Pacific Biosciences of California, Inc. (PACB) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Pacific Biosciences of California Fourth Quarter 2019 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] As a reminder, this conference call may be recorded.I would now like to turn the conference over to Trevin Rard. Thank you. Please, go ahead.

Good afternoon and welcome to the Pacific Biosciences Fourth Quarter and Fiscal 2019 Conference Call. Earlier today, we issued a press release outlining the financial results we will be discussing in 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 Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer.Before we begin, I would like to remind you that on today’s call, we may be making forward-looking statements, including plans and expectations relating to our financial projections, products and other future events. You should not place undue reliance on forward-looking statements, because they 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 reports on forms 8-K, 10-K and 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 would like to turn the call over to Mike.

Thanks, Trevin. Good afternoon and thank you for joining us today. It's been close to a year-and-a-half since our last earnings conference call, as we were under contract to merge with Illumina for most of that period. Since we agreed to terminate the contract with Illumina at the beginning of this year, we are resuming regular quarterly earnings calls going forward.I'll start with some highlights of our Q4 and full year 2019 financial results. We generated $27.9 million in product and service revenue for the fourth quarter, up 43% from Q4 of 2018. This represents the highest quarter of product and service revenue in our history and was driven by sales of our Sequel II systems and consumables, which I will describe in more detail shortly.For the year, our product and service revenue grew 16% from $78.6 million in 2018 to $90.9 million in 2019. Instrument revenue for the fourth quarter was $15.3 million, up 134% from Q4, 2018. For the year, Instrument revenue was $45.1 million, up 58% from 2018. The growth in instrument revenue was driven by strong sales of our new Sequel II system. We ended the year with an installed base of 114 of the Sequel II systems.Consumable revenue for the fourth quarter was $9.3 million, down 6% from Q4 2018, but up 35% sequentially from Q3 2019. For the year, our consumable revenue totaled $32.6 million, down 14% compared with 2018. Our consumable sales this past year were heavily impacted by customers decreasing usage of their older Sequel I systems in favor of acquiring Sequel II systems.While we expect more customers to move from Sequel I to Sequel II this year, the headwind to consumables revenue growth should be less pronounced, as sales of Sequel II consumables already comprised over half of our total consumables revenue in the fourth quarter of 2019.Gross margin for the fourth quarter was 46%, up from 29% in Q4, 2018, and up from 32% in Q3, 2019. This represents the highest quarterly gross margin in our history, excluding periods when we recognize collaboration revenue from Roche at 100% margin.Per the terms of the merger agreement with Illumina, we received $18 million from Illumina during the fourth quarter, which we recorded as other income. As a result, we came within $100,000 of breaking even for the quarter. We maintained the balance of cash and investments at the end of the year close to $50 million. Ben will provide more details on our cash position going forward later in the call.Now, I'll provide a few comments regarding the termination of our merger agreement with Illumina. We originally signed the merger agreement on November 1, 2018. I spent the better part of 14 months, providing information to and answering questions from the antitrust authorities in the U.S. and the United Kingdom. The review process was taking longer than either we or Illumina originally expected. By the end of 2019, having already spent close to $20 million on outside legal and professional fees or sales related to the merger, we did not know how much longer it could take, nor do we predict with much certainty what the eventual outcome would be.With this in mind instead of continuing to pursue clearance with both regulatory bodies, on January 2 we agreed with Illumina to terminate the merger agreement. We received a $98 million reverse termination fee from Illumina that same day and we've been receiving from Illumina the continuation advances that were previously described in the amended merger agreement.In total, by the end of Q1 this year, we would receive $150 million from Illumina in conjunction with the merger agreement and the termination of the agreement. While we were disappointed that the merger could not be completed, today we are in a good financial position to continue driving the business forward. Meanwhile, during this past year, we maintained a focus on running PacBio as an independent company and we are proud of the many accomplishments we achieved during that time.I'd like to highlight some of those accomplishments here. The launch of the Sequel II System was a success by a number of measures. At the start of last year, we began with an early access program with five customers and smoothly progressed to a general commercial launch in mid-April. By the end of December, we had an installed base of 114 Sequel II Systems, which represents the fastest ramp of a new system in PacBio's history.One of the most important measures of success for us was system reliability. We wanted customers to experience a highly reliable system from the start with minimal downtime and we exceeded our targets and customer expectations. Our early access customers, we have lots of experience breaking in new products, commented on how seamless it was for them to integrate their Sequel II Systems into their sequencing operations.A common message from them was that, it worked right out of the box which was a pleasant surprise for some of these sophisticated users of sequencing systems who had experienced significant issues with the initial launch of our earlier RS and Sequel I Systems. The Sequel II System's performance as measured by sequencing yield per SMRT Cell has also matched or exceeded our initial projections and the expectations of our customers.By the end of 2019, users on average were generating 15 times the amount of data per SMRT Cell, compared with yields on their previous Sequel I Systems. Several customers have been so pleased with the quality and throughput of data that they have already purchased additional systems within just a few months after receiving their first Sequel II units. The only drawback we've had from our successful launch of the Sequel II is it dramatically cannibalized our sales of Sequel I consumables.By the fourth quarter of 2019, Sequel I sales contributed only 10% of our instrument sales and less than 40% of our consumable sales. While the rapid decrease of Sequel I consumable sales limited our overall revenue growth in 2019, the increased performance of the Sequel II Systems is allowing us to access a broader set of larger customer sequencing projects than we could have with the Sequel I. Sequel II consumable sales have exceeded our early projections and as noted earlier, have now eclipsed Sequel I consumable sales.The benefit to customers of increasing our system throughput is that it brings down the cost of sequencing with our technology, thus allowing SMRT Sequencing to play a significant role in many larger well-funded projects. The Wellcome Trust Sanger Institute, which is heading the Darwin Tree of Life Project, is targeting to sequence 66000 species of plants and animals in the United Kingdom. With the power of the Sequel II Systems, they are setting up their pipeline to start doing so in volume. We are working closely with the Sanger group to improve the sample preparation protocols used to prepare sequencing libraries for SMRT Sequencing.One of these improved protocols has been used to produce reference level de novo assemblies from individual specimens as small as a single tiny insect such as a mosquito. Other programs including those at HudsonAlpha, The USDA, Jackson Labs, HistoGenetics and Annoroad in China focused on a variety of human plant and animal projects have also significantly expanded their sequencing programs based on the Sequel II System's increased performance.Moreover, we have begun to see greater use of our technology in larger-scale human whole genome projects both for the generation of high-quality reference genome assemblies and for the study of structural variants present in large populations.In conjunction with the introduction of the Sequel II System last year, we also began promoting PacBio's HiFi sequencing protocol for generating highly accurate long reads and it is quickly becoming a standard method for creating high-quality de novo genome assemblies and including the results from a number of other applications in SMRT Sequencing.HiFi Sequencing reads are based on the ability of SMRT Sequencing to sequence many times around circular DNA molecules generated in our sample preparation protocols. This allows generation of a highly accurate consensus sequence for an individual DNA molecule by unambiguous comparison of the repetitive read passes around the circle, even though the individual passes may themselves contain errors.The Circular Consensus Sequencing or CCS method used to obtain the HiFi reads has always been available with SMRT Sequencing and has been used to sequence shorter fragments with high single molecule accuracy in several applications.Our improvements in sample prep methods, sequencing chemistry and software now allow the CCS method to generate HiFi reads from single molecule DNA fragments up to 20,000 base pairs in link with an average accuracy over 99.9%. This accuracy is comparable to that obtained with short-read sequencing methods that operate on DNA fragments only 200 base pairs long and much higher than the typical 90% accuracy on individual reads from traditional long-read data.Starting with such high accuracy long reads make subsequent analyses such as de novo assembly much faster, requiring far less compute time and cost and it produces more complete, more contiguous final assemblies and starting with lower accuracy, but much longer reads.Moreover, use of the HiFi reads can produce consensus assemblies that are highly accurate at the base pair level greater than 99.999% or 250 without the need to polish with short-read data.Many sequencing projects involve DNA fragments of just a few thousand base pairs long. Examples include analysis of metagenome bacterial populations, evolving virus and tumor isolates, targeted gene panels and transcript isoform samples. In these cases HiFi reads with an average accuracy of greater than 250 can be obtained allowing discrimination of rare molecules with even a single base pair sequence variant in a large population of molecules with normal or close to related sequences.Another highlight for this past year is that we engaged with Berry Genomics in China to obtain regulatory clearance for and distribute our Sequel II System and consumables for clinical applications in China. Berry Genomics has had previous success with a similar partnership than it has with Illumina.Berry obtained clearance in China for an Illumina sequencer which it sells for clinical applications such as NIPT and is in the process of obtaining clearance for our Sequel II Systems for analyses suited to our SMRT technology.Berry has been an important customer of PacBio for several years providing sequencing services in China with both our Sequel I and now our Sequel II Systems. We are looking forward to working with them to bring PacBio products into clinical sequencing applications in China.Even though we began full commercial launch of the Sequel II System less than 10 months ago, we were able to release sample prep sequencing chemistry and analysis software upgrades in Q4 of 2019 that added to its initial performance. This year we plan a similar collection of upgrades to extend its performance parameters even more. These include chemistry improvements that should allow higher sequencing throughput, longer read lengths and faster analysis times.We're also working to streamline our sample prep protocols and to minimize even further the amount of starting sample DNA required to generate the sequencing libraries. We have continued to work with the Sanger to develop a sample prep protocol that could allow reference quality genome assemblies, using as little as 100 picograms of DNA. A picogram for reference is a millionth of a millionth of a gram. Such capabilities should enable such high-quality assemblies of a host of tiny organisms that scientists did not think amenable to long-read sequencing.We are also working with bioinformatics experts from several academic and commercial institutions to continue development of analysis software to take full advantage of our HiFi read characteristics. Anticipating successful completion of our acquisition by Illumina, we accomplished our results in 2019 without significant expansion of our sales and marketing organizations.With the initial success of the Sequel II System, we feel that we need to expand our investment in our commercial organization in order to take better advantage of the wider opportunities it opens up. Predicting the timing of the results of this expansion is somewhat difficult, because it takes time to both hire and train sales personnel to sell sophisticated sequencing systems such as the Sequel II.In the shorter term, we are still assessing the potential impact of the coronavirus outbreak centered in China on our business. Recall that China historically represented roughly a quarter of our total revenue base and that may be largely inaccessible until the outbreak subsides and normal commerce resumes.Nevertheless, we feel encouraged that with the dedicated efforts of our remarkable employee base and our cash resources, we are positioned for long-term continued expansion of our business. We feel strongly that our SMRT Sequencing technology is still early in the development of its capabilities and we are excited by our future opportunities as we continue to move it forward.That concludes my initial remarks. I'll now turn it over to Susan to provide more details on our financial results.

Thank you, Mike, and good afternoon everyone. I will begin my remarks today with a financial overview of our fourth quarter that ended December 31, 2019. I will then provide details of our operating results for the quarter and 2019 full year with a comparison to Q4 of 2018 and 2018 full year respectively. I will conclude my remarks with a brief discussion of our balance sheet.Starting with our fourth quarter 2019 and 2019 annual financial highlights. During the quarter, we recognized revenue of $27.9 million and incurred a net loss of $91,000. We ended the quarter with $49.1 million in cash and investments.Turning to revenue. The $27.9 million of product service and other revenue in Q4 of 2019 was $8.4 million higher or 43% above the $19.5 million of product service and other revenue we recorded in Q4 of 2018. Total annual product service and other revenue in 2019 was $90.9 million, up 16% compared to the $78.6 million recognized in the year of 2018.Breaking down the revenue. Instrument revenue recognized in Q4, 2019 was $15.3 million, up $8.8 million or 134% above the $6.5 million recognized in Q4 of 2018. Annually, instrument revenue was $45.1 million in 2019, up 58% compared to the $28.5 million recognized in 2018.Consumable revenue in the fourth quarter of 2019 was $9.3 million, compared with $9.9 million reported in the fourth quarter of 2018. For the year, consumable revenue was $32.6 million in 2019, compared with $37.9 million in 2018. Decline in consumable revenue from 2018 to 2019 has been primarily a consequence of our customer bases transition from Sequel I to Sequel II.Service and other revenue was $3.4 million in the quarter, compared to $3.1 million in Q4 of 2018. For the full year of 2019, service revenue was $13.1 million, an increase of $800,000 or 7% from the $12.3 million recognized in 2018. With regards to gross profit and margins. In Q4 of 2019, we generated gross profit of $12.9 million resulting in a gross margin of approximately 46%. This compares to gross profit of $5.7 million and 29% gross margin in Q4 2018. Total gross profit for the year in 2019 was $34.6 million with a gross margin of 38%. In 2018 gross profit was $25.1 million with a gross margin of 32%.Moving to operating expenses. Operating expenses in the fourth quarter of 2019 totaled $30.8 million compared to $36.4 million in Q4 of 2018. We incurred $1.2 million in legal and professional fees associated with the planned merger with Illumina during Q4 2019 compared to $4.7 million during Q4 2018.Total operating expenses for 2019 were $135.1 million, $9 million higher than the $126.1 million incurred in 2018. We incurred $14.1 million in legal and professional fees associated with the planned merger during the year 2019 compared with $4.7 million in 2018.Non-cash stock-based compensation included in operating expenses were $3.5 million in Q4 2019 versus $6.3 million in Q4 of 2018. Breaking down our operating expenses. R&D expenses in the quarter were $14.3 million down $2 million from the $16.3 million incurred in Q4 of 2018. Most of this decrease was related to the higher chip development costs for the Sequel II System incurred in 2018.R&D expenses for the year were $59.6 million in 2019 down $3 million from the $62.6 million incurred in 2018. Sales, general and administrative expenses in the quarter were $16.5 million compared to $20.1 million in Q4 2018. SG&A expenses were $75.5 million in 2019 compared to a $63.5 million in 2018. The increase in SG&A expenses from 2018 to 2019 was primarily as a result of an increased legal and professional fees associated with the planned merger.Finally in Q4 of 2019, we recorded a favorable $17.8 million of net other income compared to an unfavorable $100,000 of net other sales recorded in Q4 of 2018. The result -- this was a result of the $18 million gain related to the continuation advances received from Illumina in Q4 2019. Year-to-date, we have recorded a favorable $16.8 million in net other income compared to an unfavorable $1.6 million in net other expense in 2018.Turning to our balance sheet. As I mentioned at the beginning of my comments, our balance of unrestricted cash and investments was $49.1 million at the end of the fourth quarter compared with $49.2 million at the end of the third quarter. Inventory balances were reduced in Q4 to $13.3 million compared with $15.1 million at the end of Q3. Accounts receivable increased in Q4 to $15.3 million from $10 million at the end of Q3.This concludes my remarks on the financial results for the quarter. I'd like to turn the call over to Ben.

Thank you, Susan. I will be providing our financial outlook for 2020. I'll start by mentioning that we are in the process of developing our sales and commercial plan in the wake of the recent termination of our merger agreement with Illumina. We plan on adding to our commercial resources to drive revenue growth. However, it will take some time to bring on new team members and it typically takes more time to bring new people up to speed.Our goal is to drive consistent revenue growth in the long-term. We are not providing revenue growth estimates for the year at this time as our plans are still fairly fluid. Furthermore, the effect of the Coronavirus outbreak has added uncertainty around our sales into China. I will provide more color on this later in my prepared remarks.That said I will provide guidance on what we are seeing in the near-term. Starting with revenue in the near-term, we were pleased with our fourth quarter revenue which was driven by strong Sequel II System placements.Our system sales can vary substantially quarter-to-quarter as many of our customers face the timing of their capital purchases on budget cycles, government funding, and competitive factors. Based on these factors, we expect our Q1 2020 system sales to be sequentially lower than what we achieved in Q4. However, we are targeting significant growth in Q1 system sales compared with Q1 of last year.With regard to consumable sales, we were pleased to see nice sequential growth in the fourth quarter as the declines in sales of Sequel I consumables were overtaken by the growth in Sequel II consumables.For Q1 2020, however, we expect our consumable sales to be sequentially lower than our Q4 consumable sales. Under normal conditions, the Lunar New Year holiday traditionally causes seasonal declines in our Asia shipments.Due to the coronavirus outbreak, we are expecting a more pronounced negative impact to our sales in China this quarter. Many businesses in China are temporarily closed at this time and the Lunar New Year holiday in many Chinese regions has been extended through February 9th. The full impact of the coronavirus on our sales into China is yet to be determined.Overall, for Q1 2020, despite the headwind on our consumable sales, we are expecting growth in total revenues as compared to Q1 of 2019, driven by the system sales I mentioned earlier. Beyond Q1, we are targeting our consumable revenues to grow sequentially quarter-to-quarter, driven by expected growth in Sequel II consumables.Moving on to gross margin, we were pleased to see the improvement in our gross margin during the fourth quarter. The higher revenue for the quarter had a positive impact on gross margin as our fixed costs were absorbed across a higher -- or excuse me, a larger revenue base as compared to previous quarters.With lower sequential revenue expected in the first quarter, our gross margin for Q1 is likely to be lower than what we recorded in Q4. Once quarterly revenues come back up, gross margin should follow. Overall for the year, we expect our gross margin percentage to be in the mid-40s.Now, moving to operating expense. Last year, we recorded a total of $135 million in operating expense. As part of that total, we spent approximately $14 million in legal and professional fees associated with the planned merger with Illumina and we do not expect these expenses to recur this year.However, as I mentioned earlier, we are planning to make investments in our sales and commercial areas over the course of the year. In addition our patent infringement case against Oxford Nanopore is scheduled to go to trial next month in the U.S. district court in Delaware. As a result, our operating expenses for Q1 may be sequentially higher than what we recorded for Q4.Finally, regarding our cash, we ended the year with $49 million in cash and investments on hand. On January 2nd, we received $98 million from Illumina in connection with the merger termination from which we expect to pay our financial adviser associated fees of approximately $10 million.We have also received $28 million so far this quarter from Illumina and are scheduled to receive an additional $6 million in March in connection with the previous terms of the merger agreement.Earlier this month we paid off the $16 million in debt to Deerfield that have matured and scheduled. At the end of Q1, we expect to have cash and investments on hand of over $125 million.That concludes our prepared remarks and we will now open the call up for questions.

[Operator Instructions] Your first question comes from Bill Quirk of Piper Sandler.

Hi, good afternoon. This is Rachel on for Bill. Thanks for taking the questions and congrats on the quarter. So, how should we think about placements for 2020? And then going off of that how should we think about consumables pacing over the course of the year? And then I have a follow-up as well.

Yeah. This is Ben. So as I mentioned placements can vary quarter-to-quarter, I think they have in the past and no reason to believe that that's not going to happen again. In the near term, as I mentioned, we expect Q1 placements to be lower than Q4, which is not that unusual from a seasonality perspective. Beyond that, as I mentioned before, we are still working on expanding our commercial organization, and so we're not necessarily giving specific guidance on total revenues for the year, and in particular on placements for the year.

Got it. Thank you. And then, what percent of Sequel Is do you expect will be upgraded or traded in for Sequel IIs?

I would say that -- I would say most of the sales and the 114 installs that we had in 2019 were to existing customers. And so, that gives you a sense that whether a customer was upgrading or just buying an additional system, a lot of those folks did so in the first year. We expect that to continue into this year, but we also expect maybe a larger percentage of our sales to be going to new customers this year. I don't have at the top of my head the number of remaining customers who have Sequel Is who have not yet bought a Sequel II.

It's still a substantial number. We focused on the customers that we knew had the sample requirements quickly -- as quickly as possible to justify the increased throughput that you get off to Sequel II, and those have done very well with it. And even ones in certain areas who had a fair number of Sequel Is, have more or less shut down their Sequel Is, as they've converted over to an almost equivalent number now of Sequel IIs. So, they've dramatically expanded their output.We see that happening in a continued way with a lot of those customers who now have more Sequel IIs than they had Sequel Is, which is a good thing. With a lot of the remaining Sequel I customers, they were relatively lower usage. So, it's one of the reasons that we got hit pretty hard last year in terms of Sequel I consumable sales going down. People the minute they saw the improved throughput of the Sequel II systems, they just basically shut down a lot of their older ones.And now, as they've begun to ramp up their number of samples and larger projects, we're getting quite reasonable pull-through for each instrument and already in a lot of those cases the number of Sequel IIs, as I said, has exceeded what they had with Sequel Is. And so, we would look both for getting new customers as well as to continue to expand the operations at the older Sequel I larger customers in particular.

Thank you. [Operator Instructions] Next question comes from Doug Schenkel of Cowen. Your line is now open.

Hey. This is Chris on for Doug today. Thanks for taking my question. I appreciate predicting the timing of the commercial organization expansion is difficult, but can you give us any parameters on the size of the investment required to address the Sequel II opportunity? And relatedly, are you actively in discussion or open to the possibility of entering into a commercial partnership with a larger company that could support the sales effort?

I can go first, and then Mike can go second. So to answer the first part of the question, we haven't specifically quantified the investment. We certainly have open requisitions now to add to the sales team and we expect that to be pretty much something that goes on throughout the year, because as I mentioned before, it takes a while to hire people. So we'll be adding as we go along. I don't have the exact number for you.With regard to partnerships, I'll turn it over to Mike here. But one thing I will mention is the determination agreement that we had with Illumina does not preclude us from working with any third parties including with Illumina. So, we are no longer sort of, I guess constrained in any way to partner with other folks.

I mean, one of the things that we did as we were trying to do a long-time ago, a somewhat different scenario is go after areas like China, where a distributor partner, however, you want to define them in China is essential to get into their clinical market where you have to operate through a Chinese entity. That deal is not exclusive. So, we're free to discuss even similar deals in China.And as Ben pointed out, the termination agreements put no constraints on us relative to other kinds of partnerships distribution deals or whatever with third parties even outside of China. That could include Illumina it could not. And so we'll look very carefully, whether it makes sense to do some of those things from an economic perspective, whether they add to what we can do as we also get a sense of how fast we're able to ramp up in our own commercial organization, which we've begun earnestly to put some plans in place.And we've started as Ben pointed out already to put out a substantially increased set of job openings both in the sales organization somewhat in the marketing organization that goes along with that, as well as in the field support people that on the science side are a key part of our ability to sell into the sequencing market.

Okay. Maybe a related follow-up question. While we know you were careful to run the company as a stand-alone entity practically speaking we have to imagine there were certain instances where that was probably a bit difficult given the Illumina situation. So with that in mind, how would you describe the state of the commercial team today? I guess, really is there any concern in terms of recent turnover if any?

Well, we did it as a commercial organization overall as a separate entity, because we were legally required to do so, right? Not that we didn't have some what-if planning going on with Illumina ahead of time that you're committed to do. But we made it very clear in both organizations not just in ours that we were separate companies until we weren't. And so we did our best to continue going as we would have done independently of the merger deal. And so – and our team did an amazing job of doing that. We introduced a major new product with essentially no hiccups that have performed very well.As we went through the numbers you've seen that. And we continue to do that. Our turnover rates last year were the lowest we ever had in a year. And we're now looking to expand not to contract. So we feel that, there maybe individuals who are looking really forward maybe to moving to San Diego, I don't know. But we're still planning on being able to expand our organization in the areas where on the commercial side it would make a bigger impact. And that's one as Ben pointed out, you have to go out with some degree of caution in terms of the timing that you could do that. It's not just that you could hire people, but certain areas like Europe. They're frequently under legal constraints, but how fast they can move a company even when you hire them. And so the timing of that is always difficult to predict. And then you have to layer on being able depending on who they are and who their background is the training period required to get them up to speed to sell a technology that they may not have been selling. So we feel comfortable that we can do that. We've had good – we've been able to hire sales reps even last year in certain areas. So it's certainly possible for us to do that.

Okay. And maybe for my last question, could you just provide a bit more detail on the mid-40s gross margin assumption? I think that was for the full year. Really, what are the key components to the expansion you expect in 2020? And how should we think about the revenue variability? Thanks.

Yeah. So the main lever there is the top line, trying to get a hint there by saying that in Q1 gross margin is likely to be lower than gross margin percentage that we had in Q4 because the top line is also expected to be lower. The biggest lever for us quite frankly is the ability to absorb the fixed costs with top line growth. And the fastest way for us to increase gross margin is to increase the `top line. The incremental contribution on additional sales, we said this in the past, it's greater than 50%.And so the more we can grow that top line, the faster we can pull up the gross margin. You saw that we got up to 46% this past quarter. And the key to get it to over 50% would be to just keep on growing that top line.

There are currently no more questions, at this time. I will now turn the call back to management.

Okay. So, in closing, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers in the scientific community.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, long-read lengths and ability to characterize DNA-based modifications.We are excited about our new Sequel II System. And the overwhelmingly positive feedback we have received from customers, who are using it. I'd like to acknowledge the team at PacBio, who did a fantastic job, designing and building the Sequel II products. And the folks who are continuing to market sell and support them.Thank you for joining us. And we look forward to talking again, in three months' time.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.