Pacific Biosciences of California, Inc. (PACB) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc. Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. I would now like to introduce your host for today's conference, Trevin Rard. Please go ahead.

Good afternoon and welcome to the Pacific Biosciences fourth quarter and fiscal year 2015 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. Unfortunately, Mike Hunkapiller, our CEO is out with the flu today. With me are Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer, who will be reading Mike's prepared remarks. 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, products and other future events 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 report on Form 8-K and Form 10-Q. Pacific Biosciences undertakes no obligation to update forward-looking statement. 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'd like to now turn the call over to Ben.

Good afternoon and thank you for joining us today. We are pleased with our fourth quarter results and our continue progress in driving growth in our business. In particular, the launch of our new Sequel platform has been extremely well received which I’ll expand on later in the call. Highlights of our Q4 and full year 2015 results are as follows. We received orders for 49 Sequel Systems and three RS II systems during the fourth quarter. The Sequel System orders came from a broad range of customers spending academic, government and commercial entities and were well distributed across the U.S., Europe and Asia. Over 40% of the system’s order represents new PacBio customer sites. We shipped ten Sequel instruments to customers during the fourth quarter and completed the installation of six of those systems before the holidays at the end of the year. Total revenue for the quarter was approximately $36 million, which is more than double the Q4 revenue from the previous year. During the quarter, we achieved the final development milestone under our agreement with Roche and recorded the $20 million of revenue associated with the milestone. Total revenue for the year was approximately $93 million, up 53% from 2014. Excluding revenue associated with our Roche collaboration, total revenue was up 10% year-over-year. Consumable revenue for the fourth quarter was $4.6 million, up 6% from Q4 2014. For the full year, we generated $18.8 million in consumable revenue, up 43% over 2014. Meanwhile our RS II system install base grew by 28%. System utilization continues to be robust and our average consumable revenue per installed RS II system exceeded a $130,000 per year on a rolling 12 month basis. Instrument revenue for the quarter was $5.2 million compared to $8.6 million in Q4 or 2014. For the full year, we generated approximately $19 million in instrument revenue compared with $22 million in 2014. For both the fourth quarter and the year, we had fewer installs of RS II system than we had in 2014, reflecting our transition to the Sequel System. And we just started shipping Sequel instruments at the later part or in the later part of Q4. Finally, we’ve reported a net loss of $1.4 million for the quarter and a net loss of approximately $32 million for the year. This represented a significant improvement over the $66 million loss recorded in 2014. Now I’d like to provide some observations and insights on our recent Sequel product launch. The 49 systems orders we received in Q4 were higher than we expected. While, we anticipated seeing healthy demand for Sequel Systems, the immediate uptick has been gratifying. The average sales cycle time for the Sequel System appears to be much shorter than it has been for the RS II system. While it is still early on Sequel introduction cycle to project future demand for Sequel, we are very pleased with the fast start and our order pipeline continues to be robust. We began shipping and selling Sequel Systems in December and we are diligently working through an initial burning period with those sites before we open up shipments to a broader set of customers. As expected, we are iterating the software rapidly to work out early bugs that are surfaced. We plan to start shipping to additional customers soon still at a moderate pace this quarter to ensure that we can provide a high level of sport to customers during the continuing burning period for the Sequel System. The manufacturing ramp is on track for instruments, smart cells and reagents. With regard to instruments, our shipping rate in not being gated by manufacturing supply but rather our comfort level in shipping to a larger number of customers as I descried earlier and we are comfortable shipping high qualities of instruments, we have the manufacturing capacity to meet demand. With regard to smart cells, the gaining factor to our manufacturing ramp is bringing up our high volume chip supplier in Asia. For the first half of this year, we are sourcing the chips from our prototype vendor in Belgium. We continue to expect to shift the supplier smart cells to our high volume supplier in the middle of this year. One last comment I’d like to make regarding the ramp. Having launched new sequencing systems before, in particular the fact by RS in 2011 and seeing the pitfalls are trying to go too fast, we are adopting a very discipline approach to the Sequel launch. Some customers may not receive systems as quickly as they would like, however, we believe an orderly ramp of deliveries is more important than pushing too many systems into the field too early. We expect that the order backlog may continue to grow for a while, however, we are confident that we will be in a good position in the second half of this year, so that customers will not need to wait too long to get their systems after ordering. While our Sequel launch is still in its early phase, we are already exploring longer term expansion of a sequencing capacity through even higher multiplex smart cells. Our long term goal is to continue to reduce the cost of truly whole genome sequencing and thereby simplifying the task of obtaining the complex set of information required to understand the effects of genetic structure. Smart sequencing has a capability to allow scientists in one sequencing run to obtain de novo genome assembly, single nucleotide analysis, structural variant analysis, haplotype phasing and genetic information - sorry - epigenetic information. Today short-read sequencing methods require combinations of multiple sequencing experiments and specialized sample preparation techniques to provide each one of these analysis often with less into our results, making the cost of whole genome analysis much higher than the off quoted number of a $1,000. Now I’d like to provide an update on our activities with Roche. We have shipped them a number of Sequel instruments for their internal use and they are in the burning phase with those instruments similar to our other early Sequel customers. Roche continues to invest a significant amount of resources preparing for the, expect to launch of their Sequel based clinical research instrument in the second half of this year. Our team at PacBio has been providing train to their support personal in order to equip them with the tools and expertise they need to support their customers. We expect to continue having cross functional coordination activities with Roche up to the time they launched beyond. Next week PacBio and Roche are hosting a joint workshop at the AGB Team Meeting in Orlando. Invited speakers for the workshop will address both research and clinical applications for smart sequencing. As usual, we are looking forward to hearing our customer described their smart sequencing results of the AGB Team Meeting as there will be over 40 presentations and posters featuring PacBio data. I’ll finish up with a brief reflection on our accomplishment this past year of PacBio. At beginning of the year we had set some challenging goals for our team to meet. Among those goals where to drive usage of the PacBio RS II platform, obtain ISO 13485 certification, achieve the balance of the Roche development milestones and of course successfully launch the new Sequel system. The PacBio team did an excellent job this past year to achieve all of these goals. Importantly this has positioned us well to make 2016 a pivotal year for the company as we’re able to see highly capable products that can move us to closer to profitability and we’re poise to enter into the clinical market through our partnership with Roche. There is plenty more work to do with equally challenging goals for this year but we’ve never been more excited about the opportunity before us. That concludes my initial remarks. I’ll be back with our 2016 guidance. But first, I’ll turn it over to Susan to provide more details on our financial results.

Thank you, Ben, and good afternoon everyone. I will begin my remarks today with financial overview of our fourth quarter that ended December 31st, 2015. I will then provide details on our operating results for the quarter and full year 2015 as a comparison to the same periods last year. I will conclude my remarks with a brief discussion of our balance sheet. Starting with our fourth quarter and full year 2015 financial highlights, during the fourth quarter, we’ve recognized revenue of $36.3 million and a net loss of $1.4 million. This brings our 2015 total revenue to $92.8 million and net loss to $31.7 million. Q4 2015 revenue of $36.3 million was up $19.4 million from the $16.9 million recognized in Q4 of 2014. 2015 total revenue was $92.8 million was up $32.2 million from the revenue of $60.6 million recognized in 2014. Breaking down the revenue, instrument revenue quarter-over-quarter was down from last year with $5.2 million recognized in Q4 2015 compared with $8.6 million recognized in Q4 of 2014. For the full year, instrument revenue was $18.7 million in 2015 also lower than the $22.1 million recognized in 2014. As Ben stated earlier, the instrument revenue decrease reflects the transition from RS II to Sequel which resulted in a combined effect of fewer RS II System installs in 2015 versus the prior year and have limited number of new Sequel Systems installed in Q4 of 2015. Consumable revenue increased to $4.6 million in Q4, up from $4.3 million reported during the fourth quarter of 2014. For the year, consumables revenue increased 43% to $18.8 million in 2015 compared to $13.2 million in 2014. Service and other revenue increased 26% to $2.9 million in the quarter compared to $2.3 million in Q4 of 2014 and increased 28% in 2015 to $10.9 million versus $8.5 million in 2014. Contractual revenue recognized this quarter was $23.6 million which was $21.9 million higher than the $1.7 million recognized in Q4 of 2014. For the year, contractual revenue was $44.4 million, $27.6 million greater than the $16.8 million recognized in 2014. This increase relates to both the timing and achievement of the Roche milestone revenue and the changed in the amortization schedule related to the upfront payment from Roche. We’ve recorded $10 million as milestone revenue in the third quarter of 2014. In 2015, we’ve recoded another $10 million in the second quarter and then field $20 million in the fourth quarter. In addition to the higher milestone revenue 2015, we’re revised our amortization schedule related to the upfront Roche payment of $35 million, which resulted an additional contractual revenue of $1.9 million per quarter in 2015. This revision reflects the increasing certainty, reflected the increasing certainly of the estimated development period for the Roche contract. Moving to gross profit and margin, we’ve generated a gross profit of $26.5 million in Q4 of 2015 represented a gross margin of 73%. This was up from the $4.4 million of gross profit and 26% gross margin recognized in Q4 or 2014. As with revenue, the increase in margin quarter-over-quarter was primarily a result of the $20 million Roche milestone revenue recognized in Q4 of 2015 which had a 100% margin. Gross profit for 2015 was $53.5 million represented a gross margin of 58%, compared with a gross profit in 2014 of $23.4 million with a gross margin of 39%. Gross profits and margins in 2015 have increased over 2014 level as a result of the growth of higher margin consumer revenue, $20 million of Roche milestone achievements in 2015 and the previously mentioned revision of the gross amortization revenue which had an incremental $7.6 million of revenue at 100% margin in 2015. Moving to operating expense, operating expenses in the fourth quarter of 2015 totaled $27.5 million, an increase of $5.2 million from the $22.3 million incur in Q4 of 2014. For the year, operating expense is decreased $3.7 million to $82.6 million in 2015 from $86.3 million in 2014. As a reminder, the decrease in our operating expenses for the year as a result of a onetime $22 million gain recognized in Q3 of 2015 associated with the amendment to our facility leases. Further breaking down our operating expenses; R&D expenses in the quarter were $14.7 million, $2.4 million higher than the $12.3 million of R&D expense incurred in Q4 of 2014. 2015 R&D expenses were $60.4 million, a $12.4 million increase over the $48.3 million of expenses in 2014. The R&D expense increase in 2015 has been a result of higher compensation related expenses as well as increase in consulting, product development and regulatory cost associated with developing the Sequel product. R&D expenses this quarter included $1.5 million of non-cash stock based compensation expense, $200,000 increase over Q4 of 2014. Sales, general and administrative expenses for the quarter were up $2.8 million from a year ago. In Q4 2015, we incurred $12.8 million of expenses compared to $10 million in Q4 of 2014. Yeah-to-day, SG&A expenses increased $7.2 million to $45.2 million in 2015, up from $38 million in 2014. The SG&A expense increased in 2015 has been a result of professional fees associated with our Roche milestone revenue and increase in non-cash stock based compensation expense in 2015 and higher headcount marketing expenses required to prepare for in launch our new Sequel product. SG&A expenses in this quarter included $2.1 million non-cash stock based compensation expense of $600,000 from the $1.5 million recognized in Q4 of 2014. For the year, non-cast stock based compensation expense increased $1.9 million in 2015 to $7.3 million versus $5.4 million in 2014. In the area of other income and expense, in Q4, we’ve recorded $350,000 of net interest and other expense primarily related to the debt we took out in Q1 of 2013. This quarter, our debt related expenses included $700,000 of interest in amortization expense offset by a $300,000 gain related to revaluation of the derivative related to the debt. Year-to-date, our net interest and other expenses have totaled $2.6 million. Ben will provide further guidance on our ongoing expense rates later in the call. Now turning to our balance sheet; in Q4, our cash investments increased $23.4 million to $82.3 million at year-end. The increase was primarily a result of receiving $20 million for achieving the final Roche milestone and the proceeds of $27.7 million from our ATM in the quarter. The increase was primarily offset by $6.1 million of payments and deposits associated with our new facilities leased. For the year, cash investments ended $90 million lower in the $101.3 million reported at the end of 2014. For the year, accounts receivable increased $1.8 million to $5.2 million at the end of 2015, up from $3.4 at the end of 2014. Other assets included on the balance sheet are $15 million of future payments due from our current landlord which will be deployed to asset cost associated without fitting a new facility we are scheduled to move in later this year. In 2015, inventory balances decreased $300,000 to $11 million at the end of 2015 from an $11.3 million at the end of 2014. On a related note, in 2015, we transferred $2.8 million from inventory to our fixed asset account as a result of RS II instrument leasing rates as we entered into with customers in 2015 it’s part of our product transition to Sequel. This concludes my remarks on the financial results for the quarter and I will like to turn the call over to Ben.

Thank you, Susan. I’ll now be providing guidance on our 2016 financial performance. As we previously reported, we booked orders for 49 Sequel Systems this past quarter. We will now be providing a forecast for future instrument bookings however; we are planning on continuing to report our actual unit bookings number in the near term as we believe it will likely differ materially from the instrument revenues we report for those quarters. Now starting with revenue, we’re expecting sales of Sequel Systems to drive significant growth in our product revenue this year. On the other hand, we do not have any more Roche development milestones to pursue this year, whereas last year, we’ve recorded a $30 million in revenue associated with the milestones achieved. In addition, the quarterly amortization of Roche contractual revenue is scheduled to reduce significantly in the fourth quarter this year as most of that original $35 million payment will have then been amortized. As a result, the $44 million in contractual revenue we recorded last year comprised up to $30 million in milestone revenue plus $40 million in amortization revenue is expected to decrease to approximately $11 million in amortization revenue this year. Despite this $33 million decrease in contractual revenue, we expect to make up for it with increased product and service revenue, resulting in approximately $93 million in total revenue again this year. Excluding all the Roche contractual revenue from both years, this equates to approximately 70% expected increase in product and service revenue year-over-year. In the near term as we’d mentioned in our press release last month and earlier on this call, we are planning to ship a limited quantity of Sequel Systems during the first half of the year and ramp up to higher shipments in the second half. As a result, our revenue in the first quarter will likely be flat compared to last year’s first quarter. We then expect revenue to grow sequentially each quarter this year as we increase the rate of Sequel instruments. We expect our consumable revenues to grow sequentially each quarter as well but as we saw this past quarter, this may be subject to fluctuation due to customer order patterns. Moving on to gross margin, last year our gross margins were benefited from the Roche milestone revenues that were recorded with a 100% gross margin. This year we do not have any Roche milestone to achieve and therefore our gross margin for the year is not expected to be as high as the 58% we achieved for last year. We expect our gross margin to be in low 40% in most quarters this quarter, in comparison, in Q1 of last year, we had no Roche milestone revenue and our gross margin was roughly 34%. The expected improvement in gross margin this year, excluding the Roche milestone revenue, stands from higher margins on Sequel instruments compared with RS II instrument. It’s important to note that our gross margin can vary due to revenue mix. We generally have higher margins on consumable revenues and instrument revenues and we have lower margins on product sales to Roche under our distribution agreement compared to product sales to our direct research customers. And finally in the fourth quarter this year, our gross margin may decrease when the amortization of contractual revenue is scheduled to decrease. Turning now to operating expenses, we plan to continue investing in product development projects to improve the performance of our Sequel platform this year. We are bringing up our high volume Sequel chip manufacture in the near term and we are beginning development work on chips with higher multiplex. We will continue to invest in chemistry and software improvements to enhance the performance of both Sequel and RS II Systems. We also plan to add to our field support team as our installed based gross. Offsetting some of these edit investments will be field prototype related expenses. So that in total, we expect our total operating expense to grow by approximately 5% this year compared to last year. This comparison excludes the onetime $23 million gain we’ve recognized in Q3 of last year associated with the amendment to our property leases. We estimate our non-cash stock compensation expense and depreciation expense to be approximately $4 million to $5 million per quarter this year. Finally with respect to our income statement, we expect to record approximately $3 million in net interest expense for the year. Turning now to our balance sheet and cash usage, we ended the year with about $82 million in cash and restricted cash on hand. We estimate that we will need to use approximately $60 million in cash to fund operations this year. While, our cash balances had a comfortable level now we will likely raise additional capital during the year. And with that we’ll open the call to your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Tycho Peterson of JP Morgan. Your line is open.

Hey thanks. I guess Ben, first question on guidance, are you including anything for Roche clinical royalties and can you maybe just give us some clarity on when do you expect to, maybe talk a little bit more about that?

Sure Tycho. So the arrangement is not a royalty arrangement, it’s more of a typical distribution arrangement. We sell them products and they in turn sell products to end customers. So included in our guidance is an estimate of some of the sales that we will make to Roche. Already we started making sales to Roche for their internal use of creating assays and we expect to continue doing that quite frankly in the near term before we shift over to selling them the products that they will in turn sell to their end customers as clinical research instruments.

Okay. And then I guess as we think about the funnel for Sequel, can you talk a little bit more about next few years you talked about in the preannouncement 40% of customers our systems going to new customer site, I am just wondering you know the degree you are getting interest from non-PacBio customers and if you could a little bit about kind of the mix of customers that are immerging in the funnel?

Sure. Yeah, we’re pretty pleased about that, it’s a broad range of customers as we mentioned geographically and across the different customer types, academic government and commercial. There were certainly initial buyers for the customers who were familiar with PacBio to buy systems because there were new about smart sequencing. That said, we’d certainly got quite a few words from people who were not previous RS II owners. So it’s even just to achieve the 49 bookings that we did, it was you know across both existing and new customers.

And the pipeline is just as vary as the orders we’ve talked about.

Okay and do you able to quantify how many went to Roche for asset development?

It was a handful.

Okay. And then just lastly on the manufacturing ramp, can you maybe just talk when you built-in partners going to start the ramping production and then how comfortably you are that built to hit their timelines?

We’ve been working with that development partner. Are you asking about Imac and the sense of that or you timeout the high volume tab?

The high volume tab.

We’ve been working with them for several months and they are hitting all the milestone. So that’s why we’re able to be confident that they could hit the goal of being ready for us in the second half of 2016.

Or it’s called middle of the year.

Yeah.

Okay. Thanks.

Thank you. Our next question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open.

Hi. So could you - I don’t know if you mentioned this before, I may have missed it, but do you expect installations to ramp off of the ten you’d planned to install in the fourth quarter sequentially or is that off of the six that you had in the fourth quarter?

Well, we planned to ship more on Q1 than we did in Q4, so you know we’re going to certainly install as many of those as we can. But just to make sure we set expectations properly. You know we’re going to ship a modest number at least this quarter and we want to make sure that we don’t ship too many too fast. So it is out intend to ship more in Q1 than in Q4, but it will still be let’s say a little bit of our strain rate. And then not too much after that we expect to be able to ship more and once the high volume just the players up and running that Sequel that pretty well and with when we feel more comfortable shipping to broader set of customers as well.

Right. And in the 40% that are of the bookings that are from new customers, do those new customers tend to take a longer to complete the installations than the preexisting customers?

No, we don’t have too many data points on Sequel. I mean the installation part is probably not going to differ materially from an existing customer versus a new customer because quite frankly the Sequel System is only one third the size of an RS II and so it’s probably not as involved in terms of facility readiness. But you know one thing to keep in mind and for us to keep an eye at on is the ramp of utilization that could differ because you know people who are more comfortable with smart sequencing might already have a number of products already queued up and so their utilization rate might get to a higher volumes faster than let’s say new customers.

Yeah, there is trend sample prep and bioinformatics and that’s why been better earlier that we would be investing in the field based upon installation of Sequel Systems.

Okay. And I think most of what we’ve heard has been very positive response in the Sequel and you had as you said yourselves that the 49 was much higher than what you’d anticipated. Can you describe some of the issues that customers have had so far with the Sequel, have they largely been minor software issues or some firmware failures or any problems with components and how is that compared with what you had expected?

Well you know we actually only start shipping in December, so actually it hasn’t been a long and has been with a small number of customers. You know in the sense the kinds of issues that were encountering are one that you might typically expect and they are predominantly software related and that’s why we mentioned more than ones that we plan on iterating the software quite rapidly in Q1. So it’s - a burning period is a way we’re describing it, it’s probably going according to most people would have expected it to go. And we’re just trying to be prudent about how we you know roll thing out. We know there are pitfalls are trying to go too quickly with too many people and that usually results in disappointing some folks. So there is some customers who are anxious to get their systems, we realize that. But we think we are going to be better off in the long term to be more modest about the shipments this quarter then we could ship. So we don’t plan to ship you know all that backlog now.

And then communication is very strong between those early customers and PacBio and we’re pleased with the iteration back and forth. So we don’t want to lose that learning in the process.

Okay, thanks a lot.

Thank you. Our next question is from Amanda Murphy of William Blair. Your line is open.

Hi, thank you. As I guess this is a follow-up to Bryan’s question. Ben, in terms their performance I realize it’s early but you had also talked to the ability to scale up the performance more rapidly on the Sequel vis-à-vis the RS II. So again that putting the cart before the horse that I see but just when should we expect that type of ramp up on the people, is that something that might happen in 2016 or is that more of a 2017 type event?

Well, probably what we’ll see in the first part of 2016, we are working on making the Sequel System robust so that’s certainly the focused. But there are going to be software and chemistry improvements throughout the year on both Sequel and in the RS II by the way, so we plan on asking the performance of both. The new lever that we have with Sequel that we didn’t have with the RS II is being able to work on a higher multiplex chip and so we are starting working on the higher multiplex chip. Those kinds of projects are multiyear projects though. So that’s not something that you are going to see you know output in 2016.

Well I think you can now revenue guidance and then just talk about the guidance that we do expect similar throughout year-over-year to be significant and that’s the result of being to be deploying the Sequels and have them used in a certain amount of volume.

Yea, okay. And then more side of the world, when should we be looking for initial data coming off the Sequel that’s something that might happen next week or is it just too early to get an kind of early user feedback?

We are probably not kind of get a lot of user feedback because it is very early but, Jonas Korlach, our Chief Scientific Officer will be presenting some Sequel data in his workshop on Saturday afternoon at AGBT.

Got it. Again and two more from me on, first on utilization, again recognizing it’s early but given that comments on RS II that you made on the utilization, is that - give an sense at this point how we should think about modeling utilization on the Sequel, you know I know you point its view that difference between new and any kind of existing customers that just on modeling perspective, how we should think about that as we ramp through 2016?

Yeah, you know our - I think it’s maybe easier to model the steady state than the near term because the near term has you know these moving parts of installs and you now timing of people out to speed. In the long term, we think the pull through revenue on the Sequel System is going to higher than it is in the RS II for reasons that we said before. But in the near term, when you have period of time when you actually are installing quite a few systems, then the you know the modeling is not so much about the average freight system but you know modeling you know when can systems that should get up and running. So typically people have to get the system installed and run it for a little bit before they start buying higher quantities of consumables. So it’s a - you know the modeling is usually more about that then it is what is the sort of steady state run rate for an install system.

Got it. And then the last one, you’d talked about and I am sorry if I missed this, but you talked about quarter about some of your agent rentals, so are you still doing that down for people who can’t get the Sequel or do you have any sort of train for them that you are thinking about putting in place?

Yeah, we - I don’t think we do what people of as region rentals. What we did is with the handful of customers, we offer them the ability to rent RS II systems. And so on season point under script that there is something in the balance sheet in the now fixed asset area they has to do with $2.8 million of inventory doing into fixed assets. That had to do with this handful of customers that we offered RS II rentals to. But we haven’t gone into quote sort of reagent rental models.

Got it. And then how about the trading program going forward, anything that you have, thoughts around there?

Right now with such a backlog in place in building, we do not have a formal trading program later once we get through that backlog and there we see a demand for and we may respond to the market at that point. So we have no plans currently.

Okay, thanks very much.

Thank you. [Operator Instructions] Our next question is from Bill Quirk of Piper Jaffray. Your line is open.

Great, thanks. Good afternoon, everyone. First question Ben, on the guidance, can you help us think a little bit I guess about the kind of consumables versus instruments next coming year?

We expect significant revenue growth on both. So the - in the Sequel instrument shipment themselves kind of certainly drive a lot of instrument revenue growth. And roughly speaking, the RS II install base even that if there is sort of a steady state kind of think. All of the Sequel Systems that we install in the consumables that they buy are going to represent incremental revenue there. So when we give the guidance of 70% year-over-year growth on products and service revenues, it’s really driven by both the instrument and the consumable revenue growth.

Okay, got it. And then regarding a comment about gross margin being in low 40s roughly each quarter this year, is it reasonable to assume that we should we see some sequential improvement as we go throughout the year or you sticking the kind of low 40s for pretty much every quarter?

Yeah, we have some competing things there Bill. I think one thing you would expect and I think we will have is improvements in gross margin just due to volume. We expect that to get those kinds of benefits. The things that could compete against that something are revenue mix. And so we don’t get as higher gross margin percentage on the instruments as we do the consumables. So if you have course where you sell more instruments, you mean I’d see the gross margin percentage increase even though the dollar would increase. And then I just wanted to point out, in the fourth quarter this year, there is a known thing that’s going to happen which is that amortization revenue which is a 100% that by enlarge almost disappears in the fourth quarter.

We do expect that maybe not in 2016 but long term we’ll even have stronger margins on the manufacturing and volume issues related to the gross margin, but we have to balance that against what percentage could be Roche business that went long term and it’s too early to tell about that which does have a different margin hit for us.

Okay, got it. And then I guess two more short ones for me. And that is, Susan, on this year’s SG&A, I certainly appreciate the stock based comp was up, but the number in aggregate was still up quite a big both year-over-year and sequentially. And so can you just I guess flesh that out a little bit, was there a lot of hiring to support Sequel launch both in terms of sales people as well as install tax by chance?

There was both a combination I think we highlighted on the call that there is - there were definitely more people not only in getting ready in the field to take the Sequel launch but the marketing around that Sequel launch and the vertical marketing to support to robust this that the Sequel market will address. So that’s in place as well if there were some professional fees and elements in the SG&A expense that were related to the worse transactions.

Okay, got it. And then I guess this last one from me is back to Roche and thinking about the consumables for Sequel, there is charge, will you be presumably shipping them some consumables to the whole as an inventory so that or they are going to placing orders directly through you and then you are going to shipping to the end customer?

We will ship to Roche and then - and we will recognize revenue when we ship to Roche and then Roche will in turn ship their customers. So it’s going to be a sell two relationship if that makes sense to as opposed to sell through.

It does, yes. Thank you very much.

Thank you. Our next question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open.

Hi, thanks for taking the follow-up. Just quickly, are you still booking orders for the RS II as from customers how aren’t going to be able to receive the Sequel for a while?

You know Bryan, we’re - we had three in Q4 and you know we will probably you know still see a small number, but it will be quite small we think in comparison with the Sequel because once the Sequel System is more widely available to people, just the performance parameter is in the relative cost would probably cannibalize to large extend future sales of RS II.

But the lease of instruments was only something you did for you a few customers at the beginning of the fourth quarter right, you are not still doing that?

Well they are leasing arrangements which could still over from quarter-to-quarter, but we’re again talking about just a handful of transactions.

Okay, thanks a lot.

Thank you. And that does conclude our Q&A session for today.

Okay, thanks everyone. In closing, we remain set fast in our commitment to bringing the unique advantages of our smart technology and products to our customers and the scientific community in general. We believe the smart sequencing provides the industry’s most complete and accurate picture of genomes to do a superior performance and sequencing accuracy, uniformly coverage, extremely long re-links and ability to characterize DNA modifications. Furthermore by providing scientist with an ability to obtain a comprehensive set of sequence information within a single experiment, smart sequencing is often the lowest cost and only research tool available to meet their needs. We are very excited about our new Sequel System and the opportunity that presents for us to deliver smart sequencing to much broader set of customers. Our focus for the next quarter will be to make the Sequel System robust and reliable at early customer sites and to ramp up our production Sequel instruments.

Thank you joining us.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.