Good day, ladies and gentlemen. Welcome to your Pacific Biosciences of California, Incorporated Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's call, Ms. Trevin Rard. Ma'am, you may begin.

Thank you. Good afternoon, and welcome to the Pacific Biosciences second 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 the 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'd like to now turn it over to Mike.

Thanks, Trevin. Good afternoon and thank you for joining us today. We are pleased that our second quarter results and the progress we continue to make in driving our overall business. Highlights of our Q2 financial results are as follows. Total revenue grew to approximately $24.9 million, wasn't doubling our revenue of $11.4 million in Q2 of last year. Year-to-date revenue was $42.6 million, 85% greater than our revenue of $23.1 million recognized in the first half of 2014. This included the $10 million revenue milestone we achieved in April related to our contract with Roche which we described in our call last quarter. Excluding the milestone revenue and quarterly amortization of Roche contractual revenue from both years, our total revenue grew by 17% quarter-over-quarter, and grew 29% year-to-date 2015 over year-to-date 2014. Consumable revenue for the second quarter was $4.5 million, up 48% from Q2 2014. Year-to-date consumables revenue has increased 58% to $8.8 million in the current year compared to $5.6 million in the first half of 2014. System utilization continues to be robust and our average consumable revenue per installed system continues to exceed $130,000 per year on a rolling 12-month basis. Instrument revenue in the current quarter was $4.3 million compared to $4.7 million in Q2 of 2014. Year-to-date instrument revenue increased 13% to $11.3 million in 2015, compared to $10 million over the same period of 2014. As we move into the fifth commercialization of the PacBio smart sequencing systems, I'd like to give a brief over of where we are positioned in the three genomic application areas on which we focus. The first of these areas is microbiology, the one in which we first established the utility of our platform. We are generally recognized as the goal standard for bacterial sequencing. Smart sequencing is…

Thank you, Mike, and good afternoon everyone. I will begin my remarks today with a financial overview of our second quarter that ended June 30, 2015. I will then provide details on our operating results for the quarter and year-to-date with a comparison to the second quarter of 2014, and a year-to-date comparison to the first half of 2014 respectively. I will conclude my remarks with a brief discussion of our balance sheet and our July 24th 8-K filing related to our property leases. Starting with our second quarter and year-to-date financial highlights, during the second quarter we recognized revenue of $24.9 million and incurred a net loss of $11.9 million. This brings our year-to-date total revenue to $42.6 million and our net loss to $32.1 million. We ended the quarter with $72.7 million in cash and investments, $6.4 million lower than the $79.1 million reported at the end of the quarter and $28.6 million lower than the $101.3 million reported at the end of 2014. Turning to revenue, total revenue for the quarter was $24.9 million, a 118% increase over the $11.4 million recognized in Q2 of 2014. Year-to-date, total revenue in 2015 is $42.6 million, up 85% over revenue of $23.1 million recognized in the first half of 2014. Breaking down the revenue, instrument revenue quarter-over-quarter was relatively flat with $4.3 recognized in Q2 2015 compared with $4.7 recognized in Q2 of 2014. Year-to-date, instrument revenue was $11.3 million, a $1.3 million or 13% increase over the $10 million recognized during same period last year. Consumable revenue continues to be very strong, increasing 48% to $4.5 million for the current quarter, up from $3 million reported during the second quarter of 2014. Year-to-date consumable revenue has increased 58% to $8.8 million in 2015 compared to $5.6 million in…

Thank you, Susan. I will providing an update to our 2015 financial forecast. Starting with revenue as we saw this past quarter our quarterly revenue comparisons have varied due to the timing of revenue we recognized for achieving growth milestones. In Q3 of last year we recognized $10 million in milestone revenue but we’re not expecting to report milestone revenue during this third quarter as results our Q3 revenue will likely be lower this year compared with last year. However as Mike mentioned earlier we’re expecting to achieve an additional growth milestone before the end of the year. As a result we’re increasing our revenue forecast for the year expecting, annual revenue growth of at least 40% which is up from our previous forecast of at least 25% growth. Moving on to gross margin, as we anticipated and mentioned in last quarter's call our Q2 gross margin was higher than usual as a result of $10 million in milestone revenue we recognized. For Q3 we expect to record a more normalized gross margin that is in the mid-30s. For the fourth quarter we expect to record higher gross margin again reflecting additional milestone revenue. Our operating expenses in Q2 were also in-line with our expectations. Our growth in operating expense this year stems primarily from a higher investment in product developments and regulatory related costs as we prepare to provide products to Roche for the clinical market. We expect our operating expenses to continue at about the current run-rate for the remainder of the year leading to approximately a 15% growth in operating expenses over last year. 3% to 4% of the increase is expected to be result of an increase in non-cash stock compensation expense. As a reminder our operating expenses include non-cash stock compensation expense and depreciation expense together amounts to approximately $4 million for the quarter. With regarding cash usage as we have mentioned previous calls we expect to maintain a balance of cash and investments of at least $50 million through the rest of this year representing at least a year's worth of cash on hand and with that we will open the call to your questions.

[Operator Instructions]. And our first question comes from Tycho Peterson of JPMorgan. Sir, your line is now open.

This is Steve [indiscernible] for Tycho. First just on the Roche milestone, can you give us any color on what triggered this expected early recognition and then how should we think about the timing of the fourth payment.

So we’re getting closer to the achievement of the next milestone and with that at a certainty that’s the reason why we’re giving a heads up to it at this time. Again we’re expecting to achieve that milestone in the fourth quarter.

And then just on BJI you mentioned last quarter that they are contemplating placing additional unit orders so can you just give us some additional color on the conversations that are going on with that customer?

While I'm not going to detail our discussions there, we have placed the first instrument into their labs. It's relatively early, it's been there fairly short period of time and as they get themselves trained on the use of it and get a better sense of their anticipated revenue stream from their service business than we will collectively proceed accordingly.

And then lastly just on are there any updates on the RainDance collaboration in terms of timelines or milestones?

Not that we’re giving publically at this point, no.

And our next question comes from Amanda Murphy of William Blair. Your line is now open.

So I had a question on, I know you’re not giving backlog metric per say but I think you did have a decline vis-à-vis Q1 in terms of instruments revenue, so I'm wondering if you can just give a perspective on I guess without asking you to quantify the backlog kind of what that looks like maybe policy as we go forward, and then separately again maybe this is a difficult question to answer but thinking about kind of what's going on with Roche you know at a high level what that due to your instrument revenue over the longer term here?

Yes the second quarter revenue was lower than the first quarter, but we have said in the past we’re subject to some quarterly fluctuations as to deciding of when things get installed. So that’s just unfortunately that the condition that we live in. We’re not giving detailed color on the backlog, instead what we’re doing is continuing to provide guidance on the revenue growth and what we’re trying to do there is at least give you some sort of sense for the trend of the business. We increased the revenue guidance for 25% growth to 40% growth admittedly it's lot has to do with us expecting to get some milestone revenue in there, but embedded in there obviously is the continued product and service revenues that we’re expecting in the balance of the year.

Right, and I will just say Amanda it's sometimes it's better to look at the year versus the quarter so if you look at the year-to-date we’re at 13% up from last year to-date. So because again when we did talk about bookings you saw last year we did a five and a 16 and they are just too choppy of the small numbers that we really feel that they are giving pattern where it's giving you guidance until the revenue we feel a better metric of our business.

Yes overall not counting the Roche revenue, we’re up almost 30% year-to-date so that gives you a better sense of what the product run-rate is here. I think relative to Roche, I mean obviously we and Roche are making substantial investment in the clinical diagnostic sequencing arena. So one might expect that we both anticipate substantially return from that. As I’ve said we probably give you a little more clarity on where we’re with the overall Roche program in our next conference call

And maybe just a reminder on the relationship with [indiscernible] I mean that’s on the clinical side but do you have in any way to port over whatever you maybe working on the Roche onto the research side, maybe just remind on the sort of the structure of the contract from that perspective.

Well we’re developing for them a version on our technology that will go through regulatory approval eventually, for them to sell into the clinical diagnostic arena obviously that’s our technology, they will be our distributor into that space and so we have freedom to use what we develop from a technology perspective and type one [ph] technology into our markets. As we said we retain all rights outside of clinical human in vitro diagnostic. So any other markets with that technology are open to us before direct distribution.

Okay and then I guess just last one and I'm assuming the uncertain no, given the guidance I think it's basically excluding it sounds like you sort of still expect kind of the similar performance but is it the right way to think about it the relocation you know it's not going to impact your manufacturing capacity or anything like you know in terms of our modeling going forward?

Two different questions, I think you had in there but I will take the latter one first so, relocation that’s not going to happen this year Amanda because we have to basically as Susan mentioned do some improvements to that building and we have literally the next two years to execute on that move from our current property to the other property. The first part of your question had to do with I'm going to interpret as a breakdown of revenue and we’re not given specifics on the breakdown but we’re as Mike said we’re seeing growth in the business of 29% year-to-date on the non-Roche business so that’s a pretty good indicator of our business.

I will just add for the capacity increases, the power of both the install base and the amount of penetration into this continue to be very strong numbers for us. So we’re excited that we will have some more breathing room in the manufacturing facilities going forward.

As was pointed out in a couple of presentations, one of the main reasons for the relocation from our perspective independent of our current landlords for the space and the whole industry that we’re located in is to be able to increase our manufacturing capacity.

And our next question comes from Drew Jones of Stephens Incorporated. Your line is now open.

This is Jared [ph] actually in for Drew. Just a quick question on kind of just generally speaking, how you’ve seen reorder trends being going in the quarter and kind of what segments that this trends were coming from? First I will start off saying that the consumable revenues which is in the ways sort of I think of that as reorder isn't very robust and that’s been growing very well on just same store sales perspective was one way to look at that. And then in terms of existing sites or in additional systems, we continue to engage in or engage with I should say existing customers to buy additional systems without being too specific on them.

And I think as we said we have microbial, we have plant and animal and we have human. Some of those are through service providers and as their volume increases and we do see demand for more capacity on that unit. So those result in future purchase dialogue going on.

And then also just I know it's still early days but BGI, but given kind of the recent leadership change at the company is there going to be any impact felt that you see going forward with the relationship.

We don’t see any change in our relationship due to that.

[Operator Instructions]. And our next question comes from Bill Quirk of Piper Jaffray. Your line is now open.

I guess first question is instrument ASPs that if you mention something or Susan has mentioned something in your prepared comments I'm afraid I missed it, were they up down year-over-year.

They were within the normal fluctuation I would say so again built into the fluctuation in revenues is both the quantities I guess in normal geographic sort of mix. So geography by geography I think it was probably not too different than anything we see in the past but you’re always going to see some fluctuations in ASP just because of the [indiscernible] mix.

Right, and we do see a little bit obviously if everyone else does that when you do anticipate or get a unit from Europe, you’re not making quite as noise as we most of our Europe, other than the UK or denominated euros, so those elements are sometimes that’s way in the quarter but it's really advance, are you going through a Asia distributor or you’re doing direct United States or direct in Europe.

And Europe I don’t see why it's been favorable over the last 12 months.

So it's safe to say that from the geographic standpoint they have I guess more place from outside the U.S. this quarter, is that reasonable to say?

I don’t know that there is materially different sort of mix but again these are the numbers are small so any even single changes on the mix of how many in each can make difference but I'm not sure that it's -- we’re struggling with it probably because I don’t even think I calculated this.

And if you look at it more the other way which is we have had Europe at a higher last year than you have this year, that is shifted with our large geographic mix change but just some of the dynamics because you’re in a lot of not large giant numbers.

And then, maybe one more growth question, so just thinking about I guess into 2016 maybe commitments once you complete this projects in terms of instruments purchases and if so would you expect to see any of those in 2016?

Well to the latter the answer is yes, because many of them we shift they pay for it. We have shipments obviously and we have said we plan on being providing them systems for diagnostic market by middle of next year. So, I won't go into too much detail in terms of the agreement, it's been in trial in the past but they will give us a binding commitment over a period of time a new forecast system that they will put in place and if there is not sufficient working towards that forecast then there are issues associated with what our rights are with that. So the answer in one sentence is yes. But it will vary from year-to-year what that number is.

And our next question comes from Jonathan Abodeely of XLCR Capital. Your line is now open.

Just one question on the long term throughput goals for your system, can you just provide some current thinking around some of the current throughtput objectives and maybe the leverage that you’ve at your disposable as the chemistry software hardware has increased the throughput? Thank you.

Well the answer is all of those and few other things are included in the levers. So our stated goal which we have had each of the last three years going into this one the fourth has been to increase our throughput by a factor of four every year and that remains our goal and moving our goal, getting an extra year I suspect. The levers are chemistry in terms of [indiscernible] piece of that is analyzed, a lot of it is in sample prep and allows one to generate longer pieces of DNA to start with. A lot of it is in software in terms of cutting down on the amount of coverage that one has to have in order to have a certain level of accuracy. Others can come and being able to load a larger number of DNA fragments into one SMRT cell [ph]. All those things have leverage in terms of the system throughput and we are working all of them simultaneously.

And I'm showing no further questions at this time. I will now turn the call over to Mr. Mike Hunkapiller for closing remarks.

So in closing we remain steady fast in our commitment to bringing the unique advantages of our smart technology and products to our customers in the scientific community in general. We believe the smart sequencing provides the industries most completed picture, genome due to it's superior performance in sequencing accuracies and uniformity of coverage, extremely long read lengths and ability to characterize DNA-based modifications. 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.