Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pacific Biosciences Fourth Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference to our host, Ms. Trevin Rard. Ma'am, you may begin.

Thank you. Good afternoon, and welcome to the Pacific Biosciences Fourth Quarter and Fiscal Year 2013 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 Form 8-K available on Securities and Exchange Commission website at www.sec.gov. With me today are Mike Hunkapiller, our Chairman and Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer. Before we begin, I'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 and products that are subject to assumptions, risks and uncertainties and may differ materially from actual results. These risks and uncertainties are more fully described in our Securities and Exchange Commission filings, including our most recently filed quarterly report on Form 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statements. In addition, please note that today's call is being recorded and will be available for audio replay on the Investors section of our website shortly after the call. Investors electing to use the audio replay are cautioned that forward-looking statements made on today's call may differ or change materially after the completion of the live call. With that, I'll now turn the call over to Mike.

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our fourth quarter results and the progress we've made throughout 2013 on driving our overall business. Highlights of our fourth quarter and full year results are as follows: We booked orders for 9 PacBio RS II systems in the fourth quarter, bringing our total bookings for the year to 25. This represents more than double the bookings we had in 2012. We installed 5 systems during the quarter, which brings our installed base up to 88 and our backlog of systems to 13 as of the end of December. Consumable revenue for the fourth quarter was $2.6 million, which was double that of Q4 2012 at $1.3 million and up 25% sequentially from our third quarter consumable revenue of $2.1 million, showing strong utilization in our installed base. You may recall during our last quarter's call that we were cautious about our fourth quarter consumable sales because we started out a bit slow due to the U.S. government shutdown. As it turned out, our business with U.S. government customers recovered, and we had strong growth among numerous other customers in the quarter. For the year, consumable revenues grew 84%, stemming from an increase in our installed base of about 25% and more significantly, by a greater than 50% increase in the average revenue pull-through per system. We are averaging well over $100,000 in consumable revenue per year per install system. Total revenue for the fourth quarter was $9.1 million, up 55% from the $5.9 million in Q4 2012. For the year, total revenue grew 8% from $26 million in 2012 to $28 million in 2013. Our development team did a terrific job delivering new products in 2013. Over the course of the year, we introduced…

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with financial overview of our fourth quarter that ended December 31, 2013. I will then provide details on our operating results for the quarter with a sequential comparison to third quarter of 2013, a year-over-year comparison to the fourth quarter of 2012 and a full year 2013 to 2012 comparison. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our fourth quarter financial highlights. During the fourth quarter, we recognized revenue of $9.1 million, incurred a net loss of $17.2 million. We ended the quarter with $113 million in cash and investments, a decrease of $14 million from the balance at the end of Q3. Breaking down our revenue. Total revenue from the quarter was $9.1 million, up $1.7 million from the $7.4 million of revenue realized in Q3 and up $3.2 million from the $5.9 million recognized in Q4 of 2012. For the year, revenue in 2013 was $28.2 million, an increase of $2.2 million from 2012. For instrument revenue, in Q4 of 2013, we recognized $3.2 million on 5 instruments installed compared to $3.7 million on 6 instruments in Q4 and $3 million from 5 instruments recognized in Q4 of 2012. For the year, instrument revenue was $11.5 million in 2013, a reduction from the $15.5 million recognized for instruments in 2012. As a reminder, higher instrument revenue 2012 was a result of working off an early commercial backlog of 16 systems coming into 2012 compared to 5 systems in backlog coming in through 2013. Consistent with the momentum we've been describing in our last earnings calls, our backlog coming into 2014 has grown to 13 systems. Consumable revenue was again strong this quarter. Consumable revenue for the quarter…

Thank you, Susan. I will be providing guidance on our near-term and 2014 financial performance. Starting with revenue, we exited the year 2013 with a solid quarter of instrument bookings and continuing growth in system utilization which should drive revenue growth in 2014. We are forecasting significant increases in all revenue categories, resulting in at least 55% growth in total revenue for the year. This includes approximately $6.8 million in annual revenue, recognized ratably at $1.7 million per quarter, in connection with our agreement with Roche. If we exclude revenue from our Roche agreement from both 2013 and 2014, we expect total revenue to grow at least 40% from 2013 to 2014. Looking at revenue in the near term, having seen a significant jump in consumable revenues in Q4, we expect to see our consumable shipments flatten out somewhat in Q1. On the other hand, we started Q1 with 13 systems in backlog, which is up from the 9 that we had in backlog at the beginning of Q4. We expect to install at least 7 of the 13 backlog systems in Q1 compared with the 5 systems we installed in Q4. As a result, we expect total revenues to increased sequentially from Q4 2013 to Q1 2014. Moving on to gross margin. We saw our gross margin jump from the mid-teens for most of 2013, up to almost 35% in Q4 as a result of the $1.7 million in Roche revenue recognized as a 100% margin and a relatively high mix of consumable revenue, which has a higher margin than our instrument and service revenues. For 2014, with the higher mix of instrument revenue expected compared to last year, we are forecasting gross margin to be between 25% and 30%. As a reminder, at our current revenue levels, small…

[Operator Instructions] And our first question comes from Daniel Brennan of Morgan Stanley.

So certainly, a strong finish of the year on bookings front and on the consumable pull-through. Mike and Ben and Susan, how are you guys thinking about the bookings outlook for '14, given the pipeline that you're seeing in front of you today?

Well, just a comment first on the bookings that we had in 2013. On a year-over-year basis, we think it's stronger because of a combination of things: that's the product enhancements, the customer publications, the extending applications. And we've always said that those kinds of things should drive higher bookings. So generally speaking, even though it's kind of soon [ph] to call it quarter-to-quarter, we expect bookings to grow.

And then I guess, Ben, maybe related to that, and then we can move on to just maybe another question on some of the utility of the RS today. So is it more of a function that you guys were confident to call it doubling or more, which turned out to be the correct call? Is it more of a function of just a level of conservatism? Or is maybe something with the pipeline or maybe the customer base you're going into don't give you as much visibility?

Well, I think one of the things we're trying to do is kind of focus more on the revenue side since that becomes -- as it becomes a bigger number, more important. Obviously, you have to get the orders in order for the revenue to grow. The orders rate on an individual quarter because we're still at relatively small numbers is -- it isn't so much as hard to predict over a longer period of time. It's really hard to accurately gauge it on a short-term basis. And so as we get a little more into the year, we know all the things that can happen out in the funding environments and different areas of the world and so forth. We'll perhaps give a clear vision of what the numbers are likely to be, but we feel pretty good looking at all of our sources of revenue with the guidance that Ben gave relative to the total sales.

Great. And then maybe on the Roche partnership. So I guess, you mentioned things are off to a good start, creating products. When can we expect more kind of color about how we should think about that partnership? And are there types of products that may come out? Or just trying to get more visibility or going to help thinking about kind of the impact of that partnership. I know you talked about initial kind of regulatory filings to date, 2 to 3 years. But should we expect more information, material information, as the year plays out this year?

Well, if you remember how we answered that in the last conference call, we want to be a little careful as does Roche in tipping our hands a little too early on exactly the kinds of test that they want to focus on, because that's competitive information that doesn't need to be out there too early. And as we get closer to understanding what the regulatory time line is likely to be, and that relates to a specific test that we would go after first with Roche, we'll clearly give you more guidance. But it's like some potential candidates for president in election 2.5 years from now, you don't have to announce until you have to announce. And we don't feel that we're under any particular push to announce too early.

And then maybe one more, in terms of -- to the extent you execute on your product roadmap again this year with a fourfold increase in the throughput with the read length and all the software enhancements. Does that increase -- does that open -- the RS open up more significantly to any of the markets at which you've discussed? Certainly bacterial genomes is kind of your bread-and-butter, but the ag market certainly is something you're growing in and human [ph], you've talked about now. So how should we think about the markets kind of that you're penetrating today versus what you could be penetrating as the year plays out?

Well, they certainly expand in terms of the number of people who are willing to look at the RS in some of those other areas. An interesting statistic relative to the presentations coming up at AGBT next week, there are more posters and talks on the PacBio RS being used for human sequencing than there are for bacterial sequencing, which is clearly a first for us. And they're almost as many in the plant side as there are in the bacterial side. So we're already seeing as the throughput has gone up and as the software tools have improved, as people realize how much they can pick up out of these larger genomes that they just weren't seeing with the short-read technologies, an increased interest in those areas. And so we would expect that as the results of some of these early studies become more widely known, not even with the current throughput, we're getting a lot of interest from additional people within those areas.

And then -- sorry, maybe one more. Just on the consumable pull-through, how should we think about that for 2014?

That metric is one that sometimes you don't want to just take a one-quarter metric. We mentioned that we're well over $100,000. And in fact, if you just took the fourth quarter, you can talk yourself into something like $125,000. Particularly careful with some of that stuff because if you just take it over a broader time period, it might average out a little bit. That said, generally speaking, we're working on increasing it. It's just sometimes you can't track it on a quarter-by-quarter basis. And that's why we gave you the metric more on a year-over-year basis.

Our next question comes from Bryan Brokmeier of Maxim Group.

Where is your sales force today? And can you talk about any plans that you have for changes to the size of it in 2014?

Brian, this is Ben. So salesforce is still roughly the same. We mentioned that we have about a total of 50 people in the field, and that's a combination of salespeople and support people and technical service people. That's actually been fairly stable for at least a year now. I'll have Mike just maybe color us up a little bit. And there are probably some spots where we're going to look to add some resources, but we're not planning dramatic changes at this point.

Yes, the thing that we've mentioned it before is that on the consumable side, we have been utilizing some of our field technical support people more in a consumables sales mode, not necessarily as quota sales reps, but to help particularly, groups like those that run core facilities, help market their services to the broader audience that submits samples to them. And that's been a nontrivial boost to the kind of reagent sales that we've seen in those laboratories. And so having done that on a bit of a pilot basis in the last year, we plan to expand that this year. It's not changing total headcount; it's changing some of the roles and responsibilities and some of the people we already have. And as Ben said, we will probably make selective additions in certain territories, on quota sales reps as well.

And is any of your backlog from your existing customer base there and how does that compare to the percentage of customers in your installed base that own more than one instrument?

Yes, I think I got the question. So none of the 9 new bookings were with existing sites. So those are going to be new sites. And we're not at liberty to say who the new purchasers are because those are usually under some sort of confidential things. But there was at least one multisale in those 9 bookings. Both are unit sales.

Okay. And you tend to see customers that own more than one instrument run at a higher utilization, right?

Yes.

And then lastly, in you operating expenses. You been trending at the low ends of where you've been guiding us for the last couple of quarters. What should cause that to move higher such as we see increased R&D as we near some of your Roche milestones? Or how should we think about the operating expenses?

Well, R&D actually did, let's say, jump from Q3 to Q4, a pretty fair amount if you kind of looked at it. So the development expenses, they can move a little bit because they tend to be project-based. And so without calling it exact quarter-to-quarter, I think it's fair that the way we're trying to manage it is somewhere around the same of $21 million a quarter. And of course, it's going to be a little bit higher, a little bit lower, depending on what quarter it is.

Our next question comes from Bill Quirk of Piper Jaffray.

It's actually Dave Clair here for Bill. So first one for me, I was just hoping, how should we think about the pacing of improvements to RS in 2014?

Well, I mean, we expect them to be continuous, but not necessarily at the same level each time we make an improvement. So we'd expect to do more than one software upgrade, which adds functionality to the platform, particularly, in terms of more push-button support for a lot of these applications. IsoSeq is one of the ones we've mentioned. We will roll out changes in our chemistry, and we will be continuously rolling out new protocols for sample prep improvement performance. So it'll be something that gets done multiple times in bits and pieces through the year. It's not one thing that suddenly jumps by itself up to 4x improvement. As it was last year or the year before, it was accumulation of several smaller steps that got us there.

Okay. And then I think you mentioned average read lengths, we should kind of expect like 20,000 bases in 2 years. Where do you think you can get in 2014?

Well, some reasonable chunk of that.

Our next question comes from Zarak Khurshid of Wedbush Securities.

In terms of the new deliveries, just curious how quickly customers are ramping up to kind of meaningful steady-state levels of consumable pull-through?

Yes. It depends a little on the customer. Some of them have projects ready to go. Others take a little bit longer in terms of training and getting the kind of projects that they want to put on it in -- that are at scale. So I would say, some ramp-up and we had one shipment early last year that wound up being one of our higher-usage customers almost from day 1. Others can take 4, 5, 6 months to really get up to a reasonable run rate. So it's kind of all over the place. Our goal is to try to get them up as quickly as possible, and one of the reasons that we have to sort of refocus over our field applications people is to help in that process. I said they're not necessarily quoted sales reps, but they're -- one of their goals is to make sure that the customers are ready to use the machine as efficiently as possible, as soon as possible. And that's helped us get the overall consumables pull-through per instrument going upward.

Understood. And then maybe a question for Ben. I think I missed it in the prepared remarks. But what were the expectations for the Roche revenue for this year?

So Q4 is a pretty good indicator. So it's scheduled to be amortized at $1.7 million per quarter, and so the guidance is that it'll be $6.8 million for the year.

[Operator Instructions] Our next question comes from Tejas Savant of JPMorgan. Tejas Savant - JP Morgan Chase & Co, Research Division: Just stepping in for Tycho here. Can you talk a little bit about the reasons NIH budget increased? And have you heard anything from your customers in terms of spending patterns getting a little bit better going forward? And how is that sort of factored into your 2014 guidance?

Well, it's certainly better than a sharp stick in the eye in the sense that it's not like it's a whopping increase in a longer-term set. It's about, what, the budget was 3, 4 years ago. That said, it's substantially better than the worst case that people are having to plan for. And more importantly, it's a little more secure in giving people the ability to kind of plan what their budgets are going to be over, say, the next 2 years. And that's the thing that's made sort of our customer base a little bit more encouraged than they were before. Getting NIH money is still pretty tough. The grant success rate is a lot lower than historical averages over the last 2 or 3 decades. But it's -- and I think customers are certainly more comfortable now in planning programs and the kind of purchases that can go along with those from equivalent perspective than they were 2 months ago. I'm positive, but early, I guess, is the question. Does that answer your question? Tejas Savant - JP Morgan Chase & Co, Research Division: Okay. And in terms of the strength in consumables in the quarter, can you talk about how broad-based it was?

Pretty broad, overall. I think we said in the past it's -- a lot of times, there's this rule of thumb where you think 20% of your customers represent 80% of your revenue. That's not the case here at all. It's actually much more broad than that. So we're pretty pleased with the sort of broad-based increases in utilization that we saw in the quarter.

Our next question comes from Daniel Brennan of Morgan Stanley.

I just wanted to do just a follow-up. Mike, I mean, since you joined the company, the company's had a pretty significant turnaround. And I think one approach that you've taken and it appears with Ben and Susan is to not set guidance on an annual basis or things that maybe are beyond your control or too much uncertainty and kind of get the street focused on, maybe, some of your long-term goals, where usually you have visibility. So just with that being said, just back to the guidance for '14, when we think about this 55% revenue growth that you've guided to, that looks to be like a really potentially low bar, given the significant growth in instruments that you have in the field, particularly with the consumable pull-through that you're generating today. So I'm just wondering, is the lack of bookings guidance or the 55% revenue guidance, which is certainly very healthy, but nonetheless, based upon the higher instrument number -- is that just predicated upon a philosophy of just trying to kind of set a low bar? Or is there anything that's potentially happening in the field? Maybe Illumina's expensive new product lineup is potentially something you're keeping -- an eye on given -- you just mentioned grant dollars Illumina -- just kind of put together the guidance for the top line with the bookings and kind of what you're seeing.

Right, I have to say one thing, Dan. I mean, if you look at Illumina's guidance, which is spectacular at 20%, we think 40% is even more spectacular. So I think we hope this is a bullish number. We are coming in the year with 13%, but we're coming off a year that we did 25%. So we're guiding up on all elements for the revenue, and it's meant to be positive in every way. Bookings are hard to call. We probably will see less bookings this quarter because of the seasonality. And when you're in the law of 1 or 2 numbers, it's wrong to get too far there. We've guided last year on the doubling at the end of the second quarter conference call. So I think we're just trying to give you numbers we truly believe in and that we stand behind us like we do with our -- what we deliver to our customers.

Yes, and I was -- I mean, I certainly wasn't taking away fromthe55%. That's a big number. It was just when we think about the pull-through on what you have in solitary -- that was all. I was just trying to kind of come back. Because I think that'll be an investor question. That's all, Susan.

So if you look at 88 installed base and even a large percentage, an increase in pull-through doesn't really drive against it, the amount of revenue we get per instrument. So that's a dominant issue still for us.

Yes, I think, reemphasizing the point that Susan just made, we did give you guidance last year on orders and bookings. But we didn't do it until we had really seen what was going on out there. I mean, a lot of things could happen. Weird announcements from potential competitors can have a short-term influence on what happens. Changes in budget priorities, not just in the U.S., but in Europe or Asia can give you short-term lack of clarity as to what's going on. And so we felt pretty comfortable with the sort of at least number on the revenue growth. And as we did last year, we're likely to give you a more updated number as we get a better visibility into the year. We are at still small enough numbers -- that trying to think we know exactly what's going to happen is kind of nuts. And we want to try to give you something that we think is a reasonable target for us to achieve. And our goal is to do as well as we can in the marketplace. And we feel pretty enthusiastic about the progress we've made and the opportunity we have. But clairvoyance is not something I've been able to develop over the last 30 years in this business, as well as I would like to. So we're trying to be reasonable, but to still convey a sense that we feel pretty optimistic about our opportunities.

And as you know, no more questions at this time.

Okay. That was our last question for the day. In closing, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers and the scientific community in general. We believe that SMRT sequencing provides the industry's most complete and accurate picture of genomes due to a its superior performance and sequencing accuracy, uniformity of coverage, extremely long read lengths and the abilities to characterize DNA-based modifications. We continue to make progress into driving the adoption of our products and it's rewarding to see momentum building in our business. We look forward to seeing some of you next week at the AGBT, and we will talk again in 3 months' time.

Ladies and gentlemen, thank you for your attendance. This does conclude our conference. You may now disconnect.