Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc. Fourth 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 conference, Trevin Rard. Please go ahead.

Good afternoon and welcome to the Pacific Biosciences fourth quarter and fiscal year 2015 conference call. Earlier today, we issued a press release outlining the financial results we'll 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. Unfortunately, Mike Hunkapiller, our CEO is out with the flu today. With me are Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer, who will be reading Mike's prepared remarks. Before we begin, I'd 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, products and other future events that are subject to assumptions, risks and uncertainties, and may differ materially from actual results. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings; including our most recently filed report on Form 8-K and Form 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statement. 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 the call over to Ben.

Good afternoon and thank you for joining us today. We are pleased with our fourth quarter results and our continue progress in driving growth in our business. In particular, the launch of our new Sequel platform has been extremely well received which I’ll expand on later in the call. Highlights of our Q4 and full year 2015 results are as follows. We received orders for 49 Sequel Systems and three RS II systems during the fourth quarter. The Sequel System orders came from a broad range of customers spending academic, government and commercial entities and were well distributed across the U.S., Europe and Asia. Over 40% of the system’s order represents new PacBio customer sites. We shipped ten Sequel instruments to customers during the fourth quarter and completed the installation of six of those systems before the holidays at the end of the year. Total revenue for the quarter was approximately $36 million, which is more than double the Q4 revenue from the previous year. During the quarter, we achieved the final development milestone under our agreement with Roche and recorded the $20 million of revenue associated with the milestone. Total revenue for the year was approximately $93 million, up 53% from 2014. Excluding revenue associated with our Roche collaboration, total revenue was up 10% year-over-year. Consumable revenue for the fourth quarter was $4.6 million, up 6% from Q4 2014. For the full year, we generated $18.8 million in consumable revenue, up 43% over 2014. Meanwhile our RS II system install base grew by 28%. System utilization continues to be robust and our average consumable revenue per installed RS II system exceeded a $130,000 per year on a rolling 12 month basis. Instrument revenue for the quarter was $5.2 million compared to $8.6 million in Q4 or 2014. For the…

Thank you, Ben, and good afternoon everyone. I will begin my remarks today with financial overview of our fourth quarter that ended December 31st, 2015. I will then provide details on our operating results for the quarter and full year 2015 as a comparison to the same periods last year. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our fourth quarter and full year 2015 financial highlights, during the fourth quarter, we’ve recognized revenue of $36.3 million and a net loss of $1.4 million. This brings our 2015 total revenue to $92.8 million and net loss to $31.7 million. Q4 2015 revenue of $36.3 million was up $19.4 million from the $16.9 million recognized in Q4 of 2014. 2015 total revenue was $92.8 million was up $32.2 million from the revenue of $60.6 million recognized in 2014. Breaking down the revenue, instrument revenue quarter-over-quarter was down from last year with $5.2 million recognized in Q4 2015 compared with $8.6 million recognized in Q4 of 2014. For the full year, instrument revenue was $18.7 million in 2015 also lower than the $22.1 million recognized in 2014. As Ben stated earlier, the instrument revenue decrease reflects the transition from RS II to Sequel which resulted in a combined effect of fewer RS II System installs in 2015 versus the prior year and have limited number of new Sequel Systems installed in Q4 of 2015. Consumable revenue increased to $4.6 million in Q4, up from $4.3 million reported during the fourth quarter of 2014. For the year, consumables revenue increased 43% to $18.8 million in 2015 compared to $13.2 million in 2014. Service and other revenue increased 26% to $2.9 million in the quarter compared to $2.3 million in Q4 of 2014 and increased 28% in…

Thank you, Susan. I’ll now be providing guidance on our 2016 financial performance. As we previously reported, we booked orders for 49 Sequel Systems this past quarter. We will now be providing a forecast for future instrument bookings however; we are planning on continuing to report our actual unit bookings number in the near term as we believe it will likely differ materially from the instrument revenues we report for those quarters. Now starting with revenue, we’re expecting sales of Sequel Systems to drive significant growth in our product revenue this year. On the other hand, we do not have any more Roche development milestones to pursue this year, whereas last year, we’ve recorded a $30 million in revenue associated with the milestones achieved. In addition, the quarterly amortization of Roche contractual revenue is scheduled to reduce significantly in the fourth quarter this year as most of that original $35 million payment will have then been amortized. As a result, the $44 million in contractual revenue we recorded last year comprised up to $30 million in milestone revenue plus $40 million in amortization revenue is expected to decrease to approximately $11 million in amortization revenue this year. Despite this $33 million decrease in contractual revenue, we expect to make up for it with increased product and service revenue, resulting in approximately $93 million in total revenue again this year. Excluding all the Roche contractual revenue from both years, this equates to approximately 70% expected increase in product and service revenue year-over-year. In the near term as we’d mentioned in our press release last month and earlier on this call, we are planning to ship a limited quantity of Sequel Systems during the first half of the year and ramp up to higher shipments in the second half. As a result,…

Thank you. [Operator Instructions] Our first question comes from the line of Tycho Peterson of JP Morgan. Your line is open.

Hey thanks. I guess Ben, first question on guidance, are you including anything for Roche clinical royalties and can you maybe just give us some clarity on when do you expect to, maybe talk a little bit more about that?

Sure Tycho. So the arrangement is not a royalty arrangement, it’s more of a typical distribution arrangement. We sell them products and they in turn sell products to end customers. So included in our guidance is an estimate of some of the sales that we will make to Roche. Already we started making sales to Roche for their internal use of creating assays and we expect to continue doing that quite frankly in the near term before we shift over to selling them the products that they will in turn sell to their end customers as clinical research instruments.

Okay. And then I guess as we think about the funnel for Sequel, can you talk a little bit more about next few years you talked about in the preannouncement 40% of customers our systems going to new customer site, I am just wondering you know the degree you are getting interest from non-PacBio customers and if you could a little bit about kind of the mix of customers that are immerging in the funnel?

Sure. Yeah, we’re pretty pleased about that, it’s a broad range of customers as we mentioned geographically and across the different customer types, academic government and commercial. There were certainly initial buyers for the customers who were familiar with PacBio to buy systems because there were new about smart sequencing. That said, we’d certainly got quite a few words from people who were not previous RS II owners. So it’s even just to achieve the 49 bookings that we did, it was you know across both existing and new customers.

And the pipeline is just as vary as the orders we’ve talked about.

Okay and do you able to quantify how many went to Roche for asset development?

It was a handful.

Okay. And then just lastly on the manufacturing ramp, can you maybe just talk when you built-in partners going to start the ramping production and then how comfortably you are that built to hit their timelines?

We’ve been working with that development partner. Are you asking about Imac and the sense of that or you timeout the high volume tab?

The high volume tab.

We’ve been working with them for several months and they are hitting all the milestone. So that’s why we’re able to be confident that they could hit the goal of being ready for us in the second half of 2016.

Or it’s called middle of the year.

Yeah.

Okay. Thanks.

Thank you. Our next question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open.

Hi. So could you - I don’t know if you mentioned this before, I may have missed it, but do you expect installations to ramp off of the ten you’d planned to install in the fourth quarter sequentially or is that off of the six that you had in the fourth quarter?

Well, we planned to ship more on Q1 than we did in Q4, so you know we’re going to certainly install as many of those as we can. But just to make sure we set expectations properly. You know we’re going to ship a modest number at least this quarter and we want to make sure that we don’t ship too many too fast. So it is out intend to ship more in Q1 than in Q4, but it will still be let’s say a little bit of our strain rate. And then not too much after that we expect to be able to ship more and once the high volume just the players up and running that Sequel that pretty well and with when we feel more comfortable shipping to broader set of customers as well.

Right. And in the 40% that are of the bookings that are from new customers, do those new customers tend to take a longer to complete the installations than the preexisting customers?

No, we don’t have too many data points on Sequel. I mean the installation part is probably not going to differ materially from an existing customer versus a new customer because quite frankly the Sequel System is only one third the size of an RS II and so it’s probably not as involved in terms of facility readiness. But you know one thing to keep in mind and for us to keep an eye at on is the ramp of utilization that could differ because you know people who are more comfortable with smart sequencing might already have a number of products already queued up and so their utilization rate might get to a higher volumes faster than let’s say new customers.

Yeah, there is trend sample prep and bioinformatics and that’s why been better earlier that we would be investing in the field based upon installation of Sequel Systems.

Okay. And I think most of what we’ve heard has been very positive response in the Sequel and you had as you said yourselves that the 49 was much higher than what you’d anticipated. Can you describe some of the issues that customers have had so far with the Sequel, have they largely been minor software issues or some firmware failures or any problems with components and how is that compared with what you had expected?

Well you know we actually only start shipping in December, so actually it hasn’t been a long and has been with a small number of customers. You know in the sense the kinds of issues that were encountering are one that you might typically expect and they are predominantly software related and that’s why we mentioned more than ones that we plan on iterating the software quite rapidly in Q1. So it’s - a burning period is a way we’re describing it, it’s probably going according to most people would have expected it to go. And we’re just trying to be prudent about how we you know roll thing out. We know there are pitfalls are trying to go too quickly with too many people and that usually results in disappointing some folks. So there is some customers who are anxious to get their systems, we realize that. But we think we are going to be better off in the long term to be more modest about the shipments this quarter then we could ship. So we don’t plan to ship you know all that backlog now.

And then communication is very strong between those early customers and PacBio and we’re pleased with the iteration back and forth. So we don’t want to lose that learning in the process.

Okay, thanks a lot.

Thank you. Our next question is from Amanda Murphy of William Blair. Your line is open.

Hi, thank you. As I guess this is a follow-up to Bryan’s question. Ben, in terms their performance I realize it’s early but you had also talked to the ability to scale up the performance more rapidly on the Sequel vis-à-vis the RS II. So again that putting the cart before the horse that I see but just when should we expect that type of ramp up on the people, is that something that might happen in 2016 or is that more of a 2017 type event?

Well, probably what we’ll see in the first part of 2016, we are working on making the Sequel System robust so that’s certainly the focused. But there are going to be software and chemistry improvements throughout the year on both Sequel and in the RS II by the way, so we plan on asking the performance of both. The new lever that we have with Sequel that we didn’t have with the RS II is being able to work on a higher multiplex chip and so we are starting working on the higher multiplex chip. Those kinds of projects are multiyear projects though. So that’s not something that you are going to see you know output in 2016.

Well I think you can now revenue guidance and then just talk about the guidance that we do expect similar throughout year-over-year to be significant and that’s the result of being to be deploying the Sequels and have them used in a certain amount of volume.

Yea, okay. And then more side of the world, when should we be looking for initial data coming off the Sequel that’s something that might happen next week or is it just too early to get an kind of early user feedback?

We are probably not kind of get a lot of user feedback because it is very early but, Jonas Korlach, our Chief Scientific Officer will be presenting some Sequel data in his workshop on Saturday afternoon at AGBT.

Got it. Again and two more from me on, first on utilization, again recognizing it’s early but given that comments on RS II that you made on the utilization, is that - give an sense at this point how we should think about modeling utilization on the Sequel, you know I know you point its view that difference between new and any kind of existing customers that just on modeling perspective, how we should think about that as we ramp through 2016?

Yeah, you know our - I think it’s maybe easier to model the steady state than the near term because the near term has you know these moving parts of installs and you now timing of people out to speed. In the long term, we think the pull through revenue on the Sequel System is going to higher than it is in the RS II for reasons that we said before. But in the near term, when you have period of time when you actually are installing quite a few systems, then the you know the modeling is not so much about the average freight system but you know modeling you know when can systems that should get up and running. So typically people have to get the system installed and run it for a little bit before they start buying higher quantities of consumables. So it’s a - you know the modeling is usually more about that then it is what is the sort of steady state run rate for an install system.

Got it. And then the last one, you’d talked about and I am sorry if I missed this, but you talked about quarter about some of your agent rentals, so are you still doing that down for people who can’t get the Sequel or do you have any sort of train for them that you are thinking about putting in place?

Yeah, we - I don’t think we do what people of as region rentals. What we did is with the handful of customers, we offer them the ability to rent RS II systems. And so on season point under script that there is something in the balance sheet in the now fixed asset area they has to do with $2.8 million of inventory doing into fixed assets. That had to do with this handful of customers that we offered RS II rentals to. But we haven’t gone into quote sort of reagent rental models.

Got it. And then how about the trading program going forward, anything that you have, thoughts around there?

Right now with such a backlog in place in building, we do not have a formal trading program later once we get through that backlog and there we see a demand for and we may respond to the market at that point. So we have no plans currently.

Okay, thanks very much.

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

Great, thanks. Good afternoon, everyone. First question Ben, on the guidance, can you help us think a little bit I guess about the kind of consumables versus instruments next coming year?

We expect significant revenue growth on both. So the - in the Sequel instrument shipment themselves kind of certainly drive a lot of instrument revenue growth. And roughly speaking, the RS II install base even that if there is sort of a steady state kind of think. All of the Sequel Systems that we install in the consumables that they buy are going to represent incremental revenue there. So when we give the guidance of 70% year-over-year growth on products and service revenues, it’s really driven by both the instrument and the consumable revenue growth.

Okay, got it. And then regarding a comment about gross margin being in low 40s roughly each quarter this year, is it reasonable to assume that we should we see some sequential improvement as we go throughout the year or you sticking the kind of low 40s for pretty much every quarter?

Yeah, we have some competing things there Bill. I think one thing you would expect and I think we will have is improvements in gross margin just due to volume. We expect that to get those kinds of benefits. The things that could compete against that something are revenue mix. And so we don’t get as higher gross margin percentage on the instruments as we do the consumables. So if you have course where you sell more instruments, you mean I’d see the gross margin percentage increase even though the dollar would increase. And then I just wanted to point out, in the fourth quarter this year, there is a known thing that’s going to happen which is that amortization revenue which is a 100% that by enlarge almost disappears in the fourth quarter.

We do expect that maybe not in 2016 but long term we’ll even have stronger margins on the manufacturing and volume issues related to the gross margin, but we have to balance that against what percentage could be Roche business that went long term and it’s too early to tell about that which does have a different margin hit for us.

Okay, got it. And then I guess two more short ones for me. And that is, Susan, on this year’s SG&A, I certainly appreciate the stock based comp was up, but the number in aggregate was still up quite a big both year-over-year and sequentially. And so can you just I guess flesh that out a little bit, was there a lot of hiring to support Sequel launch both in terms of sales people as well as install tax by chance?

There was both a combination I think we highlighted on the call that there is - there were definitely more people not only in getting ready in the field to take the Sequel launch but the marketing around that Sequel launch and the vertical marketing to support to robust this that the Sequel market will address. So that’s in place as well if there were some professional fees and elements in the SG&A expense that were related to the worse transactions.

Okay, got it. And then I guess this last one from me is back to Roche and thinking about the consumables for Sequel, there is charge, will you be presumably shipping them some consumables to the whole as an inventory so that or they are going to placing orders directly through you and then you are going to shipping to the end customer?

We will ship to Roche and then - and we will recognize revenue when we ship to Roche and then Roche will in turn ship their customers. So it’s going to be a sell two relationship if that makes sense to as opposed to sell through.

It does, yes. Thank you very much.

Thank you. Our next question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open.

Hi, thanks for taking the follow-up. Just quickly, are you still booking orders for the RS II as from customers how aren’t going to be able to receive the Sequel for a while?

You know Bryan, we’re - we had three in Q4 and you know we will probably you know still see a small number, but it will be quite small we think in comparison with the Sequel because once the Sequel System is more widely available to people, just the performance parameter is in the relative cost would probably cannibalize to large extend future sales of RS II.

But the lease of instruments was only something you did for you a few customers at the beginning of the fourth quarter right, you are not still doing that?

Well they are leasing arrangements which could still over from quarter-to-quarter, but we’re again talking about just a handful of transactions.

Okay, thanks a lot.

Thank you. And that does conclude our Q&A session for today.

Okay, thanks everyone. In closing, we remain set fast in our commitment to bringing the unique advantages of our smart technology and products to our customers and the scientific community in general. We believe the smart sequencing provides the industry’s most complete and accurate picture of genomes to do a superior performance and sequencing accuracy, uniformly coverage, extremely long re-links and ability to characterize DNA modifications. Furthermore by providing scientist with an ability to obtain a comprehensive set of sequence information within a single experiment, smart sequencing is often the lowest cost and only research tool available to meet their needs. We are very excited about our new Sequel System and the opportunity that presents for us to deliver smart sequencing to much broader set of customers. Our focus for the next quarter will be to make the Sequel System robust and reliable at early customer sites and to ramp up our production Sequel instruments.

Thank you joining us.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.