Good day, ladies and gentlemen. And welcome to the Pacific Biosciences of California First Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Trevin Rard.

Good afternoon, and welcome to the Pacific Biosciences First Quarter 2014 Conference Call. Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com, or alternatively, as furnished on the Form 8-K available on the Securities and Exchange Commission website at www.sec.gov. 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'll be making forward-looking statements, including plans and expectations relating to our financial projection 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 annual report on Form 10-K. 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. I'll now turn the call over to Mike Hunkapiller.

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our first quarter 2014 results and the progress we are making in driving our overall business. Highlights of our first quarter financial results are as follows. We booked orders for 9 PacBio RS II systems in the first quarter, representing more than double the bookings we had in Q1 of last year. We also delivered 9 systems during the quarter, which brings our install base up to 97. With the replenishment of 9 new orders in the quarter, our backlog of systems ended up once again at 13 units as of the end of March. Consumable revenue for the first quarter was $2.5 million, up more than 30% from the prior year Q1 consumer revenue of $1.9 million, signaling continued strong utilization in our install base. We continue to average over $100,000 in consumer revenue per year per install system. Total revenue for the first quarter was $11.6 million, up over 100% from $5.6 million in Q1 2013, driven primarily by a significant increase in system sales. A recent uptick in bookings is now being reflected in our revenues as the systems are getting installed. With another strong quarter of bookings in Q1, we're looking forward to continued solid revenue growth over last year. We raised $21 million in cash during the quarter using our at-the-market equity facility. We ended the quarter with $119 million in cash, which is up $6 million from our cash balance at the end of 2013. And finally, I would like to call your attention to our joint press release issued yesterday regarding the recent investment by HistoGenetics and PacBio RS II systems for HLA typing and analysis. I will provide further color on this matter later in my remarks.…

Thank you, Mike. And good afternoon, everyone. I will begin my remarks today with a financial overview of our first quarter that ended March 31, 2014. I will then provide details on our operating results for the quarter and a year-over-year comparison to the first quarter of 2013. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our first quarter financial highlights. During the quarter, we recognized revenue of $11.6 million and incurred a net loss of $18.9 million. We ended the quarter with $118.7 million in cash and investments, $6.2 million higher than the $112.5 million reported at the end of last year. During the quarter, we raised $20.6 million in equity funding from at-the-market facility. Excluding these proceeds, cash and investments decreased by $14.4 million. Turning to revenue. Revenue increased substantially year-over-year across our products and services. The total revenue for the quarter of $11.6 million was more than double the $5.6 million recognized in Q1 of 2013. Instrument revenue nearly tripled year-over-year, increasing to $5.3 million for Q1 2014 from $1.9 million during the same period last year. The increase in revenue reflects the 9 instruments recognized during the current quarter compared to 3 last year. Consumer revenue was also strong, increasing 31% to $2.5 million from the current quarter, up from $1.9 million reported during the first quarter of 2013. Service and other revenue increased 19% to $2.1 million in the quarter compared to $1.7 million in Q1 of 2013. And finally, we continue to recognize $1.7 million in revenue per quarter associated with the $35 million upfront payment that we received from Roche in Q3 2013. Gross profit was $1.7 million in Q1 of 2014, representing a gross margin of 23%. In Q1 of 2013, we recognized $900,000 of…

Thank you, Susan. I will be providing an update to our 2014 financial forecast. Starting with revenue, we are pleased with the system bookings we achieved in the first quarter and the continuing solid system utilization that is driving year-over-year growth in consumable sales. Therefore, we are increasing our revenue growth forecast for the year, from 55% previously to approximately 70%, which translates a total annual revenue estimate of between $47 million and $48 million for 2014. We expect significant year-over-year increases in revenue for each quarter this year. That said, please keep in mind that on a quarter-to-quarter basis, our revenue can fluctuate based off the number of systems installed each quarter, which is dependent on customer site readiness. For example, our sequential jump in revenue this past quarter was largely driven by the 9 systems we delivered in Q1, compared with the 5 systems we delivered in Q4. Moving on to gross margin. We have seen in the past 2 quarters $1.7 million of quarterly amortization of the Roche payment from last September continues to result in a favorable year-over-year gross margin comparisons. Another significant factor that can drive fluctuations in our gross margins is the relative mix of instrument revenue, which has a lower gross margin than consumables revenue. During our call last quarter, we mentioned that we expected a higher mix of instrument revenue as we begin to install our larger backlog of orders. In Q1, the number systems we installed was on the high end of what we expected, which caused our gross margin to decrease more than we anticipated. Based on our positive outlook on bookings this year, we expect to continue having a higher mix of instrument revenue throughout the year compared to last year. Taking this into account, along with the continued…

[Operator Instructions] The first question comes from Bryan Brokmeier from Maxim Group.

Have you seen an improved funding environment so far? And do you see any impact on orders in the first quarter, or were new funds really not available until the second quarter?

Well, I think we certainly have seen an increase in the pipeline, particularly relative in the U.S. to government entities in terms of their ordering process. I don't know if that translated in specific orders in Q1. But certainly, their budgets in particular have become a little more freed up than they were for quite a while. I think we've seen at the consumable side even probably in Q1, but certainly, on the instrument side going forward.

Are you able to identify that?

In the academic world, it's not just -- given the budget setup, it's also going through the whole grant approval process that drags that out a little bit longer.

Right. Are you able to identify any impact from weather in the quarter? In particular, your consumable revenue, the pull-through is down sequentially, a little bit below what I expected. And we've heard from a lot of other companies about the impact they saw because of the inclement weather.

Yes, no doubt that there was some. But it's a little hard for us to kind of measure that directly.

Yes. And Bryan, it was actually right in line with what we expected. I think we even guided last quarter that we thought it would be relatively flat just because Q4 was such a big jump.

Okay. And then, lastly, the -- can you comment -- you talked about -- Ben just talked a little bit about the gross margins and -- due to the instruments versus consumable mix. But can you comment on the geographical breakdown of your installations and maybe some way to qualitatively talk about how that impacted your ASPs and margins?

Bryan, thanks for the question. Yes, geographically, I would say that Q1 was particularly strong in Asia. And that does, quite frankly, have an impact on the average selling price, because in Asia, when we do sell to distributors, we could have a lower average selling price. But that's -- we've seen that in some other quarters before. And that's why I think quarter-to-quarter is a little bit harder to call and you're able to see fluctuations in the ASP quarter-to-quarter. We are definitely continuing to see, I would say, consistent pricing within the regions that we are selling our products.

Our next question comes from Bill Quirk from Piper Jaffray.

First off, I guess, just a question on the installation capacity. I guess, is 9 kind of stretching it? Or do you think, given your comments regarding a strong order book and obviously backlog, that stretches out or at least appears to stretch out or -- for more than one quarter, could you just talk to whether or not you have some flexibility there? How should we think about that?

Well, I think we have the flexibility with a little bit of planning. What we've always said is it takes usually a minimum of 1, usually 2 quarters. And it mostly has to do with the fact that it's a fairly big purchase commitment for customers. So they get the order in, but then they have to get the facilities ready. And frequently, that takes them longer than they expect. Sometimes, it's because a new facility is being outfitted in a broader sense. Sometimes it's just they have to go through the process of getting the right AC system put in place, the right voltages and so forth. And we do very careful site prep so that we know that the computing facilities are appropriate and so forth with them, and the power supplies are appropriate. And it's mostly gated by their site readiness and how our matching of their site being ready to have the install. We can do the installs within a matter of a few days, but their sites may take several months to get ready after they place an order. And that's what the gating thing is. And sometimes -- at this time, we ask the installers then to put up more, at least at the high end of what we would have anticipated based on the orders that we had at hand at the beginning of the quarter.

Okay. Got it. And then just building off of an earlier question regarding, overall, like, I guess, geographic mix. And candidly, the instrument ASPs held in a lot better than what I would have expected based on some earlier comments. So can you just elaborate on that? Are we at more of a steady run rate here for ASPs, recognizing they can bump around a little bit?

I kind of think that we've been in a -- at a state of ASPs for quite a while. And the only thing that has made on a quarter-to-quarter basis -- the thing that's impacted it quarter-to-quarter is just the geographic mix out of these systems that we've installed.

And whether they're direct sales or whether they're through distributors.

Yes.

Okay. And then just lastly for me, just any update on the Roche collaboration? I recognized that you probably somewhat has it in stock about things in the pipeline. But is there anything, from a public milestone standpoint, that we should keep our eyes open for?

Well, you should keep your eyes open. But no, I think you've probably seen comments from them that they're committed to the technology and they've recently reiterated why they're committed to the technology diagnostics space. We continue to have a fruitful collaboration, a development program underway with them. And in particular, when they deem appropriate, we will jointly make comments regarding the progress of that.

The next question comes from Tejas Savant from JPMorgan. Tejas Savant - JP Morgan Chase & Co, Research Division: Just wanted to lead off with a quick question on competitive dynamics on HLA, given some of the recent comments from your competition.

Okay. And the question, you slipped in your... Tejas Savant - JP Morgan Chase & Co, Research Division: I mean, just your take on it, Illumina has highlighted HistoGenetics, and TMO is talking about One Lambda moving to [indiscernible]. So just wanted to get your take on that.

Well, so the -- using DNA sequencing in the typing market is not new. It's been around with Sanger technology for quite a while. And it's been around with other methodologies who are antibody based, or pro-based PCR methods or even longer. All those technologies, putting the ones that are short read or even Sanger read based sequencing, traditionally go about looking at isolated exons that are at least, at one point, were thought would be the main determinants in a transplant sense of whether or not you had a likelihood of a match or mismatch. The problem with all those reads -- schemes, in all the pro-based methodologies, and even worse, with the antibodies, is that they don't necessarily tell you which alleles in one exon are necessarily paired with alleles in another exon, even with a specific -- a given gene. And so a lot of the key opinion leaders within the HLA community have realized that what they really need is to look at the entire gene as a whole, in all of the elements of the HLA families. And being able not just to look at individual exons, but to look at the whole gene and know exactly how variations in one exon relate to variations in another. And they can't -- they've realized they can't do that properly with any of the short-read sequencing or probing technologies. And so we've been working with several of the labs for quite a while now to demonstrate that the long-read sequencing technology gives them exactly what they would like to have. Now it's early in that process. But I think the quote from HistoGenetics, which is the leading typing lab in the U.S., who's recently begun to adopt our technology, highlights what they really want to get to.…

Yes. This is Ben. So none of the 9 orders that we got were from existing customers. So the 9 orders were from new customers. The first question was how broad-based was the consumables. As we said in the past, it's pretty broad. It's -- generally speaking, it's not a 20% of the customers ordering 80% of the consumables. It's much more spread out than that, and Q1 was similar.

So you're asking about the customer concentration or the types of runs they're doing on the system? Tejas Savant - JP Morgan Chase & Co, Research Division: Just the customer concentration, actually.

One quick follow-up on the HLA market. So the other thing that people are realizing, that there are other gene families that are involved in the whole immunochemistry process. And elements like KIR, which has even more complicated gene family and there's much more variation in many cases than there is even in HLA are recognized as very important, and had been just completely refractory almost to any kind of analysis. To the point that only very recently has that region finally been added to the human reference genome, mostly from sequences generated on the PacBio RS. And that's come up as an area of significant interest from some of the people doing traditional HLA typing as an additional thing that they want access to. And they know that none of the other technologies that are out there can even touch it.

Our next question comes from Amanda Murphy from William Blair.

It's actually J.P. in for Amanda. I just have a couple of quick ones. I guess, you'd say we've noticed some increased demands for whole genome sequencing and just want to get your take on that, and if that will ultimately lead to additional demand for your systems?

You're talking about whole genome in the human space or in a broader sense?

Yes, human.

Well, I think that there is an increase in demand for human whole genome sequencing. And in essence, it's actually whole genome resequencing. And I would define it more as an effort at doing sequencing with the way of doing genotyping. Because it really isn't doing whole genome sequencing in a de novo sense and anything; it gives you very good data on a portion of the human genome. It leaves out a lot. And I don't think that we're at a throughput and a cost perspective to do large numbers of human genome resequencing in that sense. That said, there are areas of the human genome in those studies that you just do not see. HLA is a good example in that sense, but it's one of many. And so the interest that we're seeing, along with that increase in interest in the sort of whole genome shotgun approach, is how to supplement that with some targeted areas that are missing from those regions. And so in that sense, I think we are seeing an increased interest in our technology. It's not to do what the short-read technology does really well, it's to do what it can't do in that space.

Okay, got it. And then can you kind of talk about your -- the pipeline? You mentioned it being strong and kind of higher than you would expect this time. Can you talk about the customer mix a little bit and if there's any new customers coming to or any surprises that you just didn't expect?

Well, we didn't expect. I mean, you expect a halt [ph], but getting orders through the door is not always a trivial process. I think that the mix is kind of what we thought in a sense that it's fairly broad. And one of the things that we tried to highlight both in the last conference call and this one is that it's certainly branching out from the niche that some people tried to paint us in as being only good for bacterial sequencing. We are very strong there, but we're becoming recognized as being very strong in the plant and animal field, where the short-read technologies have really not done, in my opinion, a very good job at all of creating good genomes, even for references there, that the assemblies tend to be of really pretty poor quality. And given that they tend to be in cases that are valuable from a monetary perspective to the businesses associated with a lot of these crops are having much better assemblies. And genome references for reading purposes is really important, and we provide much better reference genomes and there's an enormous number of valuable plant and animal species out there to work on, and we're beginning to be much more recognized in that space. In the human area, both because of the -- both the increase in the throughput that we've had, which makes studies there a little more palatable from a cost perspective, and the recognition of exactly how much is missing in important areas, in the short-read data we're beginning to get more recognized as well. So all those things I think are beginning to broaden out, based on customers that have an interest in our technology. I think the whole IsoSeq approach is going to be a new…

[Operator Instructions] The next question comes from Zarak Khurshid from Wedbush Securities.

Ben, in terms of the growth guidance, just wondering if you could clarify how much of that is a result of better instrument demand versus more aggressive delivery schedules versus better consumable pull-through expectations?

I'd say that the increase from last quarter's forecast to this one is all predicated on system revenue, pretty much. And that's driven from -- starting with the orders, including the orders that we've got in Q1. But that also has to get reflected in installations, otherwise, you don't give the revenue. So that's predominantly the growth there. Consumables, again, came in right in line with where we expect in Q1. So we have not yet changed the expectations there. That said, if you do install more systems, generally speaking, you do expect to have more consumables. We just want to see that play out a little bit.

Well, there was revenue, yes. And the other revenue as well, so...

Got it. And then just in terms of the deliveries expected for this year, as we think about kind what happened with the [indiscernible] last year, how would you characterize kind of the quality of placements this year versus last year? Would you say there's kind of better throughput potential overall or not?

I'd say that we are definitely -- I mean, sometimes, the numbers are -- you got to be careful about averages and things. But when people are buying systems, they definitely have used this in mind. For example, we talked quite a bit about HistoGenerics already, and these are certain applications that they have in mind. So hopefully, that's going to lead to a lot of pull-through revenues.

The next question comes from Bryan Brokmeier from Maxim Group.

You're just talking about -- a little bit about the biopharma market. I don't believe you've had many or maybe any placements in the biopharma market. Is this interest by pharma new? And besides HLA typing, is pharma using the PacBio RS in any other way?

Actually, I think we had mentioned that we had plans at pharma before. I think the HLA one is one that's new because we've just now begun to be more public about the fact that we're willing to support that. So that is new, but we've had interest in the pharma side before.

I am showing no further questions.

Okay. So in closing, we remain steadfast on our commitment to bring the unique vantages 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 its superior performance in the sequencing accuracy, uniformity of coverage, extremely long read links and the ability to characterize DNA-based modifications. We continue to make progress in driving the adoption of our products. It's rewarding to see momentum building in our business. We look forward to talking again in 3 months' time. Thank you.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.