Good afternoon, ladies and gentlemen and welcome to the Fluidigm Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Ana Petrovic, Director of Corporate Development and Investor Relations.

Thank you. Good afternoon, everyone. Welcome to the Fluidigm second quarter 2016 earnings conference call. At the close of the market today, Fluidigm released financial results for the second quarter ended June 30, 2016. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Following these comments, we will host a Q&A session. Presenting from Fluidigm today will be Gajus Worthington, our CEO and Vikram Jog, our Chief Financial Officer. This call is being recorded and the audio portion will be archived in the Investors section of our website. During the call and subsequent Q&A session, we will discuss plans and projections for our business, future financial results and market trends and opportunities, including among others, statements regarding the anticipated impact of recent organizational changes and other business strategies; expectations with respect to our new President and Chief Operating Officer; expectations for the single-cell biology and applied markets and our prospects and growth opportunities in such markets; our anticipated product launches, including the addition of imaging capability on our mass cytometry platform; and impact of our product pipeline; the expected timing of product launches; the impact of product performance; our views of competitive market position and the impact of competition; seasonality and product revenue trends; our expectations with respect to the levels and timing of revenue growth in the third and fourth quarters of 2016 and anticipated contribution to revenue growth from new products. And current estimates of 2016 total revenue, including in particular, expectations with respect to revenue growth in the second half of 2016; the seasonal and/or unusual nature of certain SG&A expenses, GAAP and non-GAAP operating expenses, stock-based compensation expense, depreciation and amortization, interest expense, capital spending, cash, cash equivalents and investment balances and currency-related impact on 2016 revenue.…

Thank you, Ana. Good afternoon, everyone. Before we get into results for Q2, I would first like to welcome Chris Linthwaite to Fluidigm as our new President and Chief Operating Officer. Chris’ executive management experience is highly relevant for us. He has been President of several divisions at Life Technologies and Thermo Fisher Scientific, including most recently, genetic sciences. I have gotten to know Chris over the last several months and I am certain that his combination of operating savvy, strategic thinking and passion for customers will be instrumental in driving growth at Fluidigm. The Board and I are very excited to have him in the Fluidigm and can’t wait to dig into all the aspects of our business with Chris. So, with that, let’s get started. Earlier today, we reported revenue of $28.2 million for the second quarter of 2016, down approximately 2% from the year ago period. Product revenue from research customers was $15.5 million in the quarter, down approximately 13% or $2.4 million year-over-year due primarily to lower C1 instrument revenue. Product revenue from applied customers was $9.3 million, up approximately 19% or $1.5 million year-over-year, driven primarily by higher proteomics and genomics analytical instrument revenue. Primary headwinds and tailwinds were respectively C1 instrument weakness and strength in our applied market business. We acknowledged earlier this year that our new competitive entrance – on the single-cell genomics would impact our C1 business, particularly in the first half of the year as we work through our doublet fix and towards enabling another order of magnitude increase in our throughput. These dynamics have played out mostly as we anticipated, but we did see an increase in competitive intensity in the second quarter. As we have previously discussed, our formation of a robust commercial team to focus on applied markets…

Thanks Gajus and good afternoon everyone. I will now walk you through our second quarter 2016 operating results and highlights. For the second quarter of 2016, total revenue of $28.2 million was down 2% year-over-year. For the first six months of 2016, total revenue was $57.2 million, an increase of 3% year-over-year. Total instrument revenue of $13.2 million decreased by 9% or $1.3 million year-over-year in the second quarter, mainly due to lower revenue from C1 and accessory systems and lower average selling prices. Approximately 60% of the BioMark HD systems sold during Q2 were motivated by single cell biology research and approximately 40% of C1 systems sold in the quarter were combined with the BioMark HD system. Total consumables revenue of $11.5 million which includes IFCs, assays, reagents and antibodies increased by 4% or $416,000 year-over-year for the second quarter, mainly due to higher revenue from genomics analytical IFCs and proteomics reagents, partly offset by lower revenue from genomics and for prep IFCs. Our genomics analytical IFC pull-through for the second quarter tracked within its historical range of $25,000 to $35,000 per system per year. While our genomics preparatory IFC pull-through tracked below its historical range of $15,000 to $25,000 per system per year. Our proteomics analytical pull-through tracked within its historical range of $50,000 to $70,000 per system per year. Total service revenue of $3.4 million increased by 17% or approximately $485,000 year-over-year in the second quarter. Product revenue by customer, which excludes service revenue for the second quarter of 2016 was as follows; product revenue from research customers was $15.5 million, down approximately 13% or $2.4 million year-over-year, mainly due to lower C1 instrument revenue; product revenue from applied customers was $9.3 million, up approximately 19% or $1.5 million year-over-year, driven primarily by higher proteomics and genomics…

[Operator Instructions] And your first question comes from the line of Sung Ji Nam from Avondale Partners. Your line is open.

Hi, thanks for taking the questions. Gajus, I am assuming your research business is largely exposed to global academic spending. And if that’s the case, could you give us some color in terms of what you are seeing as far as academic spending is concerned globally. Specifically, Europe, Asia and Japan given there is a lot of mixed outlook coming from your peers?

Well, I would say that the only consistent pattern ex-U.S. right now is in Japan where it continues to be a very challenged research environment and that’s been – that’s gone back multiple quarters and we have cautioned repeatedly that we won’t be counting on growth out of Japan until we see that repeatedly. And this past quarter was consistent with previous quarters and that it was highly volatile. In Europe, we haven’t seen anything, any pattern which we would care to call out at this point in time as it relates to the availability of funding generally. I know there has been some commentary about that from some of our comparables even going back last quarter. But in general, as it relates to our business, the drivers there are really things that relate to us specifically our markets, our opportunities and not secularly to funding generally. So, I guess to summarize, the only territory which we see a consistent pattern which we could therefore call out is in Japan and that’s been well documented.

Okay. And then my follow-up is for the Imaging Mass Cytometry product line, you expected to launch later this year. Understanding that there is good backlog historically, it’s taken a few quarters if not more for significant revenue recognition coming from new products. So, I was wondering if they are being currently – if that system is in Early Access Program currently. I am just trying to get a sense of what gives you confidence that you will see meaningful – you will see some impact from that product line? And then also could you speak – could you talk about what the list price might look like in comparison to your rest of your mass cytometry products? Thanks.

Sure. So, my confidence for the IMC release and its contribution to revenue is manifold. So, let me take you through the various elements. So first, the R&D development and manufacturing team in Markham has done a fantastic job of consistently hitting their milestones. And as a result, we are very confident in the schedule for the fourth quarter, schedule for completion of the system, its availability and manufacturing. In addition – and this is I think unique in our experience. We have meaningful backlog that’s been generated in the first half of this year. And of course, we expect that even more backlog will be generated in the second half of this year. We are heading into our launch, which means then that begin to fulfill our revenue obligations, we need to ship. On top of that, we have a very strong pipeline. In addition, we have beta units out of our customer sites right now. As you may remember, we shipped our first alpha units or prototypes at the very end of 2014. And so we have actually a pretty good set right now of customers that are up and running on this platform and generating data. They have been actually publishing off of it. Some of those publications are quite meaningful, like major biotech and what have you. There are also presentations recently at CYTO posters and podium presentations from the Imaging Mass Cytometry system. All of that has led to a significant amount of commercial groundwork that’s been going on over the past year that contributes to word-of-mouth among customers and opportunities that we have now in our pipeline of confidence in the customer base based on data that’s been shared between peers. And as I mentioned earlier, this has really manifested and most importantly, in backlog. So, based on all those factors and I realized there are a bunch of them. But that’s a big part of the reason why we are very confident that this will be a contributor in the fourth quarter.

Your next question comes from Bryan Brokmeier from Cantor Fitzgerald. Your line is open.

Hi, good afternoon. I apologize if I missed this, but third quarter was a bit below expectations, I understand your plan for launching the imager, so what gives you the confidence in being able to achieve your guidance that you have provided earlier this year?

Sure. So if I were – the way I would interpret your question there Bryan, is that if we are looking at a third quarter that is sequentially flat, that implies a pretty meaningful up-tick between 3Q and 4Q, just to put a finer point on it. So I think I will come at it that way. And if you want to come back because an element of your question that I missed, I will be happy to clarify. So there are multiple elements that give us confidence in the guidance and also what it implies for the fourth quarter. The first is that we always have a seasonal up-tick in the fourth quarter in our business. That’s common in our industry. It’s in biopharma, it’s a result of budget flush in academia that it can be – it’s generally related to the use of fiscal year budgeting. And it’s very predictable, it’s very consistent. There is nearly always an up-tick that’s fairly meaningful sequentially between the third quarter and the fourth quarter. In addition, as I mentioned in the prepared remarks, we are expecting some traction with the C1 based on our plan and specifically the initial adoption of the small cell high throughput chip, the availability of the medium cell high throughput chip and the impending availability of the 10-K solution that will come out of the C1. I should also note that the launch of TCR sequencing on the C1 which we announced today is a really important application in immunology and immunotherapy. And it’s already generating interest in academia and in biopharma. Third piece is that we expect continued strength in proteomics. And that includes a bolus of initial revenue from the Imaging Mass Cytometry system. That’s the availability of the system itself. And then in addition, there were upgrades of existing Helios customers if you enable them to capitalize on the imaging function. Last thing that I will note there Bryan, is that we said last quarter that in the first half of the year we expect to do roughly 45% of our year in the first half. And the first half of this year tracks accordingly to roughly the midpoint of our guidance.

Okay. And this afternoon, you announced the hiring of Chris, I see his positions, but I am not really that familiar with them, what does he sort of bring to the table, what are his skill sets that may allow him to quickly come up to speed in the company and really start to affect sales for the company?

Well, it’s a long list. So first off, highly relevant domain experience in genomics, in genetics, in cell biology, his exposure to that as a President and executive level manager going back to Invitrogen Life Technologies and more recently, Thermo Fisher Scientific. Another major piece, which is a big part of what we are looking for was experience, successful experience in driving growth of already meaningful businesses to much higher levels. We really in the search – which I conducted over a long period of time we were looking for somebody who had a demonstrated track record in taking businesses that were already in the hundreds of millions of dollar range to much higher levels and dealing with the attendant, organizational complexity, the maturation of process and discipline and what have you. Also we were looking for somebody who was in alignment with our culture to continue to bear the standard of Fluidigm, both internally and then with our customer base. I could go on, but that’s a pretty good foundation for why I feel Chris is a really important element of our, frankly our growth plan going forward.

Your next question comes from the line of Bill Quirk from Piper Jaffray. Your line is open.

Great. Good afternoon everyone. This is actually Alex Nowak filling in for Bill today. I apologize if this was already discussed, but I jumped on the call late, do you think there are any competitive dynamics in single cell that could explain why C1 instrument revenue declined in the quarter, I know a recent competitor just came out earlier this year and there is already starting to be some reports emerging on their technology?

Well, we noted in the call that – in the prepared remarks that the C1 was one of the main drivers of our shortfall during the quarter. And indeed, a chunk of that is related to intensified competitive dynamic, which the fact that there is a competitive dynamic is not a surprise. It was more intense in Q2 than our initial planning had indicated and we expect that to continue in Q3. So there are few things that I want to note about the C1 though as we go forward. The consumable impact in the second quarter was actually relatively minimal. And that’s important because what that indicates is that our customers are continuing to use the C1. So it’s not as if they are shutting these things off. That’s a really important thing to take home. The second thing is that the performance in revenues, actually stratified somewhat based on the segment. So in research, for the first half of the year, it was as we expected and that’s really important also because it indicates that in that environment – and admittedly with reps and folks on the ground, who are more experienced with the C1 that it’s doing what we expected it to do. However, it was more challenged and applied and why might that be. Well, the applied team is newer. They have been on the ground now for six months thereabouts and still C1 and some of the single cell technology is new to them and we are still building a pipeline there. We are still doing work there. So maybe not surprising that would be more challenged there in applied. So indeed, the business was impacted by competition in the second quarter and we expect that trend to continue in Q3. However, as we execute on our product roadmap, we expect there to be an improvement. And I will reiterate where those improvements come from. They come from TCR sequencing, which is driving interest in biopharma, its driving interest in academia. It comes from the small cell high throughput chip, which is in the – being tested by customers now and will be released later this quarter, the medium cell high throughput chip that is on track for our fourth quarter delivery. And finally, the anticipation of our order of magnitude increase in throughput solution. So hopefully, that gives you a more complete picture about what the competitive dynamic, how it stratifies and what we are doing about it.

Yes. That’s actually very helpful. And then just a second question, the Chinese precision medicine program includes the funding component for single cell analysis, I was just curious if you are seeing any orders or even sales coming from this program already?

China has done well in the first half of this year and we are expecting it to be a – to continue to do well in the back half of this year. And the funding, I think we have noted for quite some time that we expected funding availability specifically earmarked for single cell to pop-up internationally so the funding coming out of China is not a surprise to us and some of that is starting to get released and some of that will play out frankly over the course of years. We expect there will be more announcements domestically and around the world with specific allocation for single cell funding. This is what – one of many things that gives us confidence in the growth of the market over the long-term. Just to switch continents on you, the NIH has indicated that they are soliciting proposals for – from the common fund for another round of activity related to single cell biology. We think that’s actually a very important signal that the NIH is going to follow-up their initial common fund that was dedicated for single cell biology was something perhaps even more substantial.

Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Hey guys. Thanks for all the color on the Q3 to Q4 ramp logic. I am sure you guys appreciate the guidance implies that you are thinking that revenue growth would need to go from a range of $28 million to $29 million per quarter over the first three quarters of the year to about $41 million in Q4, which would represent about 33% year-over-year growth. Again, you have provided a lot of color on kind of the logic behind this. So, I don’t mean to be redundant and I am not asking you to repeat what you have already said. But I think we have to come back to this again, because I think you guys sort of acknowledged the recent track record hasn’t been pristine. And this Q3 to Q4 jump is pretty outsized even recognizing historical norms for seasonality. So, with that in mind, can you provide something more specific on any of the following things like what do you have in backlog dollars that you expect to come in Q4? How much specifically of this is attributable to Imaging Mass Cytometry given one of the questions earlier that kind of pointed to the fact that typically it does take a little while for an instrument to get going? Again, not trying to be difficult, but this seems – on the surface, pretty aggressive. And I want to give you, I guess one more opportunity to be a little more specific on why we should take comfort that this is a doable number?

Sure. So, there are a couple of things that you mentioned there that I can be more clear about, but not necessarily breakout dollars and cents for each component here. But regarding the ramp of initial products and this is something that we have talked about before and in general, I think we have always been very cautious about that. There are really material differences in the IMC launch and its commercial outlook for the remainder of the year versus anything that we have done historically, most notably that we do have meaningful backlog heading into the back half of this year. That backlog will grow. It has happened absent to commercial launch. It has happened absent to any salespeople who were specifically focused on this platform. It has happened largely organically and that is through word-of-mouth and through the endorsement that the technology has gotten from peer-to-peer. So, it is very logical that we would be able to repeat that performance in the back half of the year in terms of generating backlog. We did nothing better, but we will do a lot of things better. We are going to have a product launch. There is amounting publications and information that are publicly available from our initial users. They are becoming more vocal. They are talking to investors, not on our behalf, but we know that as they tell us this that they are being contacted by them. So they are referenceable at this point as well. So anyway, without giving specific dollars, its meaningful backlog that we already have and we know that, that will grow through the back half of the year. And then in terms of our ability to recognize revenue, because we have enough of these platforms out in the field already, many of the kinks that often exist in figuring out what value is or how you would go through the accounting rigmarole to make sure that you can confidently recognize revenue, we are well advanced on certainly much more so than we have been with a brand new system in the company’s history. So, the math that you described of a meaningful uptick, it incorporates a meaningful contribution and the bowl is really of revenue from the IMC launch, which for the reasons I described earlier, we have high confidence. And then if you layer that on top of a sequential increase between Q3 and Q4 that is consistent with history. You can get to the kind of growth that we are – that this implies for the fourth quarter.

Okay. Vikram, I think a question for you, just looking at the gross margin performance in the quarter, I mean we knew this wasn’t going to be your best gross margin quarter ever. But I think this is the weakest gross margin quarter we have seen this decade. Can you just talk about – I am just having a hard time when I kind of model out the components here getting to these levels, can you talk about gross margin in the quarter?

Yes. So, thanks Doug. So, as we have consistently said, we have always encouraged analysts to model us at the high – in the high 60s for gross margin and that’s what we would encourage you to do. We do that internally. So, the rest of the – and we don’t specifically give guidance on gross margin, but we have given and reiterated guidance on OpEx and cash flow for the year. And internally, we have consistently modeled ourselves at the same number that we encourage analysts to model us at.

I am showing no further questions at this time. I would now like to turn the conference back to Ana Petrovic.

We would like to thank everyone for attending our call. A replay of this call will be available on the Investors section of our website. This concludes the call and we look forward to the next update following the close of the third quarter of 2016. Good afternoon, everyone.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.