabilities improvements associated with that really in the middle of last quarter and finished them in mid-April across the whole user base. But the wildcard is how long it takes once people get that confidence and how long they feel they need just to have sort of a positive experience, just more positive experience, before they go out and actively promote the technology to others. But the other perhaps bigger issue is how long it then takes the people who are prospective customers to go through the grant or funding process, whatever it is -- their individual cases -- to get the money to buy a pretty good chunk of capital equipment. And it will vary from one customer site to the next, how long that takes. But it's my experience, anyway, it's a little difficult to kind of predict that based on such a short history of turnaround.

Okay. And then just one more for me. I was hoping to get an update on the competitive landscape here, just given some of the news that's been coming out of Oxford Nanopore.

Well, I'm not sure quite how to answer it. I haven't seen any news coming out of Oxford Nanopore since AGBT, you might know more than I do in that regard. They certainly came out with a splash with -- from what our perspective was very little data to back up what their claims were. And they have not gone public with any additional information that I've seen either in print or elsewise since then, so it's still stay tuned.

Your next question is from the line of Bryan Brokmeier with Maxim Group.

First, what are you telling your customers -- new customers or new potential costumers about when they can start taking deliveries? And you said that you may be able to install all 7 that are currently in your backlog, so I guess they are able to get delivery as soon as they want? Or is it all up to what their timeline is and when they want to take delivery?

I think it's mostly up to their timeline. It's a modestly complex piece of equipment, so part of the issue with doing installs is getting the site prepped in terms of space and electricity and so forth. I think at this point, that's probably the rate limiting step relative to doing installs on new orders.

And you talked about improving the performance of the systems and working on improving those references of your current installed base. But also really how important is the -- is seeing the consumable pull-through improve and really getting more utilization out of your systems besides just customers being happy but you're just having a longer time of the commercialized products running?

I'm not sure I understood that.

Again, just building on your track record, or building on the system performance of the systems besides just the customers being happy but just the potential new customers seeing the system being run.

Well, I think it's absolutely the key. And that's why we want to emphasize our efforts in the last few months to getting people up and running on a routine or a round-the-clock basis as much as they can. It isn't just that they get happy or they are to get good results. But it's something they can share with their colleagues and what their colleagues are interested in is, can you get new and important science done on this platform. And so having the usage go up is an indication that people are getting confident about getting that useful science. And so in this space, it's absolutely, as I've said before, everyone in the scientific world is from Missouri. And you if can't show that performance then people are going to wait until you can.

And just lastly, Ben, you had provided kind of broad outlook for your total operating expenses? But how should we maybe expect to see that change during the next couple of quarters, particularly given that you have some -- you talked about today some new products you plan on coming out with in the back half of the year. So should we expect to see R&D kind of pick up from the $12 million in the first quarter?

That's a good question. I mean, on a broad basis, the R&D expenses are going to be relatively stable. We do have those kinds of activities going on all the time but there's going to be variations quarter-to-quarter based off of prototype materials and those kinds of things. But by and large, we see those operating expenses being pretty stable. And then I just mentioned since we had, of late, some higher litigation expenses that were in that run rate certainly in Q1 and we don't expect to have that run rate going forward, then our total operating expenses are expected to be lower than what we just saw in Q1.

Your next question is from the line of Ramesh Donthamsetty with JPMorgan.

Ramesh in for Tyco Peterson. Just taking a step back and seeing demand trends with the RS and you also have alluded to some customers with the first run being relatively unhappy. At what point will you think about the strategy, and we've gone away from thinking about a V2 instrument or a new form fact for the instrumentation. But at what point do you think that you have to evaluate maybe a stronger shift in strategy for the current offering?

Well, I think you do that when you think you've got to the end of the performance envelope of the current platform. And we're a long, long way from getting to that point. We've got a series of product enhancements that we'll put-- some are software, some are modest hardware upgrades, a lot are application kits and bioinformatics tools that we will put on to the existing platform. And we think that extends the performance by a lot over the next few to several quarters. So that's our primary focus at this point. I'm not going to talk about future new instrument developments for obvious reasons. We certainly kind of have a feeling of what the lifetime of our current platform is, but we have not reached the end of that at all.

And just in terms of the consumable utilization. I was just wondering amongst the installed base today, the range of kit volumes you're seeing from the range today and kind of where you could see that going or your targets maybe in the next few quarters?

This is Ben. I'll take a shot. I mean, it is quite varied. You have people who are just barely getting their instruments online. And so very, very little utilization yet on those guys who are just getting up and running. And then some of our higher volume-guys, Mike mentioned -- he highlighted some activities that JGI is working on, and those guys have 2 systems. So they're going to be one of the higher-volume guys. And so you see quite a bit of volume from users like that where by and large, they're trying to use their systems, let's say, all the time.

Great. And just, I guess, a quick one. The burn rate was a little bit lower than the $20 million, I think, number that had come out maybe last quarter, maybe the quarter before that. Is that maybe one quarter or are we trying to track at $20 million or less per quarter for at least the short term?

I think -- it's Susan. I think we -- what we want to highlight to you is the $16.1 million of this quarter is benefiting from some prepaying units that we would normally have projected into the next quarter, as well as the fact that we have settled some litigation element. So you will see the burn rate go on -- aim at $80 million for the year, but you have to think about if you have a low, first you're going to have to make that up in the second.

[Operator Instructions] Your next question is from the line of Amanda Murphy with William Blair.

Actually, it's Sylvia here for Amanda today. I dialed in kind of late, so if someone has asked the question before I apologize for this. Just a quick question for Mike. Some players in the market talked about the benefit of combining long-read technology with short-read technology. So just curious on your thoughts here such as how much would this benefit PacBio by combining those 2 technologies? I guess, we know that most of your customers here use hybrid technologies in their own labs. Thus, from PacBio's perspective, would you consider expanding your product line to have other type of genetic analysis tools?

Well, we certainly encourage our customer, particularly doing de novo assembly, to do frequently hybrid approaches, as I'd highlighted in some of my prepared comments where we've got customers that frequently use, as JGI does, short read Illumina data combined with the PacBio long- reads to do finished assemblies. And we provide a form of that ourselves in the sense of doing relatively shorter insert CCS sequencing, which can give you very high-accuracy single molecule reads. With the longer read data that generates scaffolds, that together you can do the finished assembly. So I think one of the things that we have to do an increasingly effective job on is giving people the right king of guidance on which bioinformatics tools to use to be able to do that. And I think that's probably our primary focus in that area right now -- to help people know which type of short-read data to combine with long-read data to do the best kind of assembly work.

Okay. Then from company's perspective, you wouldn't think adding maybe micro arrays or PCRs will be useful to the product offerings?

Well, not in terms of us taking on that kind of technology per se. I think we're more focused on enabling people in the sequencing space directly to be able to merge data sets appropriately and give the right kind of results.

Your next question is from the line of Daniel Brennan with Morgan Stanley.

Just a couple of questions. Maybe just starting off with the publications from AGBT. So Mike, just how long should we expect those types of publications? What is the typical kind of timeframe from when a researcher would get the ability to read them, take a look at them, maybe talk to the authors and do a thorough evaluation? Because there seems certainly to be a lot of excitement over the 35 publications and certainly it didn't translate into any order in this quarter. I'm just trying to get a sense of what -- what the typical lead lag would be.

Well, it's a process, right? So at a scientific meeting like that, which is one that's better attended ones, particularly in the sequence technology space, you have posters, you have scientific talks and a lot of those eventually translate into publications in peer-review journals, which is the next stage. And that can take from a few months to several months in order for a lot of that to get out in print because you have to go through both the review process and the publication process. But it varies all over the place in terms of the time. And then you have the process of that along with what people see at the presentations at the meeting, what they hear from their colleagues outside of that meeting in terms of getting funding request in to whatever source they're going to use to get the money. The government processes, NIH, for example, can take 9 months. Other sources are faster than that, but there's a set process, and individual customers will go through from a few months to a year in that process. So it's kind of hard to a put a blanket answer for that one. But it isn't overnight.

Okay. And maybe a follow-up question would be in terms of the C2, is the C2 chemistry kind of what it offers in terms of the improvement certainly versus the initial commercial launch? Is it enough in the current environment, do you think, with the pressure on funding and the improvements that Life and Illumina are making longer reads, faster turnaround, cheaper instruments? Can you maybe give us a window? And I know you're focused on improving reliability in the C2, but can you give as a sense on maybe C3 or whatever might be behind it? Any insights towards kind of the things you're working on in the user group meetings maybe that are being shared on, dramatically longer read lengths or throughput or anything of that nature?

Well, so let me step back a little bit referencing the competition issue. I don't think we see ourselves competing head-to-head with the short read technologies from Illumina or Life and their concept of getting longer reads is still in the hundreds, and we're now customer average is roughly in the 2,500 to 3,000 sometimes more average read length. So we're substantially different from the long-read perspective than the short-read technologies, which have yet to catch up with the older Sanger methodologies. And so I think we see ourselves more as a companion to those in the certain types of applications, particularly hybrid assemblies than a direct competitor. And we take advantage, our customers take advantage of using both technologies. I think what changes is that you want to get longer and longer read lengths, which open up for new avenues of how to use this system. And we did share with our users at AGBT some early work that we've done on really, really long read lengths that come about by mitigating one of the primary factors that limits read length in our system now, which is photo damage. When you're basically interrogating the polymerization process by introducing a fluorescent dye along with a nucleotide into the active site of the polymerase, you have a finite chance each time there's a contact there of the dye, once it's excited by a laser, doing sufficient damage to the polymerase to kill it, and that kind of results in a steady diminution of active polymerase molecules and hence read length. And we've got some pretty exciting projects underway, which we, as I said, shared the early terms with the users that effectively eliminate photodamage as a source of shortening of the read lengths and have demonstrated quite long read lengths. So…

Right. And, Dan, I would also mention that you saw some of the AGBT work, where customers were using their own bioinformatics for methylation at detection and that is a product line that we are very excited about. We have an early stage this quarter on the software tools for that. And those -- that opens a whole new area of science that other technologies we have not seen be able to approach.

Your next question is from the line of David Ferreiro with Oppenheimer.

This is Josh sitting in for Dave. Just one quick question. I was wondering if you have all the machines running kind of at full capacity, do you have any idea what kind of consumable pull-through that represents in the quarter?

If we had that, well, it's obviously a much bigger number than where we are now.

I think we've -- in the past, we'd -- if you do a little bit of math and you can certainly see people doing $300,000 worth of consumables on a system. In fact, that's something that on a run-rate basis we've seen, so that number might be one of the ones you could sort of start your high end model with.

And there are no further questions in the queue at this time, so we'll go ahead and close out our question-and-answer session. And I'll turn this call back over to management for some closing remarks.

Okay. Since that was the last question of the day, in closing, we do remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers in the scientific community in general. We continue to focus on helping our customers leverage the value of their PacBio RS systems, and we're particularly excited about the opportunity we see in base modification analysis, an area that's still developing but has the potential to be very significant going forward. The work we have to do will take time, but we're confident that the value of our products brings to biological research and applications will have a significant impact. Thank you for listening in and we will talk again in 3 months time. For those interested, we will be hosting our Annual Stockholders Meeting on June 13th in Palo Alto, California.

Ladies and gentlemen, thank you so much for your participation in today's event. This does conclude the presentation, and you may now disconnect. Have a great day.