Good day, ladies and gentlemen, and welcome to the Fluidigm First Quarter 2019 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Agnes Lee, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good afternoon, everyone. Welcome to the Fluidigm First Quarter 2019 Earnings Conference Call. At the close of the market today, Fluidigm released its financial results for the quarter ended March 31, 2019. During this call, we will review our results and provide commentary on recent commercial activity, market trends and our strategic business initiatives. Presenting for Fluidigm today will be Chris Linthwaite, our President and CEO; and Vikram Jog, our CFO. 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. Examples include statements about growth in immunology and other research markets; prospects and revenue trends for our products; market and regional trends, adoption of new products; and guidance for revenues, operating expenses and cash flow for the second quarter of 2019. 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 and uncertainties and other information affecting our business and operating results is contained in our annual report on Form 10-K for the year ended December 31, 2018, as well as 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 the reconciliation between these presentations. Reconciliations between GAAP and non-GAAP operating results are presented in the 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, our President and CEO.

Thank you, Agnes. Good afternoon, everyone. Thank you for joining our first quarter 2019 earnings call. We made great progress on multiple fronts during the period. Progress aimed at extending our leadership position in the immuno market. I'm excited to share the details with you. A few upfront takeaways. We extended our streak of consecutive double-digit growth quarters to 4. Mass cytometry adoption continues at a brisk pace, including an uptick in new customer adoption of the technology. Our customers are publishing new findings in leading peer-reviewed journals with a notable shift to translational- and clinical-oriented publications. We invested in innovation to sustain our competitive advantage. We significantly deleveraged the company balance sheet, reducing our debt obligations by 75% or $150 million while creating enhanced liquidity for stockholders. On a separate note, in addition to our earnings release, we issued a press release today that illustrates our growth in the field of global immuno-oncology. This customer success is representative of the broader trends underpinning our longer-term prospects. Turning to the details. First, revenue performance. We kicked off the year on a strong note, delivering 19% top line growth over Q1 2018 with total revenue of $30.1 million. The clear standout number of the quarter is the impressive 110% growth in mass cytometry powered by sales at instrument systems, both the imaging and suspension configurations. We secured new placements across all geographies and customer segments. We did experience a net decline in consumables growth on a year-over-year and sequential basis, which was primarily due to two factors. Microfluidics consumables declined on a year-over-year basis. This was partially due to a large order that we called out last year as well as timing of some service and OEM customer orders. Mass cytometry consumables grew double digits on a year-over-year basis delivering growth…

Thanks, Chris, and good afternoon, everyone. Total revenue was $30.1 million in Q1 2019, an increase of 19% year-over-year. Changes in foreign exchange rates negatively impacted our revenue by $400,000 or 1% year-over-year. Mass cytometry revenue of $18.8 million increased 110% year-over-year. We had strong sales of both Helios and Hyperion Imaging Systems in the first quarter with most of our placements to new customers. Mass cytometry consumables end service revenue delivered double-digit year-over-year growth in the first quarter, although consumables pull-through tracked below the prior year quarter and below our 2019 guidance of $73,000 to $78,000. We believe that some customers accelerated their consumables purchases from Q1 2019 to Q4 '18, ahead of the effective date of a price increase announced in Q4 '18. Adjusting for the estimated effect of this acceleration, consumables pull-through in Q1 '19 was in line with the prior year quarter, although still below the low end of 2019 guidance. In recent quarters, we've been successful in targeting the broader marketplace beyond our early adopter customers. These customers are taking longer to ramp instrument usage and consumables purchases as they become familiar with the technology. We're continuing to evaluate the effect of these changes in our customer base on consumables pull-through. Microfluidics revenue of $11.4 million decreased 30% year-over-year and 14% sequentially in the first quarter. Revenue declined across all categories led by instruments. Consumables were also down on a year-over-year basis. In the prior year quarter, we, as highlighted, a large consumables purchase of over $1 million, which had an impact on the comparison to this quarter. As you may remember, a significant portion of our microfluidics consumables revenue is tied to a small number of customers. We continue to expect quarter-over-quarter variability in microfluidics revenue as we execute in our strategy to focus…

Thank you, Vikram. We had a great start to 2019. We started the quarter with strong performance in instrument placements and we see headroom for growth around the world. With the launch of Maxpar direct immune profiling assay, we are providing new sample-to-answer content to make it easier for our customers to do their research. Our strategy is simple, advance our core technology, build content and provide more complete workflows with matched informatics. We are a major market participant empowering immuno research via our multi-omic platforms. We are the clear market leader in multiplexed image analysis of tissue via Hyperion, and we are demonstrating global adoption with a focus on translational and clinical research. We continue to make great progress on our operational and quality initiatives. We integrated our quality systems across three locations and began deployment of a leading-edge digital tool. We passed a rigorous external audit with no adverse findings or deficiencies. We executed a seamless transition of commercial leadership at the end of Q1 with our prior leader, Steve McPhail, retiree. Once again, I thank Steve for his many contributions. Colin McCracken assumed the leadership in April. We're excited at the enhanced capabilities we've added to the team. Colin brings more than 25 years of commercial leadership in life sciences tools, spanning research in regulated markets. He's an award-winning leader to hone new skills at QiAGEN, Invitrogen, Life Technologies and Thermo Fisher Scientific. Well-established leaders in commercial excellence. Colin will guide us through the next phase of scaling our franchise worldwide. Finally this month, we are kicking off our 20th anniversary celebration. Over the next year, we will celebrate our tradition of innovation. We've transformed inspiration into reality. We are bringing new insights to life. More to come on this front as the year progresses. From a shareholder perspective, I remain confident that our mix of innovation, revenue growth, financial discipline and operational excellence will drive tremendous value. I'd like to thank our over 500 employees for their contributions this quarter and their commitment in our mission: providing customers with tools to drive new insights in health and disease, identify meaningful biomarkers and accelerate therapeutic development. With that, I'd like to open the line for questions.

[Operator Instructions]. Our first question comes from Sung Ji Nam with BTIG.

Chris, congratulations on the National Cancer Center in Japan win. I was curious as to whether or not you guys might be willing to share kind of what the opportunity looks like internationally from the cancer center standpoint in terms of how many such centers are out there that you think could be good potential customers of the mass cytometry technology?

Hi, Sung Ji. Thank you very much for the compliments, and good afternoon or evening to you. As part of MCC, we're superexcited about what the progress we're making there at the National Cancer Center in Japan. Let me take a little bit of a longer think about how much we want to share kind of the mapping of all the cancer centers and the consortia that we're developing. In some sense, it's really competitive advantage intelligence for us and we've got - had targeted business development activities in those areas. But I think kind of a broad breaststrokes have kind of a number of placement opportunities that kind of seize the opportunity to these centers is important fair. So we'll get back to you on that.

Okay. That's fair. And then just on the - just a clarification on the service revenue, the lumpiness of it, could you maybe elaborate on kind of what's going on there? Whether that might be potentially recognized in future quarters?

Yes. So I think that your question is specific to microfluidics and that was really kind of highlighted, I think, in my comments about potential service providers and OEM. I think that's the area you're referring to, correct?

Yes.

Yes. So microfluidics, we have seen - as you know, we've been focusing. We have a relatively concentrated customer base. A number of those customers are resell. So they actively use our technologies, they build content on top of it and then they sell that into hospital systems or other places that consume the test volume. So I'd just say that they've been signaling, they had some lumpiness in their demand and that was - they've been launching new products. They didn't give us any kind of clear guidance as far as the rate of uptick, but we have reason to believe they're certainly conveying optimism about their business models. And for this particular quarter, we seem to have some lumpiness.

And our next question comes from Doug Schenkel with Cowen & Company.

This is Adam on for Doug. We can get to the high end of your Q2 revenue guidance by simply setting instrument placements flat sequentially and full through the midpoint of the range. So acknowledging that you don't provide placement guidance numbers, can you directionally or qualitatively frame how you expect the mass cytometry and genomics instrument segments to perform in Q2 relative to last quarter?

Well, Adam, thank you very much for the question. First off, so I think - to think about that, I think as far as the mass cytometry instrument placements are concerned, as you said, we have not been giving kind of broken-down guidance as it relates to specific unit placements nor mix related to that. As you well know, there's a significant that can be a bit of sensitivity related to the mix and ASPs related to the mix in which they replace. So I think at this time, I just kind of wouldn't provide any additional color as it relates to the specific number of instrument placements.

Maybe, Adam - hi, this is Vikram. I think something to note, not specifically responding to your question on instruments per se, but we did make a statement about the mass cytometry consumables issue that we experienced in Q1 that should normalize in Q2. And then likewise, we talked about a blip in Europe in microfluidics consumables, which would also come back into more normal conditions. So perhaps that might give you additional color as to the mix of revenues that we're expecting in Q2 should be slightly less instrument focused than it was in Q1.

Okay. That's helpful. And gross margin came in a little bit largely modeled, but the mix shift rationale and the lower utilization in the period makes sense. Do you expect the plant utilization to rebound in Q2? And can you just talk about how you're thinking about gross margins trending over the course of the year?

Yes. So gross margins, I think, is - as we have talked multiple times in the past, is a function both of mix as well as capacity utilization. Q4 generally tends to be the quarter in which capacity is utilized to the maximize. And compared year-over-year, the margins were more or less in line with some mixed changes in Q1 '19 because of the consumables issue we talked about. But I don't expect nor do we give guidance on gross margins in the future, but there's nothing in our business environment right now in the short run that should cause the margin profiles and individual products to be any different than we experienced in Q1.

And our next question comes from Bill Quirk with Piper Jaffray.

So first question, Chris. I think I heard you say in your prepared comments that - actually it might have been Vikram - that some of the new mass cytometry customers in terms of consumables utilization were coming up a little slower perhaps than you'd seen in the past. And so I guess if I heard that correctly, can you walk us through some of the plans, maybe some of the steps you're taking to try to get these new users comfortable and up and running faster?

No problem, Bill, I'll take it. It was in Vikram's section as I remember correctly, so he may want to add some additional color on this later. Yes, so we have seen some - I mean, it's a kind of a good news, bad news thing in a sense that it's not - we seem to be perhaps reaching kind of one of these inflection points in which we're expanding the addressable market or moving past the early adopters to a group of users who are newer to the technology. That's incumbent upon us to make that easier for them to make that transition, that means that we have to do everything perhaps including kind of increasing our capacity just to conduct more training as we've broadened our user base, so we have a bit of a key right now of backlog related to getting users trained up on systems. Our field service engineer group that helps them with the support and FAS team, or field application specialist team, which supports them and helps them design panels to ramp up. The third element to this is informatics. So things like we've done, particularly with the new product offering with this direct immune monitoring technology or assay that we've released, this panel takes a lot of that preexperimental planning away. It puts them all in a single tube, just add blood, run the past setter software package and this helps accelerate the whole cycle time on that system. So as people - as we build more backbone panels and we release more content that allows turnkey-like analysis, that will also help these new to the technology adopters coming to speed faster in our estimation. And third leg as we introduced some of that with imaging also, so we have not advanced our fixed content and backbone strategy as far as we'd like to do it here in the coming quarters. In the imaging side, that will also help bring users up to speed faster. So we build out more antibody library content and more fixed content. So all of these things kind of play together. So it's a combination of training, helping them get the installation and training experience up to post the experimental planning and then the analysis of those experiments and helps lead to the next experiment faster. And so these are couple of 5 or 6 different strategies. They're well understood strategies and they're - but they're within our control. But it's something that we need to pay attention to and it could have some impact in the near term and some of our pull-through dynamics.

Understood. And then, Chris, if I hear correctly that some of the placements in China were for DTC usage. And if I heard that correctly, can you talk about whether or not this is portable to - I guess, first of all, what is it for, specifically, I guess the application for? And then secondly, whether or not this is portable to other geographies?

Well, as you well know that - for this specific to microfluidics in this particular context, I think you well know the explosion of creativity that's being - or animal spirits that are being unlocked particularly in the Chinese market in the DTC space. We have examples in the U.S. as it relates to 23 immuno other models like that. But in China, there's a wonderful number of new companies that are appearing, a number that are doing that are selling it as part of insurance packages or they are part of signing up for travel programs and you also get a profile on your health by the series of markers or set panels that relate to kind of a snapshot of health. And so I think this model is certainly portable to other geographies. I think China has kind of a unique mix of willing capital, large population base, entrepreneurism and some of the installed sequencing capacity to take advantage of that. So we're certainly going to feed into that, but we're very cognizant of trying to replicate or support others that have DTC models in other fast-moving markets and other geographies. So yes, we are quite optimistic about that and I think that's part of the advantages of our value proposition particularly in the Juno system that allows that automation that helps throughout the simplification in the hindfeet into these higher throughput opportunities. And our systems are uniquely positioned, as you also well know, for miniaturization of reduction of reagents, reagents being the single largest component to the experiment to get that answer, and DTC customers are particularly sensitive to price points and so we can help them automate and help them drive lower cost per data point.

And our next question comes from Paul Knight with Janney.

I was looking at one end for the biotechnology market. I've seen demand for experience in mass cytometry. Is there a shortage of capable users in the market do you feel? Or meaning, is that a gating factor? Or what are your thoughts around that?

Well, it's a great question actually, Paul. If you know any folks who would certainly be interested in [indiscernible] our way to our customers, that is probably one of the very limiting steps is getting qualified users and getting off to speed quickly. The good news is we started out with some of these super large state-of-the-art kind of leading-edge research centers. They produce small armies of postdocs and PhDs and in their process - in their education process. And as we have more and more systems in place, we have more users and so it's helping expand our ready-made group of people who can operate the system. But you don't have just be a PhD or postdoctoral on the system. That's part of the advantages as we're starting to simplify the elements of that workflow so that it makes it easier for operators to come to speed. And I will say that it's true. We see more of that in the suspension mode and they get the placements of people going into flow cytometry labs, but when we talk to people who have experience in the imaging side, they actually come to speak quite quickly on the technology. And it's something about the user base perhaps in the imaging course or coming from an imaging background that they use a very complex kit and they seem to come to speed much faster and operating it. So it's true the placements in the suspension side, I have also heard that story when I'm bed out. And generally, when we talk to people or I come to new accounts and I visited a lot of new accounts in the last 2 quarters and that will be one of the things they're talking about. It's not just getting the facilities ready, it's not just getting their first experiment up and running. It's helping them match up or marry with an experienced operator or an operator.

What portion of their math on your panel do you think are homebrew?

That's a tricky question. I would say, I don't know how - I don't know the answer off the top of my head. We have some indication - we have 3 elements to kind of our revenue streams. We have things such as kind of starting at the APACs, the most complete offerings are things like the newest technology release to be [indiscernible] to just add blood to an answer. That's prefixed, right? And then we have preconjugated antibodies and we have one of the largest menus of preconjugated antibodies certainly for - we have the largest for mass cytometry. And in that case, people can configure antibodies that we've already developed. They put them in the novel configurations. One could argue those novel configurations are homebrew based, but I think the real question they're getting here is the labeling and detection kits. So the use of our labeling and detection kits in which they bring their own antibodies and they bring their own combinations and we don't necessarily have visibility to that is one of the toughest things for us to track. And there's many reasons why labeling and detection kits are useful for them to spike in or add antibodies of interest, targets of interest and the things we've already build backbones for, we do track our label and detection revenue streams and we're keen to try to get the right mix between preconjugated antibodies and more prefixed menu and still balance those label and detection kits like - because we know we need to enable the flexibility for people to bring their own components to the table. So in one hand, we kind of represent - we do know what exists as a leakage as potential monetization or pull-through revenue that we can realize in the system and we enable it right now as part of our business model to allow that flexibility. So I think we need to continue to contemplate different business models that help us capture more of that kind of homebrew market.

And our next question comes from Dan Brennan with UBS.

I joined a little late, Chris, I apologize. But on the mass cytometry, did you guys provide any color regarding Hyperion versus Helios and kind of within the quarter kind of [indiscernible]?

First off, welcome, Dan. I think Vikram is taking a deep breath to answer the question. Welcome to the - did you want to go ahead with the answer?

Yes. So short answer, Dan, is we don't. But I'll point you to the information we provided at the beginning of the year relative to our installed base where we had talked about an installed base in mass cytometry of 240 systems, of which over 50 had been enabled with imaging capabilities. So rough order of magnitude, it's in the just over 1/5 of our systems have been enabled with imaging capabilities. And we continue to be very encouraged by the demand that we've seen for imaging in Q1, and we would expect to get periodic updates on the lines of the information we provided at the beginning of the year.

And then in my prepared comments, you'll read that we provided - we have good strength in both sides, both suspension and imaging.

Excellent. And then kind of related to that, Chris, I know [indiscernible] your market sizing data was willfully kind of old and kind of, I think, kind of too small. So has there been any more color regarding helping us think about kind of this opportunity ahead whether it'd be this year or a couple of years about the TAM that these products are playing in it?

Dan, you're singing from the Hamlin, I'd like to hear. So I hope that my marketing team is listening as I anticipate that they are probably listening this, so that we do later on where we do anticipate giving you updated information as it relates to market sizing. I know Agnes is working on some things just now. Maybe, Agnes, is there anything you want to add color on to right now?

No, Dan. We do expect to have at least some new the information and we'll be releasing that kind of over the next couple of quarters.

And I think or I believe it's both willful and it's understood.

And then, Chris, I know you talked about that there's a lot more behind the scenes that you're doing in terms of R&D and while the products are doing quite well right now, it looks like there's always improvement. So is there anything that we should look forward to whether it'd be this year or that might further enhance the products? Whether it'd be more multiplexing, maybe getting the price point down, maybe improving the speed? Just any color that could kind of enhance the products further?

It's a great question, Dan, for many reasons. So when I first joined, I felt that the company have gotten kind of well over its keys and kind of talking about futures and maybe it's even within my own DNA not to want to talk about kind of this prospective road map of technology development. We've had this - we've been having this discussion at the Board level. We'll continue to - I'm not ready to tell you quite answer yet, but I will say that I believe there is a point in time which we need to start sharing more openly on where some of the areas that we're working on, and now we're going to scale this technology because as you identified each one of these areas were speeding up the instrument, reducing the overhead or idle time on the instruments themselves, this is mass cytometry related, whether it's refreshes of our various microfluidic space platforms, new chipsets, new chemistries, et cetera. All these things are obvious things that we should be working on, including content strategies and informatics. We've been intimating about it, but we haven't really talked about how we're going to add more multiplex and capabilities and continue to scale the platform. And I think, unfortunately, in the absence of us creating a narrative around that, a different narrative is forming. So I can assure you that we're working on those. But we have to kind of figure out what the right way to share glimpses, snapshots, kind of vignettes or windows and where we're going so that there's confidence in both the investment community as well as our installed base that we are fully intending to scale this business.

And then maybe just a final one. I don't if you commented about the genomics. It was a lot weaker than we expected. I know it's a lumpy business. I know you were pretty confident in terms of a lot of low-hanging fruit, partnerships and generating more content. So any - can you just kind of speak to kind of the color about the outlook for genomics?

Well, it starts on microfluidics.

Yes. Thank you for - I was going to correct to microfluidics, but some of our fastest-growing applications are in the protein side in microfluidics. Bottom line is there's plenty of market - there's plenty of market opportunity for us and we're very small market share participant at this moment. And we've got content strategies, we've got focused customer strategies. We've got - we've been throwing a lot of things at this and I remain [indiscernible] I kind of had a comment about that I think in my prepared comments that discussed that we remain bullish and committed to the long-term prospects of driving growth in the microfluidics platform, in particular in consumables. We readily admit there our instruments may be kind of lumpy from cycle to cycle as we're focusing on more OEM accounts, more kind of large whale, so to speak, that we may see variability in the placement from cycle to cycle. However, so one thing we need to keep coming back to is how the consumables doing I think it's quite reasonable, and that's where we're committed to driving growth in the consumables business.

Actually, sorry, maybe one more. Can you give any color on mass cytometry regarding like incremental things to watch? Whether it'd be number of IO trials, whether it'd be like there's an any shadow backlog or any qualitative call you gave about parameters or indicators that give us a flavor for kind of what the opportunity is and how quickly like your kind of customer might be willing?

What we did do is we did talk about clinical trials, so I think that's also something that's kind of interesting. We're actually seeing more clinical trial participation than I had - we had anticipated we would see even 6 months ago. So that is something that's an interesting metric we may start to titrate out. What we did share in the prepared comments relates to publications. So as you know the currency of the realm for academics is publications and so we track that as important adoption curve signal. And we presented in the prepared comments over 70 - over 70 publications alone in mass cytometry and 22 now cumulatively in Imaging Mass Cytometry. And to put that into context, in 2015, we had 75 for the entire year. So that's what we did in just one quarter. So you can see the acceleration, we continue to see - continued acceleration on the trial - a very high trend line for publications, and we are beginning to see more and more spill over in the clinical studies and in clinical trials. So I think it is very encouraging, although the only data we're sharing externally at the moment is the one related to publications. And that's one of the easiest one is to track, although you in the community just same as us can start to reference the clinical trials databases and could begin to build a picture of that, and that's something we're very intrigued by trying to develop for ourselves and then to share with you externally, there's another signal.

[Operator Instructions]. Our next question comes from Sung Ji Nam with BTIG.

Maybe kind of a different way to ask Adam's question earlier. If you look at your second quarter guidance at the midpoint, it kind of implies a sequential decline. And you talked about - and there are a lot of moving pieces here, but you talked about mass cytometry consumable improvement and then also the EU microfluidics consumable should also normalize, et cetera. So I was curious as to kind of what's underlying that assumption of a sequential slight decline? Is that also due to the more [indiscernible] comp in Japan?

Well, we did signal as you said. I mean, Japan was a very strong period - or a very strong quarter for us. It was a strong instrument placement quarter also in Japan in the first quarter, and there's no reason to anticipate generally second quarter as the weakest quarter of the year and will pull down the APAC number. So thus we had an inversion of particular cycle in which APAC exceeded EMEA in total sales for the first time for us, which is great, but it's not like it'd be sustained in the near term. I think that's the short answer. I think there's a mix in the instruments. There's no reason necessarily. We still have instrument placements that could be lumpy from cycle to cycle, but I think I understand that kind of root of your real question.

Yes, so Sung Ji, this is Vikram. Our guidance for Q1 was $28 million to $31 million, so the midpoint was $29.5 million and we came in at $30.1 million. So I think the numbers between the midpoint that would signal the decline, I think, are so small within the ASP of one instrument or even less. So I wouldn't over-interpret the guidance as to signal a decline. It's, I think, within the margin position that we can have given our mix of products and the relative ASPs.

That's one of the areas we stayed pretty disciplined on with maintaining this kind of $3 million swing for the very reason that Vikram highlighted. And so I could imagine if you deconstruct, you could see - would reach kind of some of the conclusions or reaching, but again, I'll fundamentally reassure what we said, we see strong and steady demand. We don't really reveal backlog numbers, but we continue to see very strong demand for instruments. And on the consumable side, we see no reason why the trend lines won't continue to revert back towards the norm. With the caveats what we described with perhaps on the mass cytometry side, we've seen some impact from this significant introduction or wave of new to the technology users.

I'm not showing any further questions at this time. I would now like to turn the call back over to Agnes Lee for any closing remarks.

Thank you, Jewel. We'd like to thank everyone for attending our call today. 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 second quarter of 2019. Please reach out to us if there are further questions. Good afternoon, everyone. Jewel, you may now close the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.