Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Ms. Trevin Rard. Ma'am, please go ahead.

Good afternoon, and welcome to today's Pacific Biosciences first quarter 2013 conference 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 negatives of these terms or other 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 backlogs, expectations of future cash usage and other statements regarding future events and results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filing, including the company's recently filed Annual Report on the 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 of 2013 is available on the Investors section of the company's website at www.pacb.com, and has been included on 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. We are pleased with the continued progress we're making in driving the adoption of our products. Highlights for our most recent quarter's achievements are as follows: we grew consumables revenue by approximately 46% from the previous quarter as our customers have significantly increased the utilization of their PacBio RS systems. We booked new orders for 4 PacBio RS systems and installed 3 systems from our prior backlog of 5, which brings our new backlog of systems up to 6. Earlier this month, we launched the PacBio RS II, which doubles the sequencing throughput compared to previous long moving sequencing runs. Existing customers with PacBio RS systems can achieve the same output as the RS II by purchasing an RS II upgrade. Prior to launching the PacBio RS II, we began offering the upgrade to our existing customers and we have received 31 orders for upgrades as of the end of March. At the end of January, we launched our 1.4 SMRT Analysis software upgrade, which enables customers to achieve Q50 or 99.999% consensus accuracy of assembly using only standard PacBio long sequencing runs. In February, we attended the annual Advances in Genome Biology and Technology or AGBT conference. Many attendees remarked that the PacBio presentations were the highlight of the conference. The scientific data generated by PacBio customers was impressive, and the feedback we received from our customers were both complimentary and generous. Finally, after completing a $20 million debt financing with Deerfield in early February, we raised an additional $9 million of equity using our aftermarket stock offering through Cantor Fitzgerald. This cash provides us with greater flexibility and time to further develop our products and grow the business. In each of our last few earnings calls, we…

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with a financial overview of our first quarter that ended March 31, 2013. I will then provide details of our operating results for the quarter, the sequential comparison to the fourth quarter of 2012, as well as a year-over-year comparison to the first quarter of 2012. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our first quarter financial highlights. As Mike said, we booked 4 instruments in Q1 and ended the quarter with 6 instruments in backlog. During the first quarter, we recognized revenue of $5.6 million and incurred a net loss of $21.1 million. We ended the quarter with $112.3 million in cash and investments, an increase of $11.7 million from the balance at the end of Q4. This Q1 ending balance includes the addition of net proceeds of $28.5 million of debt and equity financing, offset by cash use of $16.8 million. Breaking down our revenue. Total revenue for the quarter was $5.6 million, relatively flat with the $5.9 million of revenue realized in Q4 and down $4.4 million from Q1 of 2012 For instrument revenue. In Q1 of 2013, we recognized $1.9 million on 3 instruments, compared with $3 million on 5 systems in Q4 and $7.9 million on 11 systems in Q1 of 2012. As a reminder, in the early part of 2012, we were still working off the pre-commercial sales backlog. Consumable revenue grew substantially in this quarter. Revenue for the quarter totaled $1.9 million, up $600,000 or 46% above that recognized in Q4 2012 and up $1 million or 125% above the $860,000 recognized in Q1 2012. As our installed base continues to grow, service revenue increased in Q1 2013 to $1.5 million, up…

Thank you, Susan. I will be providing an updated forecast on our near-term 2013 financial performance. Our first quarter revenue results were in-line with our expectations. We installed 3 systems in Q1, which is consistent with what we had anticipated. With 4 new bookings from the first quarter, we started Q2 with 6 systems in backlog. As we mentioned in the past, we generally expect to convert systems from backlog to revenue in either the first or second quarter after they have been booked, depending on the readiness of our customers. Looking forward to Q2, we anticipate that 2 or more of the 6 customers in backlog will not be ready to have their systems fully installed by the end of the second quarter. As I mentioned earlier in the call, we also expect to recognize revenue on RS II upgrades as they are installed over the next several months. As of the end of March, we had received upgrade orders totaling approximately $630,000. Now recording -- regarding consumables. As we also mentioned earlier, our consumable revenues jumped significantly in the first quarter, reflecting higher system utilization across the installed base. Although we expected a sequential increase, the amount of the increase we achieved in such a short timeframe was surprising. We likely benefited from some early purchases of consumables by some customers as they began embarking on new projects. We're continuing to drive toward higher levels of utilization. However, we would not expect to see another sequential jump of this magnitude right away. Furthermore, the RS II upgrades may cause some disruptions in utilization over the next quarter or 2, as some customers who have ordered the RS II upgrades may wait until after the system has been upgraded before launching into new projects. And the upgrade itself can…

[Operator Instructions] Our first question comes from the line of Bryan Brokmeier from the Maxim Group.

I'm not sure if you've said this at the end there, Ben but you have about 31 upgrade orders as of the end of March. How should we think about the pace of those upgrades and what's coming in the second quarter? I think you may have mentioned that, but I have missed it.

So we have already started, I think, some of those upgrades this month. We want to do it in a systematic manner and it does require some coordination with customers because it means that we have to take down their system while we do that. So we may not get all those done this quarter. Most likely, it's going to happen over the next several months.

Do you expect some of that -- it's about, I think it's 42% of your total installed base, are you expecting more of the rest of your customers to upgrade or how should we think about the rest of your installed base?

Yes, it's been a very popular upgrade. So we do expect to see more orders. As Mike mentioned, we are selling that for $20,000. And sometimes there's a purchasing process that they have to go through. And so, we expect them to just be coming in on sort of ratable basis.

Okay. And your consumable revenue was stronger than I was expecting. What accounted for the higher utilization Mike had mentioned? And what types of projects may be driving that higher utilization?

This is Mike. I think actually, it was kind of more or less across the board of our applications. Certainly, in microbial space, we're seeing a lot of uptick there but as I tried to point out, we're also seeing larger genomes being tackled in the plant, in the fungal space, as well as in the mammalian space, even with humans now and those involve a lot more cells per sample, or SMRT cells. But I think generally, it's just the reliability and performance of the system is to the point where people are planning more and more projects on their system. The core labs, if they're a service facility, are seeing an increase in projects from their clients that want to use the long read capabilities of the RS. So I think it's pretty much across the board.

All right. And have you begun realizing any revenues from the 100,000 foodborne pathogen projects?

Only a tiny bit. I mean, it's still mostly in the sort of start up phase, relative to the customers there working on decisions on which bacterial strains they're going to prioritize to begin with, as well as them working on the automation of their sample prep. And I think we'll start to see more of that this quarter. We saw relatively little last quarter in that regard.

We saw a nice publication on that, actually a week or so ago. Where I think the FDA mentioned that they sequenced one of the salmonella strains that was responsible for an outbreak back in October, and that was part of that project.

And our next question comes from the line of Daniel Brennan from Morgan Stanley.

First off, Mike, could you provide maybe a profile of the 4 orders that you had this quarter? Any type of color on the types of customers that are kind of ordering RS today?

Well, it's kind of the main applications. Certainly, in the bacteria world, we're doing very well and having made the case there that we can do things that other people can't do. And people in the human space who have began to realize how much they missed from the short read technologies, there as much information as they do provide, there's still a lot of holes, are beginning to look at the RS, at least in conjunction right now with the short read technologies as a way to give a much more complete picture of genetic variation. And then the third area, I would say is in the plant space, where you have all kinds of reasons, both from an agricultural perspective and coming up with better varieties to looking at sources of alternative energy components. So I think, those are the areas that kind of parallels what the biggest uses of our system are right now, as well as a what the -- shorter term list of prospects are looking at.

Great. And then, I think you alluded upfront, you also mentioned on the prior conference call, you discussed or I don't know if it was Susan or yourself, Mike, about the funnel and how you're optimistic, and you had the 4 orders this quarter, but you got -- it's difficult to predict like conversion. So is there any -- I know this comes up on every call, but is there any color about the funnel itself as it stands today? Any kind of new things you can point to, to give us a sense of the size of the funnel? Whether it be new leads or days to close, anything that would give us a sense of where you stand today versus where you stood last quarter?

We tried to say at the beginning or even the past quarter that we were getting to see the inklings of increasing our pipeline. I think we've seen that accelerate during this quarter, even starting right after AGBT. I think the issue of how difficult it is to predict exactly when a big capital purchase like this comes into realization, has to do with a procurement process, which can be somewhat erratic time wise and somewhat lengthened, if there is a long procurement concept. Things have to go up for bid in a lot of cases, particularly outside the U.S. And even though it's in essence, designed to be a sole-source bid, this still is a process with 2 to 3 months on that. And then you're at the whim of the bureaucracy that's guiding this through. And then the other thing that's an issue in the U.S. these days is the sequester thing, which probably delayed an order or two in the U.S. for us last quarter. It didn't stop an order but government agencies, in particular, were under a lot of constraint on their capital budgets, until right at the end of the quarter. And now that that's been at least resolved in the short term, I think that's less of an issue. But big ticket equipment items have a certain process that one has to go through, and even though you know you're going to get the order, knowing exactly what month, sometimes the quarter you're going to get it, it's a little hard to gauge sometimes, particularly at the -- where we've been or 1 or 2 units make some big difference for us percent-wise. As the pipeline gets bigger, and hopefully our sales get bigger as a result of that then 1 or 2 of those units being pushed from one quarter to another, becomes less and less of an issue.

Great. And if I can just maybe sneak one more in. Just back to that question earlier on the consumable pull through. Is it possible to the kind of quantify, I think you mentioned there's a few customers who do as much as $300,000 on an annualized basis to pull through. Is it possible to give a sense of was the increase in the pull through this quarter fairly broad-based? Was it driven by a select number of customers or any metrics you can give towards the substantial increases around the pull through and kind of the customer drivers behind that?

Actually, it was pretty broad-based. I mean, our top end customers continue to push the usage of their machines. But one thing that we did, I think we mentioned on our last call, was we've shifted some of our sales efforts, particularly focused on consumables and utilization of the systems in that perspective. And we targeted a lot of the sort of medium to low throughput users, to making sure that they knew how to get projects adapted to the PacBio RS and just carry out successful usage of it. And that's starting to pay off pretty handsomely for us as well.

Can I just sneak one more in? And I spoke to Ben about this but as a woman who looks through a lot Moleculos-facing technology maybe this year, will that be a direct competitor to the type of long reads that the RS generates or will it be something different? I'm just trying to think about how customers think about comparing Moleculo towards the RS.

Well, it's hard to know because no one really knows what the performance of that's going to be at this point. I mean, our belief is that it still has a lot of the limitations of the -- that the sample prep associated with the short read technologies, it relies on PCR amplification step. It's even more difficult and wrought with problems, strictly biased that the current system uses because you're having to deal with long-range PCR. You just -- it's just no one's ever demonstrated you can do that very uniformly. So you still will end up with a lot of holes because of that, that coverage bias issue. With our technology, you don't have that. We have even longer reads than you could routinely get on most long-range PCRs with our technology already. And by the end of the year, we expect to have an average of even longer read lengths from our customers. So while I suspect that it's -- if I had to guess, it's probably not that different from the mate-pair -- the long mate-pair libraries that they use now in terms of what it adds to the luminous short read sequencing technology.

[Operator Instructions] Our next question comes from the line of Amanda Murphy from William Blair. Amanda Murphy - William Blair & Company L.L.C., Research Division: I just have a follow up to Dan's question. And not to belabor the point but in terms of the comments around bookings for the year, I'm just curious, given that the capital -- well, the budgeting issues you talked to and perhaps, the long conversion cycle in terms of sale. I mean, how do you get comfortable with that bookings number, especially given that there's a bit of an acceleration implied towards the end of the year or through the year rather?

Well, there's a certain way to look at it. We actually doubled this quarter year-over-year. But no, I think this year is we know enough about the pipeline at least, what we can see, things could always change, to know that a substantial number of those potential orders are already in the purchasing queue. And so, I think our outlook is at least, as far as we can see, is less on the order of the quarter we're going to get those orders from than it is exactly what quarter they're going to come in. But we know that there's funding available for most of the ones that we're looking at in our pipeline, at least, in the next quarter or 2. So funding is always an issue in a general sense but to the degree that we have impetus from our customer base, who need to do things they can't do otherwise with sequencing technologies, we feel there's a pretty strong momentum in our favor. Scientists in the end, have been pretty creative about how to get money from things that they need to do through science with. It may take them a little while but usually, they force the issue. Amanda Murphy - William Blair & Company L.L.C., Research Division: Okay, got it. And then, in terms of instrument ASP, how should we think about that in light of the new platform? Is it -- should we think about it consistent with how it's trended in prior quarters or will there be some increase? After the upgrade?

I mean, it's priced the same as the RS. I mean, there's -- we'll see an up-and-down from an ASP depending on what geography we're selling in, particularly at these -- at modest unit numbers where you don't have much of an averaging effect. The RS II and the RS are the same price. Amanda Murphy - William Blair & Company L.L.C., Research Division: Got it, okay. And then just last one on methylation. And I know you've had some software introductions there, can you just remind us where you sit with methylation? Are people using it? I know that you've had some publications that are using it but how much are people using the RS platform for methylation studies at this point?

Well, if they're doing bacterial studies, they're using it probably uniformly and you'll probably see an even bigger set of papers coming out in the next 6 months from people who have even gone back and taken some of their old data and reprocessed it to look for methylation patterns. I think there's sort of 2 issues about it in microbial space. One has to do with the fact that you've got sort of 2 kinds of reasons for methylation in microbial systems. One has to do with defense against their pathogens, which tend to be phages. But the other has to do with regulating gene expression within those organisms. And as people understand the latter in particular, there's a much bigger interest in that space. In the sort of nonbacterial space, where some of the predominant methylation patterns are -- types are different, we're beginning to see people exploiting that. But I'd say, that's probably still in the early phase.

[Operator Instructions] And I see no additional questions in the queue at this time.

Okay. So in wrapping up, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers and the scientific community in general. We continue to make progress and we see momentum building in our business, particularly in system utilization. With further product and software releases on the horizon, it will be exciting to see how this will impact both our consumable sales and new systems bookings in the coming quarters. Thank you for listening in, and we will talk again in about 3 months' time.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.