Good day, ladies and gentlemen, thank you for standing by and welcome to the Pacific Biosciences Third Quarter 2014 Earnings Release Conference. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Trevin Rard.

Good afternoon, and welcome to the Pacific Biosciences Third 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 related 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 the forward-looking statements made on today's call may differ or change materially after the completion of the live call. With that I like to turn the call over to Mike.

Thanks, Trevin. Good afternoon and thank you for joining us today. We have quite a number of business highlights to share on today's call starting with some very good financial results. Highlights of our third quarter financial results are as follows; we booked orders for 16 PacBio RS II systems in the third quarter representing more than triple the bookings we had in Q3 of last year. And it brings our year-to-date bookings to 30 systems compared with 16 systems booked for the first three quarters of 2013. We delivered six systems during the quarter and as at the end of Q3, our backlog of system stood at 20. Consumable revenue for the third quarter was $3.3 million, up 57% from the prior year Q3 consumable revenue of $2.1 million and up 7% sequentially from Q2 of this year. We were pleased to see a sequential increase in consumable sales despite the seasonally slower summer months. We continue to average over $120,000 in consumable revenue per year per installed system. Total revenue for the third quarter was $20.6 million up 178% from Q3 2013. This included $10 million payment we earned from Roche for meeting the first development milestone associated with the collaboration agreement we signed with Roche last year. As a reminder we established multiple milestones from which we expect earn a total of $40 million over time. With the $10 million enhancement to revenues, this year we now expect our total 2014 revenue to be more than double our 2013 revenue. Now turning to some other business highlights. Last week we announced multiple new products, including an enhanced chemistry, which significantly improves the performance of the PacBio RS II. Our C4 chemistry set delivers average read lengths between 10,000 and 15,000 bases with the longest reads in excess…

Thank you Mike and good afternoon, everyone. I will begin my remarks today with a financial overview of our third quarter that ended September 30, 2014. I will then provide details on our operating results for both the third quarter and year-to-date with a comparison to the third quarter of 2013 and year-to-date comparison to the first three quarters of 2013. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our third quarter and year-to-date financial highlights. During the third quarter, we recognized revenue of $20.6 million, and incurred a net loss of $9.2 million. This brings our year-to-date total revenue to $43.7 million and our net loss to $47.2 million. We ended the quarter with $99.3 million in cash and investments. This is $5.7 million lower than the $105 million reported at the end of Q2, and it includes the $10 million milestone payment from Roche. Turning to revenue, revenue increased substantially in Q3 year-over-year as a result of the recognition of the $10 million Roche milestone as well as large increases in consumable and service revenues. Total revenue for the quarter of $20.6 million was 178% greater than the $7.4 million recognized in Q3 of 2013. Year-to-date revenue in 2014 was $43.7 million, up 129% above the revenue of $19 million recognized in the first three quarters of 2013. The increase in year-to-date revenue stem from substantial increases in all product categories including systems, consumables and service as well as the addition of the contractual revenue from Roche. Instrument revenue decreased slightly to $3.5 million in Q3 2014, from $3.7 million during the same period last year. Year-to-date, instrument revenue has increased 62% to $13.5 million in 2014 versus $8.3 million in the first three quarters of 2013. The year-to-date instrument revenue…

Thank you, Susan. I will be providing an update to our 2014 financial forecast. Starting with revenue, with our strong bookings in Q3 and the addition of $10 million in revenue which we recorded from Roche, we are increasing our forecast from 70% growth to over 100% growth in revenue for the year. We expect total revenue for the year to be over $58 million. With regard to instrument revenue, we had 20 instruments in backlog at the end of Q3 and we expect to install majority of these systems in Q4. Moving onto gross margin, the $10 million Roche milestone we achieved and recorded in Q3 brings up our forecast for the year. Previously we had estimated our gross margin for the year to be between 25% and 27%. We now estimate our gross margin for 2014 to come in at approximately 38%. With regard to fourth quarter gross margin, we are expecting a high mix of systems revenue, which has a lower gross margin than consumables. So our Q4 gross margin is expected to be lower than it has been in recent quarters. We have taken this into account for our annual estimate of 38%. Operating expense for Q3 of $21.6 million included a $600,000 cost recorded in SG&A associated with the Roche payment we received. While R&D expenses came in a little lower than usual due to the timing of certain expenditures. Taking into account these normal fluctuations we expect our Q4 operating expense to be roughly the same in total at between $21 million and $22 million. As a reminder our operating expenses include non-cash, stock compensation expense, and depreciation expense together amounts to between $3 million and $4 million per quarter. With regard to cash, we are right on target with the plan we had set out at the beginning of the year. Our goal was to consume $16 million or less for the year, and after three quarters we consumed about $44 million. Adding back the $10 million we collected from Roche and about $21 million we raised earlier in the year using our [market] facility our cash balance at the end of Q3 of $99 million is about $13 million less than where we had started for the year. Assuming we consume approximately $15 million again this quarter, we should end the year with at least $84 million in cash and investments. And with that we will open the call to your questions.

(Operator instructions) Our first question comes from Bryan Brokmeier from Maxim Group. Please go ahead.

Hi, good afternoon. The booking numbers was well above what we were expecting could you – is that as of the end of the third quarter or is that as of today?

The end of the third quarter.

Okay. And can you provide us some details on the types of customers that are in the backlog and how that has changed from what you have seen recently?

Well, we actually enumerated I think quite half of the bookings in the listing that Mike was giving you. So for them once that we had a press release on before so two from Macrogen and two from Human Longevity and you got two in there for the CDC. Then you have got these repeat orders from Mount Sinai, Zurich and Tokyo. So that gives you a pretty good cross section. The other ones, we don't identify everyone but it's a combination again of a variety of academic and commercial sites.

But is the rest of that pretty similar to what it normally is and so then these additional bookings that you detailed are sort of how the backlog has changed?

Well this is Mike, I think the one thing it's really new out of that group is the beginnings of a bit of a trend that we are seeing where people who have invested in the Illumina X Ten system for really large scale massive human sequencing/genotyping studies to begin to add to that the use of PacBio for looking at structural variation and the kind of complex regions that are kind of missing from the short-read analyses. That’s really the new component relative to what we have seen in the past.

But we do not lose track of the fact sheet – that you lose track of the fact that we are gaining traction in the ag-bio, the micro-bio, as well as the human and the HLA. So we think there is a nice mix of all three areas in that backlog.

And do you expect to encounter any capacity constraints installing the instruments, and are you going to have to add, expand your sales force given the backlog in the new demand that you are seeing?

[Indiscernible] easily install the instruments but we are pleased I think with the capacity on your team that's in place.

I will just add that we are prepared to install a majority of those 20 in the fourth quarter end. What is – I will say good news is that good numbers of customers have told us that they would like their systems to be installed in Q4. So we should have a pretty healthy amount of installs in that quarter.

Yes the rate of install is not so much our capacity issues, it's whether or not the customers’ labs are prepared and ready to go for the installs and that frequently has taken one to two quarters from order.

Okay. Thanks a lot.

Our next question comes from Will Quirk of Piper Jaffray. Please go ahead.

So I guess just a follow-up on the other question I mean is it reasonable to assume guys that we could start to see some sort of X Ten RS II matching in other words, the additional customers and Illumina obviously has some overlap there but how are you thinking about those as a relatively near term replacement opportunity?

Well I don't think we are going to match the number of units. I mean it's more with an X Ten you get ten super [Indiscernible] equivalents and we have seen sort of one to two instruments to start with from the PacBio side that people feel are appropriate at this point for the sort of full de novo approach that they are going to use for certain numbers of samples. But we have seen it first from other of those sites than the one, the two that we have highlighted. So it is something that we are actively following.

And as we said before, we have the robust pipeline built and calling it in any one particular quarter on where that order comes in we are not that good at this point in time.

I certainly understand that obviously you can – you could see a fair amount of movement around the timings there. On the consumable side, obviously it was nice to see them stay kind of flattish sequentially given as you noted typically a pretty seasonally slow quarter, how should we be thinking about consumables utilization with the new chemistry release. I guess I intuitively think that it could go higher but we would love some color there. Thank you.

I will take a shot. I think that in general the added capabilities of the chemistry release should open up more applications but beside that fact we are just seeing overall increases in utilization and you have this growing installed base. So we are expecting sequential growth in consumable revenues from Q3 to Q4.

The other thing is that I think it's pretty obvious from the capabilities is that it opens up larger projects being done more often because it makes it less – prohibitively expensive to do really big genome projects as opposed to the smaller ones. And so it means that the number of SMRT cells that we use to complete a project is higher than it is for say doing bacteria works basically one SMRT cell for organism and that means that people have the opportunity to utilize the machine more frequently because they have the sample ready to go.

Understood. And I guess maybe just I guess just to kind of ask one last thing at is there any price difference in the new chemistry or is it similar pricing to what we had previously and obviously Mike to your point if we see larger more frequent studies no doubt the average consumables will rise and follow.

Yes, it's similar pricing. So we are not expecting a difference just due to any sort of price change.

Okay, got it. Thank you.

Our next question comes from Amanda Murphy of William Blair. Please go ahead.

Hey thanks. So just to follow-up to some of the discussions around the derivative opportunities if you will from the X Ten, I am just curious is there a way we can frame what that might look like, I know it's early days but if you were to say okay let's say we sequence 10,000 genomes on the X Ten what percentage of those might need sort of this higher quality assembly type concept just trying to frame out what that might look like in terms of opportunity for you guys.

Well I think it's early days on that. I think it depends on how fast people wrap up their [information], capability and their choice of samples that they take to go into more de novo sequencing approach. I think it will probably for a while remain a relatively small portion of the total. That said, given that the return for us per genome because of the kind of [Indiscernible] trying to get out of that it's a lot higher than a single sample that you get from the Illumina. Now our price is not near to $1000 per genome. And so I think that will have some limitation in terms of how many samples people will be able to run early on but as we have sort of seen the sort of two PacBio RS to a full X Ten set as being something that seems reasonable for people at this stage.

Got it, okay. And then just a couple on the reagent side so in terms of the new chemistry kit, I guess I have two questions one obviously other than kind of throughput, which you continue to increase over time, is there anything that you maybe need to continue to improve to fully take advantage of the opportunity on the human side and then second question is you have been pretty consistent about kind of wanting new chemistry kits every six months or so do you sort of plan to continue to do so sort of in the context of your current instrumentation?

I think the answer to most of those is yes taken in the back. So one of the things that we clearly need to do is to continue to work on the sample front end because that's a key limiter to how much sequence data that customers get out of a given sample, which is even more important to bigger projects than it is with bacteria, which is almost [Indiscernible] experiment now. And so we will stay tuned but you will see or should see over the next several months continued improvement in that, which by itself going to actually extend read lengths and throughput. I think the other thing is on the informatics side. So we have now worked with a one of our Japanese customers who has come up with a very clever way of looking at whole genome level in the human or above the bacterial space for epigenetic study and one of the things that we like to do is to get that more broadly available to people so they can do the kind of experiments that we have done with the [Indiscernible] sample that I mentioned and so there is a lot on the software side as well as the sample prep. We will certainly continue to work on the more efficient usage of the SMRT cell capacity that's there in terms of the number of reaction wells that can be loaded and sequenced simultaneously. So we have a lot to go for, for our next year's increase of [Indiscernible] that we have traditionally used as our measure of how to improve our performance every year.

Got it, thanks so much.

(Operator instructions) And our next question comes from Tycho Peterson of JP Morgan. Please go ahead. Tejas Savant- JP Morgan Chase & Co.: Hi guys it's Tejas in for Tycho. Thanks for taking the question. Just had a quick one on gross margin I mean adjusted for the contribution from Roche in terms of the milestone as well as the $1.7 million ongoing payment, gross margins were flat versus last year roughly around 16% so can you share any thoughts on how you see that evolving over time, I mean obviously there is a mix issue at play here, but just what is the tipping point where the consumable gross margins begin to dominate?

Yes Tejas, this is Ben. I think your math is right. I would say that sometimes the total gross revenue amounts we are talking about, little subtle changes can actually make changes in the percentage that could easily move at least a couple of points. In the long term no question, we are moving and driving towards higher gross margins in general. And the consumables generate higher gross margins for us as a percentage of revenue and the systems and so the growth in the consumables that should help in driving overall growth in gross margins. That said we are actually pretty delighted that the growth in instrument revenues this year over last year is going to be quite significant, and so when you take a look at year-to-date maybe you are not going to have that much difference on the percentage but hopefully you are going to have higher gross margin dollars because you do have higher revenues. Tejas Savant- JP Morgan Chase & Co.: Okay. And then in terms of gross margins on the instrument side, can you share any sort of particular components of the bill of material that you could potentially see yourself reducing over time, and I mean following-up on that I mean would that mean that you have a little bit of pricing flexibility as well as the need were to arise down the line based upon competitive dynamics.

Yes Tejas, we don't typically go into that level of detail. We do have ongoing discussions with all of our vendors and we take each of those projects on one at a time. Of course we are trying to drive cost reductions across the entire bill of materials but that's just not something that we are sharing with the broader audience. Tejas Savant- JP Morgan Chase & Co.: Okay, fair enough, and then just one last one on Roche, I know you have got that $10 million in milestone this year, so that leaves about $30 million over the next couple of years, is that a fair way to think about it that $10 million would be the approximate size of these milestone payments and it's fair to amortize them over the next couple of years or could it be lumpier than that?

Well it's likely to be lumpier. I mean obviously $10 million was a pretty big lump to start with and I don't think that we are prepared at this point to give a time line on those, stay tuned for that. Tejas Savant- JP Morgan Chase & Co.: Okay. And can you perhaps highlight sort of priorities for your R&D spending going forward?

Well obviously one is to continue to improve the performance of the system from the sequence or itself to the sample prep and the chemistry that goes into it to the software, back in, we clearly are focused on our development program with Roche to create a diagnostic compatible device for them to sell into the human in vitro diagnostic marketplace, so we might expect that's a pretty big priority as well. Tejas Savant- JP Morgan Chase & Co.: Okay, great. Thanks and congrats on the great bookings this quarter.

Thank you.

Thanks.

There are no further questions at this time. I would like to turn it back to Michael Hunkapiller for closing remarks.

Okay. 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 its superior performance in sequencing accuracy, uniformity of coverage, extremely long read lengths and the ability to characterize DNA-based modifications. Over this past year, we have made substantial progress driving the adoption of our products in key markets including infectious disease, ag-bio, human bio-medical research and immunology. At the recent ASHG and ASHI meetings we started seeing a lot more activity in the human sequencing space and we expect to see much more at the upcoming AGBT meeting in February. We are still very early in the adoption cycle for SMRT sequencing but it is becoming more clear that we have a great potential for building PacBio's business. Thank you for joining us and we look forward to talking again in three months time.