Good day, ladies and gentlemen, and welcome to the Fluidigm fourth quarter earnings 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. Ma'am, you may begin.

Thank you. Good afternoon, everyone. Welcome to the Fluidigm Fourth Quarter 2016 Earnings Conference Call. At the close of the market today, Fluidigm released financial results for the fourth quarter and full year ended December 31, 2016. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Presenting for Fluidigm today will be Chris Linthwaite, our President and Chief Executive Officer; 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 make forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, future financial results and market trends and opportunities. Example of these forward-looking statements include expected changes to our commercial and organizational structure and business strategies and the anticipated impact of such changes, expected timing for releases of new products, changes in competitive dynamics, potential applications and growth drivers for our products and businesses, cash management and other financial plans. These statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current expectations. Information on these risks, uncertainties and other information affecting our business and operating results are contained in our quarterly report on Form 10-Q for the quarter ended September 30, 2016, and our other filings with the SEC. The forward-looking statements in this call are based on information currently available to us, and Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law. During the call, we will also present some financial information on a non-GAAP basis. Non-GAAP information is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. We encourage you to carefully consider our results under GAAP as well as our supplemental non-GAAP information and reconciliation between these presentations. Reconciliations between GAAP and non-GAAP operating results are presented in a table accompanying our earnings release, which can be found in the Investors section of our website. I will now turn the call over to Chris.

Thank you, Ana. Good afternoon, everyone. Thank you for joining us today for our Q4 and year-end call. I'll begin with a quick summary of 2016, followed by a recap of our fourth quarter performance and spend the balance of the time discovering -- discussing the progress we made based on our strategic review. First, a few comments on 2016. Clearly, 2016 was a year of change for Fluidigm. Despite having access to 3 interesting end market, we failed to deliver against our financial commitment. As a result, in October, we changed executive leadership, followed by a reorganization of our sales and marketing organizations. We also suspended forward-looking financial guidance and initiated a thorough strategic review. I'm pleased with the number of difficult items we tackled concurrently in the quarter, and while we did not grow year-over-year in the period, in the fourth quarter, we believe we saw some stabilization in our funnel, and we also secured new customers. In summary, while we are encouraged by our progress and sequential revenue growth of 13%, we are not satisfied. Importantly, we are conscious of the work ahead of us and ready for the challenge. We are taking the necessary steps to change the company's prospects for the better. Now starting with our fourth quarter performance and first quarter outlook. Total revenue for the fourth quarter of $25.1 million decreased 18% from the year ago period mainly due to softness in revenue from instruments and, to a lesser degree, consumables, partially offset by services. Instrument revenue of $10.7 million in the fourth quarter decreased 32% compared with the year ago quarter due to softness in sales across most platforms, primarily driven by Helios and, to a lesser extent, C1 system. Consumables revenue of $10.3 million in the fourth quarter decreased 12% compared…

Hey, thanks, Chris, and good afternoon, everyone. Before discussing the fourth quarter financial results, I'd like to take a moment to add some context around changes we made to the installed base and pull-through metric. As noted during our last earnings call, reengagement of customers with inactive instruments is a key priority for us. In the meantime, we believe that our active installed base presents a better gauge of instrument utilization compared to the total installed base. Accordingly, beginning with this earnings call and annually thereafter, we will report our active instrument installed base, which excludes instruments that were sold over 6 quarters previously and for which there were no associated consumables purchases in the previous 6 quarters. In addition, we will concurrently provide projected annualized consumables pull-through for the following year that includes assays and reagents. Now turning to the quarter and full year results. Total revenue of $25.1 million in the fourth quarter was down 18% from $30.7 million in the year ago period and up 13% sequentially. For the full year 2016, total revenue of $104.4 million decreased 9% from $114.7 million in 2015. Instrument revenue of $10.7 million in the fourth quarter decreased 32% compared to $15.7 million in the year ago quarter due to softness in sales across most platforms, driven by Helios systems and, to a lesser extent, C1 system. Instrument revenue in the fourth quarter grew 16% sequentially driven by mass cytometry [indiscernible] . For the full year 2016, instrument revenue of $46.8 million decreased 20% compared to $58.5 million in 2015 due to decreased revenue across most platforms, driven primarily by lower revenue from genomics instruments, particularly C1 system. Our active installed base of approximately 1,340 instruments at the end of fourth quarter comprised, in the aggregate, approximately 585 BioMark and EP1…

[Operator Instructions] Our first question comes from Bryan Brokmeier from Cantor Fitzgerald.

Do you have any sense for why customers aren't using the inactive system?

Go ahead. Actually, I can -- there's a little reverb in the background.

Yes. I think the question was a sense for why customers are not using the inactive system. So let me add some color to this, and maybe Chris can supplement. So there's a couple of dynamics between the -- within the inactive systems. So one dynamic is the changeover in the Access Array platform from the Access Array to the Juno, as we have pointed out in the past. So as a result of that, more and more of our Access Arrays are getting inactive as customers are switching over to the Juno. So actually, if you look at the 500-ish delta between the active systems and the previously disclosed installed base of roughly 1,800 systems, the bulk of that is the Access Array platform. And secondly, not surprisingly, is the C1 dynamic. A couple of factors there. One is the competitive headwinds and the current value -- I'm sorry, the current use model in single-cell prep being high-throughput has placed some pressure on the utilization of C1, exacerbated by the doublet problem and the time it has taken for us to put a replacement chip on to the market. So I would say that those are the 2 biggest dynamics in the inactive system.

So for the C1, we can see improvements, you can try and get some of those [indiscernible] back online?

Yes. Bryan, I'll take this for a second. Yes, absolutely, there's strategies in place for both situations we just described, whether it's the C1 systems or the BioMark system. I think there's ample opportunity for us to continue to reactivate those accounts.

Our next question comes from Doug Schenkel of Cowen and Company.

So maybe a follow-up on the inactive instrument metric you provided, and I appreciate that level of disclosure. One of the surprises relative to our model was the number of active C1s coming in really around the 100 below the installed base number we have in our model. Do you believe that the attrition of your existing installed base, I guess, if that's the way to put it, has started to stabilize? I guess, what I'm asking is, what level of increase in activity should we be contemplating in our models moving forward, not just for C1s but for all platforms?

I think, Doug, it's fair to say that this is something we need to watch, I would say, over the next 2 quarters. A couple of dynamics to watch just because of the, a, the methodology that we've adopted. We've taken a look at 6 quarters. So by definition, there will be some lag by the time we snuff [ph] out all the inactive systems. But offsetting that is the recent launch of the high-throughput medium-cell chip, and that should have an offsetting impact. The third factor I will mention, and we don't really know which direction that will take, is that there's a lot of unknown on the cell accessing programs and exactly what shape they might take and what the direction it might take in terms of whether throughput will come first and followed by breadth or will they be put down in parallel. So right now, I think the safest way is to just wait and watch over the next 2 quarters, and we expect it to stabilize around about the middle of the year or so.

Yes. I think it's difficult for us to speculate particularly on the velocity of either direction. I think this was something that we really started progressively in the fourth quarter [indiscernible] programs around at various [indiscernible] Bryan's question. Inside sales [indiscernible] more just bringing online to help focus on those accounts [indiscernible] called dead accounts or inactive accounts with service contracts or attachment. So some success we've seen, particularly on the service line, has been related to reactivating or reattaching service contracts [indiscernible] consumables going back through. So we're earlier in the process of getting inside sales activated, but we're further along on things like service contracts, attachment and then sellout [indiscernible] program, presents a whole new wildcard, then there's a couple of key meetings this quarter [indiscernible] giving us more clarity [indiscernible] play out over the coming year.

And just to be clear, your commentary, is that all specific to C1 in terms of needing another quarter or 2 to see how this plays out? Or are these efforts to stabilize the installed base and maybe even reverse some of the inactivity? Is it broader than the C1?

Well, I think there's different [indiscernible] . There's other platforms that play here. Aside from BioMark, we talked also of Access Array with the transition of one platform to another. I think with BioMark, there's an opportunity for us to do a lot more. You'll see -- or you've already seen [indiscernible] with the venue of application out there with the [indiscernible] BioMark is attached to the large group C1 workflow. The BioMark [indiscernible] also provides a -- original history, provided a lot of benefits in [indiscernible]. And so I think it's going back to reactivate the base with additional panel and value proposition on that. And I think that's got a different set of remedies than the C1 and has a different root cause. I think, for BioMark, it was really a lack of attention to it [indiscernible] there was a lot more than we had. C1 has a different type [ph].

Okay. And pivoting to service revenue, which was a clear bright spot in the quarter as well as for the year, based on installed base brand to the slowdown in the pace of DVS placements, which have the biggest ability to move service revenue, could you talk about your visibility for service revenue growth over the coming quarters and how resilient this line item should be viewed over coming quarters?

So Doug, obviously, we are not giving guidance beyond Q1. But generally speaking, your observation is valid. As we have said, we have experienced double-digit growth in 2016. So while our instrument placements have slowed down, we have done a fairly good job, I would say a very good job in the attach rate of those instruments to service contracts. The other dynamic is there are variations in the attach rates between instrument platforms, and generally speaking, the mass cytometry franchise has a higher attach rate. It tends to be a more complicated instruments -- sorry, instrument compared to say, the C1 and such. So I think it's a factor of the installed base, being one, but also we're doing a good job in increasing the attach rate. The latter effort, of course, will continue in 2017 and going forward.

Okay. And one last one. We just talked about, I guess, a good guide for the year. One of the notable bad guides at least in the second half was your TAM [ph] performance. You did attribute this in your prepared remarks to, at least in part, tough DVS comparison. That said, I just wanted to hear if there was anything specific going on there with your commercial efforts or competitive dynamics. And more broadly, we've heard some of your peers speak about academic funding, uncertainty in Continental Europe and the effect of that may be having. I'm just wondering if that was a factor that affected performance.

You bet, Doug. Yes, I'll add -- I'll comment and then maybe Vikram will add a few different comments. So I think within Europe, it certainly was a very disappointing performance for us on a full year basis as well as on a year-over-year change. Some of the comments, I think we even touched on in the prior quarter call, were things such as there's more competitive options now in the single-cell market than there were in the past. So what that's done is had an impact on the tendering process. It's the tenders that we thought that would come through or actually are noncompetitive tenders are now more competitive. That stretches out the process by 3, 4, 5 months. That's one of the impacts that I think has tempered some of the growth or certainly, the contraction in the European market isn't the heightened competitive dynamic but is a process of the markets or a function of the markets that we're focused on. Helios was another area. And the third was sales force turnover, which we touched on in the last call. So I think those 3 have been -- are the primary impact. I think we have been putting things in place to address them, but it's way too early to speculate the impact of that going into 2017. Vikram?

Yes. No, I would've said the same things.

Our next question comes from Bill Quirk of Piper Jaffray.

First question, Chris, just thinking about as the business is pivoting amongst the different segments and instantly, you've talked at lengths about the opportunities here in mass cytometry. But to help us, I guess, think a little bit about the margin, associated margin profile of that historically it's been lower than in some of the legacy Fluidigm gross margins. And so without asking for guidance, help us think a little bit about kind of pacing maybe.

Yes. So I think we have talked about this before given the relative differences in volumes of both the units of instruments between the mass cytometry business compared to the legacy genomics business, and we have also talked about the high margins we've experienced in the C1 particularly. I think it's safe to say in the short run that there will be pressure on margin as we pivot our C1 -- I'm sorry, the mass cytometry franchise becomes more significant. But I'll say that when the genomics instruments was at that same level of volume, we had those pretty much the same margins. So it's a function of increasing volume will have the effect of increasing or decreasing the cost of goods sold. The other dynamic on margins that's not particular to any particular platform or so is the related selling prices. And as we have mentioned many times before, for modeling purposes, we always encourage analysts to model in the high 60s and because we wanted to keep our powder dry to take advantages of elasticity and demand based on pricing. And those are areas that we will continue to study and explore in the future.

Yes, I'll just add on that. I mean, I've been -- one of the opportunities I saw when I came into the fourth quarter is the fact that the ASP declines [indiscernible] very marginally and little ASP decline in our business [indiscernible] decline in replacements, and that raised a lot of questions. That's certainly things we looked at the dispute review process. So I know on a macro situation, I mean, we do need to be cognizant of margin performance, but I wanted to [indiscernible] replacement overall [indiscernible] to take [indiscernible] back up margin [indiscernible]. But for me, we need to put more focus on getting replacement growth back into the business, and the mix had been relatively close between the 2 portfolios, the genomics business and the [indiscernible] in our plan.

Okay, got it. Appreciate all the color, both from Vikram and as well as your color added, Chris. I guess, second question for me, just thinking about the imager, you mentioned that you had placed it with some select kind of high-value customers in the fourth quarter. How should we be thinking about feedback and then obviously opening that up to your broader mass cytometry customer base?

Yes. I'll start with that, and then Vikram can add any comment if he'd like. Bill, I think there are -- the principal thing for us, we really started to put those in place really in the December time frame, so it's going to be a little while, until [indiscernible] commercial [indiscernible] unit in place. So I don't expect rapid feedback that we can start to [indiscernible] the market especially on the things that make us kind of tempered in our outlook for the full year because we do know that the best growth drivers will be for the [indiscernible] business and [indiscernible] in data that [indiscernible] by these early adopters. So we really are focusing on those critical first [indiscernible], make sure they're having [indiscernible] experience. We're titrating [indiscernible] beginning in the first quarter, and the market came [indiscernible] have those [indiscernible] as quickly as possible, but I'm [indiscernible] expectation for Q2, but we're going to have a lot of stories to start sharing in the marketplace. And therefore, we will continue to work off our [indiscernible] backlog, build-through backlog. But we just need to be very [indiscernible] expectation for [indiscernible] on itself, very optimistic but we need to make sure that we [indiscernible] tempered in our expectation.

Our next question comes from Sung Ji Nam of Avondale.

So Chris and Vikram, just curious for your first quarter revenue guidance, it's flattish sequentially. I think historically, you -- Fluidigm, for the first quarter revenues, you usually see a step-down sequentially from the fourth quarter. So I don't want to obviously read too much into it, but could you maybe give us more color in terms of what your underlying assumptions? And is this kind of an indication that there is improved sales pipeline that you're seeing?

First off, thanks for the question. My first reaction that Q3 was an incredibly disappointing quarter and represented a significant departure from where the trend line has been for the business. As I mentioned on the first call together in the beginning of the fourth quarter, the goal was to start to build our credibility back one step at a time, and I think Q4 was more from where we started, where we predicted we were going to finish, how we started the way we finished. There were some natural kind of gives and takes [indiscernible] replacements, but we generally finished pretty close to how we modeled we thought we'd finish for the year. That wasn't [indiscernible] a signal, so we only have 1 quarter of data. So I think, definitely, we're basing the judgment off of the funnel that we're bringing end of the year. I think we're doing better in the building blocks and methodologies that are required to turn the business around. But I think, as I said, it's going to be a transitional year for us, and I think we're just going to need to build confidence 1 quarter at a time, and I wouldn't try to speculate what 1 quarter means from a trend line perspective.

Okay. And then also, in terms of -- for the C1 platform, you're seeing increased competition, more competitors entering the market there. Could you maybe tell us kind of how you think about Fluidigm's competitive position for that platform with the current applications you have over the next kind of the 12 to 18 months?

I'll start. So I think, subjectively, as we -- as Vikram [indiscernible] it's how to sell [indiscernible] program plays out. I think it's going to be -- it's really a key variable that as we get more insights here in the first half of the year, I think it'll start giving us a much better understanding of our long-term competitiveness on the 12 and 18 months' time line. We've also seen very limited data outside of the Tenex [ph] system. We have very limited data on the performance of the systems, but there's truly pricing pressure and then the dimensions of high -- of throughput [indiscernible] micro RNA. It is -- we're clearly -- it's a difficult kind of environment for us. So we're just now bringing the 100 cell chip, media cell chip online. I want to see how that helps us. And we also have the breadth of the market, the breadth of applications, and we still have the largest breadth in the industry. So I think those make it -- I mean, it's like kind of a mixed bag of outlook for us. I think we're not sure. We know it's going to be scientifically very important. In rich market, we want a -- we have a value proposition to play. If not before, I mean, it's a critical part of our business, but it's not the only major driver within our business that we're being very tempered in our expectations of where it's going to go. And we're going to take -- I mean, we're going to be a key market participant in this. We want to be a good seat at the table with regards to the [indiscernible] initiatives and how it's going to play out. We've got a good installed base, but we need to do a better job of serving, and we have some new product offerings that we're titrating out in the market. So I think it's very premature for us to speculate on where the market's going to go. It's a small market but growing very rapidly, and we just need to make sure that we're ready to [indiscernible] to make the best transition, hopefully from academic and research settings into more applied settings in the coming years. And that's I think the next leg that are really informed by where this market is going to go and which technology and which form factors are going to be the most critical [indiscernible]

The next question is from Bryan Brokmeier of Cantor Fitzgerald.

Can you talk a little more about the strategic priority of fostering innovation? You have a large portfolio of instruments, particularly following the introduction of the IMC. Over the course of 2017, are you primarily focused on the development of new IFCs? Or could -- are you investing in R&D dollars on new instruments as well?

It's an excellent question. And I -- on one hand, I'd love to share a lot of the details of our product pipeline, and -- but [indiscernible] we talk about the past, we're not going to present forward-looking statements as it relates to the mix of investment. So -- but you are correct. I mean, we have made some adjustments in expense, in OpEx [indiscernible] continue to drive. We did have a pretty heavy instrument -- heavy set of expenditures in 2016 as well as in 2015. We wanted to speculate, but we probably would shift some new dollars to maximize the power of the installed base we're going to replace. But I would say [indiscernible], we're going to have a more blended investment strategy. And I talked about 3 major factors, and I talked about what's the revenue horizon is and what's the time line in which the dollar we -- from the day we start doing our project in kicking off that innovation, when does the first dollars occur and what's the intensity of that second, third and fourth dollar over a period of time. That's definitely one factor. We're trying to get a more blended return, not [indiscernible] launches that have a long multiyear development cycle and then deferred gratification to realize the benefit of those. So you could imagine that we'll be looking both at the revenue intensity, we'll be looking some [indiscernible] towards margin performance of those products. There is some activity in the margin performance of them. And the third is the technology risk related to it, and it's certainly easier, and you can imagine, there's less risk as it relates to building content and menu and software that sits on top of instruments you've already done hard science in inventing. So I think you'd expect from us a very blended portfolio that we'll see over a period of time to start to give us hopefully a more predictable return horizon on our investments.

I'm showing no further question at this time. I'd like to turn the conference back to Ana Petrovic for any closing remarks.

We'd 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 first quarter of 2017. Good afternoon, everyone.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.