Earnings Labs

Pacific Biosciences of California, Inc. (PACB)

Q1 2015 Earnings Call· Tue, May 5, 2015

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Transcript

Operator

Operator

Good day, ladies and gentlemen. Welcome to your Pacific Biosciences of California, Inc. First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to the conference over to your host for today, Trevin Rard, you may begin.

Trevin Rard

Analyst

Thank you. Good afternoon, and welcome to the Pacific Biosciences first quarter 2015 conference call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com, or alternatively as furnished on Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. With me today are Mike Hunkapiller, our Chairman and Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer. Before we begin, I would like to remind you that on today's call, we will be making forward-looking statements, including plans and expectations relating to our financial projections and products that are subject to assumptions, risks and uncertainties and may differ materially from actual results. These risks and uncertainties are more fully described on our Securities and Exchange Commission filings; including our most recently filed current report on Form 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statements. In addition, please note that today's call is being recorded, and will be available for audio replay on the Investors section of our 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. I would now like to turn the call over to Mike.

Mike Hunkapiller

Analyst

Thanks Trevin. Good afternoon and thank you for joining us today. We are pleased with our first quarter results and the progress we continue to make in driving our overall business. Highlights of our Q1 financial results are as follows. Total revenue grew to $17.6 million, representing over 50% growth compared with $11.6 million in Q1 of last year. This included an increase in Roche contractual revenue, triggered driven by recent progress we have made in our development efforts with Roche. I will describe our progress in more details shortly, and Susan will provide details on the revenue recognition. Excluding Roche, contractual revenue from both years, our total revenue grew by over 40%. Instrument revenue for the first quarter grew to $7 million, up over 30% from Q1 2014. Consumable revenue for the first quarter was $4.3 million, up 69% from Q1 2014. Our average consumable revenue per installed system has steadily increased and now exceeds $130,000 per year on a rolling 12-month basis. Today, we announced that we achieved the second development milestone under our development, commercialization, and license agreement with Roche. As a reminder, we are developing sequencing products for the clinical diagnostics market, which Roche will purchase from us and distribute to their customers. We have now earned half of the milestone revenue set forth in our agreement with Roche, and a pathway to the finish line is becoming more definite. We expect to be able to deliver products to Roche for the second half of next year, consistent with the targeted timeline we announced when the Roche agreement was signed about 18 months ago. Both we and Roche are very pleased with the progress we have made and while there is still lot of work left to do, we are excited to see this development program…

Susan Barnes

Analyst

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, 2015. I will then provide details on our operating results for the quarter and a year-over-year comparison to the first quarter of 2014. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our first quarter financial highlights, during the quarter we recognize revenue of $17.6 million and incurred a net loss of $20.2 million. We ended the quarter with $79.1 million in cash and investments, $22.2 million lower than the $101.3 million reported at the end of last year. Turning to revenue, revenue increased substantially year-over-year across all of our products and services. Total revenue for the quarter was $17.6 million, a 52% increase over the $11.6 million recognized in Q1 of 2014. Instrument revenue increased 32% to $7 million in Q1 2015 from $5.3 million during the same period last year. Consumable revenue was again very strong, increasing 69% to $4.3 million for the current quarter, up from the $2.5 million reported during the first quarter of 2014. Service and other revenue increased 32% to $2.7 million in the quarter compared to $2.1 million in Q1 of 2014. Finally, we recognize $3.6 million of revenue associated with the $35 million payment that we received from Roche in Q3 2013. It should be noted that the revenue recognized in this quarter is a $1.9 million increase over related amortization amortized revenue recognized in past quarters. Revised revenue amortization related to this upfront Roche payment reflects our increasing certainty of the estimated development time for this agreement. Gross profit was $5.9 million in Q1 of 2015, representing a gross margin of 34%. In Q1 of 2014, we recognized $2.7 million…

Ben Gong

Analyst

Thank you, Susan. I will be providing update of our 2015 financial forecast. Starting with revenue, we are pleased with our first quarter revenue results and we remain on target with our product and service revenue expectations for the year. We are also excited to resource second Roche milestone a little earlier than we had anticipated. The milestone achievement this quarter will result in a $10 million increase in contractual revenue for Q2. We also expect to continue recognizing about $3.6 million in contractual revenue each quarter this year related to the amortization of the original upfront payment we received from Roche in 2013. In summary, we are increasing our revenue growth forecast for the year from 20% previously to at least 25%. Moving onto gross margin, we saw in Q1 the positive impact of higher rate of contractual revenue we had on our gross margin. With this higher rate of contractual revenue expected to continue, our quarterly gross margin percentage this year should remain in the mid-30s except in Q2, our gross margin should be higher as a result of the extra $10 million of gross profit that will be recognized with the milestone revenue. Our operating expense in Q1 jumped up due to a combination of planned investments in Q1 and normal quarterly fluctuations. For the remainder of the year, we expect our operating expenses to level off compared with Q1 levels, so will remain higher than our run rate in 2014. For the year, we expect our total operating expense to increase approximately 10% to 15 % over last year. 2% to 3% of that increase is expected to be a result of an increase in non-cash stock compensation expense. Our operating expenses include non-cash stock compensation expense and depreciation expense that together amounts to approximately $4 million per quarter. With regard to interest and other expense, we continue to expect to record approximately $1 million of interest in other expense per quarter [ph] to fluctuations. Roughly half of that represents cash interest expense from our outstanding debt and about $300,000 represents non-cash amortization expense. With regards to cash usage, we consumed more cash than we had forecasted in Q1, due primarily to the timing of inventory receipts and AR collections. We expect to reduce our cash usage in the coming quarters, particularly in Q2 with the $10 million payment expected from Roche for achieving the second development milestone. We expect to maintain a balance of cash and investments of at least $50 million throughout the rest of this year, representing at least a year's worth of cash on hand. With that, we will open the call to your questions.

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Bill Quirk of Piper Jaffray. Your line is open.

Bill Quirk

Analyst

Great. Thanks. Good afternoon everybody and very nice quarter.

Mike Hunkapiller

Analyst

Thanks, Bill.

Bill Quirk

Analyst

First question for me is, I guess, just thinking about the BGI deal and I was hoping to maybe have you help us frame that a little bit and certainly recognize some sensitivity around giving us a specific number, but maybe help us think a little bit about I guess is this a deal that that could be in kind of high-single or double-digits, and if there's any specific I guess triggers that they need to see that that may in turn lead to a large number of orders.

Mike Hunkapiller

Analyst

This is Mike. Yes. I think, we are not comfortable at this point with giving you a number. It is pointed out in the press release. We received one order from them with a plan to as they get that integrated into their pipeline add to it in reasonable numbers. It has taken us a long time to get into that position, but we finally convinced them with the value of technology. They have been using some of the other service labs that we have RS systems installed in China and decided that they needed to jump into long read sequencing more directly themselves using our technology, so we have a plan worked out with them to move that level of investment in their part up as they get it integrated into their informatics pipeline, but we are very excited about the possibility and I think they are well.

Bill Quirk

Analyst

Okay. Very good. Then can you just talk recognizing that you want to keep some of the details around instrument placements and back quarter and such confidential for competitive reasons. Can you help us at least think a little bit directionally about order patterns or backlog, anything like that?

Ben Gong

Analyst

We are going to continue to give you a guidance on revenue growth and hopefully that gives you at least a sense that there is stability there, but as Mike mentioned before, just giving you those details is something we thought would better not to do going forward, but given that consistency in the revenue guidance that we put out there, I think you can infer from that that things are fairly consistent.

Bill Quirk

Analyst

Okay. Got it. Then just last one for me and I will jump back in the queue here. Just thinking a little bit about consumables guidance, can you give us a little extra color here. Obviously the numbers came in well above kind of where you had targeted those to be, and I am just kind of curious kind of how much further can you push that dial?

Mike Hunkapiller

Analyst

Well, we continue to push it up. The number we gave you was an increase on a rolling 12-month basis relative to what we have given the last couple of calls, so given that is on a rolling basis looking backwards, you could affirm that it is higher than the number we gave you for that on a quarterly basis anyway. We still see continued usage at an increasing number of our sites, particularly as they get into more complicated genome projects, which require multiple sample SMRT Cell runs per project in the human area, and the plant and animal space in particular, it takes a lot more sales to get the finished genomes with people looking for than it did, say, for microbial sequence. They might run a lot of microbes, but it is basically one cell, at most a piece or some of the other projects may take 50 to 100 cells. We think, we have ways to go on the per usage, per instrument usage .

Susan Barnes

Analyst

We do have customers as high as 300,000-plus on a single system, we have seen increases not just at an 80-20 rule, but across the product line, so we are very excited about its features, ability to continue to drive more and more consumer revenues through that installed base.

Bill Quirk

Analyst

Got it. Okay. Thanks a lot guys.

Operator

Operator

Our next question comes from the line of Bryan Brokmeier of Maxim Group. Your line is open sir.

Bryan Brokmeier

Analyst

Hi. Thanks for taking the questions. You indicated that the increase in Roche revenue amortization reflects the increased certainty of the completion, but that it is in line your expectations. Why would not the amortization - if it is in line with your expectations, I guess I am just trying to understand what accounting wise causes the amortization to change if your – if it is in line with your expectation. Is there a risk adjustment to that?

Susan Barnes

Analyst

Yes. I mean, management though has great expectations, but accounting has to be very careful about the projections of the amortization period, so as that gets shorter and shorter and more and more certain, it is more milestones are met we are more comfortable changing the estimate.

Bryan Brokmeier

Analyst

Okay. I understand that you are not providing more color on the specific bookings numbers, but Mike could you provide a little bit of color around the makeup of that? Are you seeing an increasing percent of that backlog coming from the human area and sort of how that has changed over the last couple of quarters?

A - Mike Hunkapille

Analyst

Well, the answer is yes. I think, we have seen an increase not just in humans, but customers are looking at more complicated genomes, larger genomes, so the plant and animals spaces is part of that as well as the human space, which has been the most dramatic in terms of usage increase, certainly in the last five to six months.

Bryan Brokmeier

Analyst

Okay. What is the largest number of systems that any individual customer has? Is there something that you are able to share and how have you seen the number of customers at multiple systems changing recently?

A - Mike Hunkapille

Analyst

The largest single sites that we have announced before is four and we have seen, I would say relatively steady increase in the number of customers that either purchasing two - more than one or purchasing additional systems, so that has steadily increased. As their usage get up to sort when they maxed out the machine and they realize that they have more samples to run then we tend to get in discussions with customers about additional instruments and we have see that happening.

Bryan Brokmeier

Analyst

Okay. Could you talk a little bit about your pipeline and any changes that you have seen there in terms of the bigger funnel beyond your backlog? Thanks a lot.

Ben Gong

Analyst

Hard to be that specific about that, Bryan. I mean, the pipeline is good and it wasn't then we would not be able to price sustain at sort of guidance that we put out there.

Bryan Brokmeier

Analyst

Okay. Thanks a lot.

Operator

Operator

[Operator Instructions] Our next question comes from Anthony Sassali of William Blair. Your line is open.

Anthony Sassali

Analyst

Good afternoon guys. Just to let you know, I am actually calling up with Amanda so she is still around. Congratulations on a great quarter. First question, in regard to the RainDance agreement, would you be able to provide a little bit of more insight as to how or the timing of the type of impact that could have on 2015?

A - Mike Hunkapille

Analyst

Well, the timing depends on upon how quickly and successfully our joint development program takes place. I mean, that they have a system as you are probably aware it's a couple of systems that make use of droplet technology for variety of application some of which are in targeted sequencing. They have, as part of that, some interesting barcoding technologies for doing it and we have some technology, which we have been developing here that provides for very long range amplification without using PCR. Our goal is to combine those two technologies and have them in the end sell a version of their platform that will carry out the fragmentation and labeling, a very large pieces of DNA in their microdroplets and use that as a way to generate barcode labeled large fragments from the very large pieces of DNA that are compatible with our sequence read-lengths on the RS. By virtue of that, have a system that provides for extending the read length effectively in a synthetic read format from our technology and do so because we are not having to break things in the end down to 200 or 300 base pair fragments for sequencing that do not leave gaps due to PCR-bias or such, so we think that we can take advantage of the synthetic read capabilities, generated by that technology that go even beyond what we do now, where we have the industry-leading ability to do contiguous assemblies. Importantly, to also carry that forward to haplotypes and phasing of haplotypes over very, very long stretches of DNA, so we are excited about it. It is in the early stages of development obviously, but a lot of the hardware associated with it already exists and so it is really an application and chemistry development program.

Anthony Sassali

Analyst

Thank you for that insight. Then kind of piggybacking off on earlier question, in regard to adjustable markets and how the machineries more demand and used for complex genomes related to - for human, hence could you provide any insight into maybe the amounts that that would contribute to the 2015 guidance or has that been baked into the 2015 guidance?

A - Mike Hunkapille

Analyst

Well, as it has been baked in, I mean obviously partly. Longer-term, our goal is the way to get into an even larger percentage of the human market is to get the cost per human sample down much below where it is right now. Right now, it is predominantly being used to do an expansion of looking at reference genomes. What has been realized recently was some of our early studies from customers in the RS is that there is far more structural diversity out there in the general population, particularly worldwide than was realized with technologies that mostly looked at SNP variation, and given that there is a large number of projects underway in various geographies now to look at that and our hope is that lays the groundwork for how much variations out there and the need to do that analysis more broadly on a very, very large number of samples. As we get our cost per sample down, towards much more competitive with a short read technologies, we would expect to get a much larger chunk of that market and we have announced that we expect to be able to get an increase of at least four-fold and the throughput per dollar this year, which gets us down into a better range. As we get even below that amount, we should have an even more competitive position.

Anthony Sassali

Analyst

Great, guys. Lastly, and I know I am just kind of repeating what everyone will discuss, but in terms of the instrument or consumable revenue, can you provide or explain if you expect in 2015 just for either segment just to have revenue are we expecting to see both increase year-over-year?

Ben Gong

Analyst

This Ben, products and service revenues are certainly going to grow 2015 over 2014 and then the Roche contractual revenue, just due to do the additional amortization [ph] rate is also going to grow, so the 25% growth forecast that we have given is just the combination of both of the things.

Anthony Sassali

Analyst

Guys, I appreciate the time. Thanks.

Operator

Operator

Thank you. We have no further questions in the queue. I would like to turn the call back to Mike Hunkapiller for closing remarks.

Mike Hunkapille

Analyst

Okay. In closing, we remained 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 believe the SMRT sequencing provides the industry's most complete and accurate picture of genomes, due to its superior performance and sequencing accuracy uniformity of coverage, extremely long read lengths and ability to characterize DNA-based modifications. The expanded use of our technology and products, particularly in human genetic analysis affirms our growing position in the marketplace. We are still very early in adoption cycle for SMRT sequencing, but it is becoming even more clear and we have a very large potential for building PacBio's business. Thank you for joining us and we look forward to talking again in three months time.