Standard BioTools Inc (LAB) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fluidigm fourth quarter and full year 2013 financial results 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 is being recorded. I will now introduce your host for today's conference, Un Kwon-Casado, Vice President of Corporate Development. You may begin.

Good afternoon, everyone, and welcome to the Fluidigm fourth quarter 2013 earnings conference call. At the close of market today, Fluidigm issued financial results for the fourth quarter and year ended December 31, 2013. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Following these comments, we will host a question and answer session.

Presenting for Fluidigm today will be Gajus Worthington, our President and CEO, and Vikram Jog, our Chief Financial Officer. This call is being recorded in the audio portion will be archived in the investor section of our website.

During the call and subsequent Q&A session, we will be discussing plans and projections for our business, future financial results and market trends and opportunities including, among others, statements regarding Fluidigm's anticipated acquisition of DVS Sciences, guidance regarding 2014 total revenue, operating expenses, stock-based compensation expenses, capital spending, and product margins, expectations for the development of the single-cell and production genomics markets, our future products and other businesses strategies, and future market conditions, prospects and growth opportunities. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results.

Risks relating to our business and operating results are contained in our quarterly report on Form 10-Q for the quarter ended September 30, 2013, and our other filings with the SEC, including our registration statement on Form 3SASR filed with the SEC on January 29, 2014. Additional information will also be set forth in our annual report on Form 10-K for the year ended December 31, 2013, to be filed with the SEC. We advise investors to review these risk factors carefully. Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law.

During the call we will present certain financial information on a non-GAAP basis. Reconciliation between GAAP and non-GAAP results are presented in a table accompanying our earnings results release which can be found in the investor section of our website. With that, I will now turn the call over to Gajus.

Thank you, Un. Good afternoon, everyone. Thank you for joining us today. We capped off 2013 on a strong note. In the fourth quarter we delivered record instruments and consumables revenue, record C1 and Single-Cell BioMark shipments, and positive operating cash flow. Looking back, we believe 2013 will be remembered as a pivotal year in the evolution and validation of the single-cell genomics market. The scientific community is increasingly recognizing the experimental bias introduced with analyzing heterogeneous bulk samples and migrating toward methods targeted at single-cell resolution. 2013 culminated with Nature selecting single-cell sequencing as the method of the year in December 2013.

Finally, last week we announced our transformative acquisition of an emerging company called DVS Sciences to enhance our leadership position in the single-cell analysis market. Following the acquisition, Fluidigm will offer a comprehensive portfolio of advanced technologies across single-cell genomics and proteomics and cement our position as a technology leader in single-cell biology.

In the fourth quarter, total revenues of $20.9 million grew 33% year over year. Full-year total revenue growth was 36% compared with our guidance of 32% to 34% provided on our last earnings call. We were pleased to see strong growth across both instruments and consumables as instruments grew 26% and consumables grew 48%.

At the end of 2013 we had a total install base of approximately 920 systems, of which over 300 combined C1 and BioMarks are designated for single-cell research. We believe we are tracking well towards our goal of approximately 700 Fluidigm single-cell systems by the end of 2015. Single-cell genomics revenue, which represented approximately half of the Fluidigm product revenues in the full-year 2013, nearly doubled year-over-year.

In 2014, we expect single-cell genomics to continue to be a strong growth driver albeit not at the pace of the growth in 2013 given more difficult comps. We forecast the overall single-cell genomics market should continue to grow at a CAGR of 50% beyond 2015 leading to a $450 million market opportunity by 2017.

We have seen strong initial interest in our single-cell targeted DNA sequencing workflow that was launched in the early access mode at the end of 2013. The newly introduced workflow provides a fully automated solution to isolate, image, stain, and perform whole genome amplification of up to 96 individual cells at a time. When used in combination with the Access Array system, researchers can profile up to 480 known mutations or targets across individual cells. This application should make a big impact in research fields that study somatic mutations in heterogeneous samples such as cancer.

We will be showcasing the C1 and our single-cell genomic solutions across DNA and RNA next week at the biggest sequencing conference of the year, the AGBT Conference in Marco Island, Florida. There will be five high-profile speakers presenting talks related to single-cell sequencing, including the opening plenary session talk by one of our collaborators at the Broad Institute.

Production genomics continues to provide additional market opportunity and diversification in terms of customer type and product mix. Consumables revenue driven by production genomics applications represented approximately 60% of our total consumables revenue in the quarter and was up over 60% year-over-year. We estimate our total addressable revenue opportunity at $285 million across Ag-Bio, bio banking, and clinical labs. While the total number of addressable customers is counted in the hundreds versus the thousands in our target research market, the consumables pull-through per system can be orders of magnitude higher than what we experience in research markets. In 2014, we will be making investments in additional dedicated sales people to focus on production genomics key accounts versus broad-based selling across our product portfolio.

In conclusion, we are extremely pleased with our 2013 performance but very much are looking forward to 2014 given the strong fundamentals within our organic business bolstered by our recently announced proposed acquisition of DVS Sciences. We believe we have a vast opportunity ahead of us given our unique technology profile across genomics and proteomics and intimacy with our customer partners to drive the single cell biology revolution. We have built a strong team and commercial infrastructure to scale with our growth and we are committed to building a great and lasting enterprise. I will now hand the call over to Vikram for a more detailed view of our financial results.

Thanks, Gajus. I hope you've all had a chance to review our fourth quarter 2013 earnings release. I will walk you through the operating results and highlights.

In the fourth quarter 2013, our product revenue grew 34% to $20.6 million. We had strong quarter for instrument revenue which grew 26% year-over-year to $12.1 million driven by sales of the C1 and BioMark systems. Single-cell genomics continues to be a strong growth driver for the Company and for instrument revenue in particular. Approximately 70% of the BioMark systems sold during Q4 were motivated by single-cell research.

Our total consumables revenue, both IFC and assays, was $8.5 million during the fourth quarter, an increase of 48% over the prior year's quarter. Chip pull-through in the fourth quarter was within our historical range of $40,000 to $50,000 per system per year for our analytical systems and higher than our historical range of $10,000 to $15,000 per system per year for our preparatory systems. The high utilization on the preparatory systems was driven by high throughput production genomics applications.

Given the trend over the last four quarters and our current visibility into future quarters, we now expect the chip pull-through of our preparatory systems to range from $15,000 to $25,000 per system per year. As mentioned in our investor call on January 29, annualized pull-through for the CyTOF platform, which will become part of Fluidigm following the closing of the DVS transaction, has historically ranged between $50,000 to $70,000 per system per year. The install base of approximately 920 instruments at the end of 2013 included approximately 530 analytical systems and 390 preparatory systems which include C1 systems.

Geographic revenues as a percentage of total product revenues for the fourth quarter were as follows: United States 44%, Europe 32%, Asia-Pacific 11%, Japan 10%, and 3% other. Net loss for the quarter was $3.9 million compared to a net loss of $3.6 million in the prior year fourth quarter. Non-GAAP net loss for the fourth quarter of 2013 was $1.1 million compared to the $2 million non-GAAP net loss for the fourth quarter of 2012. Please refer to the reconciliation of GAAP to non-GAAP information attached to the fourth quarter 2013 earnings release for details. Q4 product margins of 72% were in line with the year-ago period. For modeling purposes, I would continue to encourage you to think about our business as a high 60% product margin business.

Turning now to OpEx. Research and development expenses were $5.5 million in the fourth quarter of 2013 compared to $4.3 million in the fourth quarter of 2012 and $5 million in Q3 2013. The year-over-year increase in research and development expenses were primarily driven by increased headcount. SG&A expenses were $13.2 million in the fourth quarter 2013 compared to $10.6 million in the year-ago period and $12.1million in Q3 2013. The year-over-year increase in SG&A expenses were driven mainly by headcount and expenses related to the pending purchase of DVS. Stock-based compensation expense was $1.8 million in the fourth quarter of 2013 compared to $1 million in the fourth quarter of 2012 and $1.7 million in Q3 2013.

Now, moving on to the balance sheet. Total cash, cash equivalents, and investments were $86.3 million at the end of Q4 2013 compared to $82.8 million at the end of Q3 2013 and $83.7 million at December 31, 2012. We are very pleased to report that we generated $3.2 million of net cash flow from operating activities in the fourth quarter of 2013. This was driven largely by higher accounts receivable collections and, to a lesser extent, timing of vendor payments. Accounts receivable were $10.6 million compared to $12.4 million at the end of Q3 2013.

DSO at the end of the fourth quarter of 2013 was an all-time low of 45 days compared to 74 days in Q4 2012, an eclipse of 56 day mark set in Q2 2013. For modeling purposes, we continue to use a DSO of 60 to 65 days. Inventory was $8.1 million, up slightly from $8 million at the end of Q3 2013.

I'd like to now turn towards guidance. Please note that our financial guidance excludes the anticipated impact from the proposed acquisition of DVS Sciences. We are reiterating our revenue growth guidance for the full year 2014 to be between 23% to 28% over 2013 revenue of $71.2 million. We would like to remind investors that we have historically experienced seasonality in the quarterly pacing of our product revenue and product revenue in the first quarter has historically trended down sequentially from the fourth quarter of the previous year.

Operating expenses, excluding litigation settlement and acquisition-related expenses, are projected to be between $88 million and $90 million in 2014 compared to $67.2 million in 2013. In order to maintain a strong top-line growth and position us well for future success, we have decided to significantly accelerate investments in R&D and strength in our commercial organization by adding additional field applications, marketing, and technical support personnel, and targeting additional geographies for direct sales efforts.

Directionally, R&D expenses are projected to grow at a faster rate than SG&A expenses in 2014. We will provide updated operating expense guidance, including the OpEx impact from DVS Sciences, on our next earnings call.

Stock-based compensation expense is projected to be between $12 million and $13 million compared to $6.4 million in 2013. Substantially all of our stock-based compensation expenses are reflected in operating expense. And, finally, capital spending is projected to be between $7 million to $9 million compared to $3.4 million in 2013. 2014 CapEx projections include expenditures related to the move and expansion of our Singapore manufacturing facility. And, with that, I will turn the call over to the operator to open it up for questions.

(Operator Instructions)

The first question comes from Dan Leonard of Leerink.

Thank you. I was wondering -- hello? Hello, operator? Can you guys hear me?

I can hear you, Dan.

I'm having phone problems. Can you elaborate on the planned increase in operating expenses in 2014? Vikram, you gave us some color, but it was much higher than we were looking for. So, if you could just offer some additional.

So, I think given the increase we have experienced and the substantial momentum we have generated in single-cell biology over the last 12 months and more, we have decided to capitalize on the opportunities presented by that growth potential and decided to accelerate our investments in R&D. And roughly three-fourths to 80% of our expenditure in 2014 is in support of single-cell genomics.

Dan, I'd like to add that this is very much project-based. In other words, we are not peanut buttering on additional R&D spending looking for things to do. We identified very specific things that we could execute on that we felt were really going to move the needle. In fact, we did some of this in 2013 and that's why you saw us raise OpEx guidance during the course of the year and some of the performance of 2013 was a direct result of some of that activity.

Okay, I'm having phone problems, so I will let somebody else hop on. Thanks.

Bryan Brokmeier of Maxim Group.

Hi. Thanks for taking the question. With the introduction of single-cell DNA sequencing with the C1 and Access Array, should we expect to see a gradual decline in the percent of C1 sales that include BioMark HD will be a sharp decline, or should we continue to expect it to be in that 25% to 30% we have seen in 2013?

Hi, Bryan. It's Gajus. We haven't given any forward-looking guidance with respect to that percentage going forward, but just qualitatively we actually don't anticipate the utility of the BioMark to abate these new opportunities. So, what we think this will do is will stimulate more usage of single-cell genomics on the front end of next-generation sequencing, and that in order to perform work you'll still want to complement of the genomic solutions.

In other words, you're not just going to be sequencing and doing DNA work and then stopping. It will include DNA work, RNA work and indeed we believe will of necessity include proteomic work as well down the road. So, we don't expect that the utility, the BioMark, is going to abate at all. In fact, one of the things the BioMark does really well is genotyping and we haven't launched targeted DNA -- or targeted single-cell genotyping solution on the BioMark yet, but you can imagine that is something that we are certainly thinking about.

Thanks. Follow up to the question earlier, is any of these investments that you're making in R&D, is it entirely driven by the opportunity you see in the market, or is there any of it in response to competitive pressures or new entrants into the market or anything that you see there that you want to try and head off investments and traction by other companies in the space?

Bryan, it is all the former. It is all recognizing opportunities that we see by virtue of our intimacy with the scientific community and identifying specific invention work that is longer term. Some of these things are not a slam dunk. There is some risk associated with them. But if you could pull them off, they could be transformative.

And other things that are more engineering products like, for example, better software solutions that have a very clear need, but that is more of a matter than just turning the crank, so to speak. But really none of it is in response to competitive pressures. I have been asked that question many times, has the competitive landscape really changed much in the last year and to be honest, it really hasn't.

Thank you.

Doug Schenkel of Cowen and Company.

Good afternoon. So, my first question is what percentage of C1's were placed in Q4 with the purpose of using those C1's with sequencers? And how has this progressed over the course of the year?

Hi, Doug. It's Gajus. So, it has increased over the course of the year. We launched sort of a natural effect because we launched the mRNA-Seq application really at the very tail end of 2012, so it really only started to have an impact at the very, very end of the year and then grew throughout the year.

You actually don't have a specific breakdown of this, and it's actually getting harder and harder to tell, because customers that buy C1's on the front end of next-generation sequencing initially with -- sometimes with no intention have come around purchasing a BioMark are in fact doing that. That is one of the reasons why we had such a strong utilization in the fourth quarter; 70% of the BioMarks that we sold were intended for single-cell use. And, indeed, some of those were customers who bought C1's on the front end of next-generation sequencing but then came back around and bought a BioMark.

So, what that means is it is getting more and more difficult to tell when the C1's are being used purely for DNA sequencing. Generally, that has increased during the course of the year just naturally as a result of the protocols out for the course of the year, but I don't have a percentage for you in the fourth quarter, at least.

Okay. That is directionally helpful. So I guess with that in mind, a key driver to next-gen sequencing growth over the years has been reducing the end local cost per sample. So, if you look at Illumina and their recently announced new products and product enhancements, they're taking another step forward towards lowering the cost per sample and cost per data again.

I bring this up because if C1's are increasingly feeding sequencers and next-gen sequencing costs continue to go down, intuitively that would mean that the C1 associated sample prep costs would either increasingly account for a higher percentage of total assay costs, or you're probably going to have to lower costs commensurately. Could you just talk about this Dynamic, and whether you agree, and how you expect to manage your way through this over time?

Sure. So, there's a couple things. One is, you are right that the cost per sample, cost per cell to do this sequencing has come down a lot and it's not only because of -- well, actually the things that Illumina announced just recently, I think, have yet to really be felt or appreciated in the scientific community.

But to date it has been more about the fact that the biology and just the way that single cell mRNA-Seq in particular works. You need far fewer reads than anybody ever thought that you would. This has been actually a big stimulant to sales and to using single-cell gene expression via sequencing or mRNA-Seq more broadly because the cost per experiment is far more affordable than, I think, what people thought a year and half ago. So, that has contributed to the growth of the field.

Now, I think this biological effect is unlikely to show up as much in DNA sequencing as it did in RNA sequencing, so indeed we were really pleased to see Illumina's announcements, because frankly without a substantial reduction in cost, single cell -- whole genome sequencing, for example, would just be too expensive to engage in any meaningful way. I think even at $1000 per cell it's still a pretty pricey experiment, well, a very pricey experiment to be sequencing 100 individual cells at $1000 per genome.

The implication of this, as you point out -- well, you didn't point this out but I'll get to it in a minute, the implication is that targeted DNA sequencing is going to be much, much more popular at an individual cell level than whole genome single-cell sequencing, and it's going to be in the range of, if we get really lucky with some chemistry from -- that largely will come out of other third party vendors, that maybe you can do whole exome sequencing for less than $100. Even at that level, the contributor for the C1 is pretty low. It's a minority of the overall sample preparation cost.

So, I guess where we stand right now, we don't feel any pressure to reduce the cost on the C1 from a pure economic perspective as experiments are being done today. Now, the reason why that has going to change is the appetite for doing large experiments is going to change. And indeed we have customers already that are embarking on very large projects to the tune of 100,000 cells per sample.

So, when you get to that level, it isn't a matter of just reducing costs. Really, you need to think in terms of different configurations of chips, of different technology in order to substantially reduce the cost of not only the sequencing but the sample preparation. So, and we don't think it's going to stop at 100,000 cells.

We think it will -- single cell is one of these fields where there is a virtually unlimited appetite for the number of cells that the community would like to be able to handle and it has all kinds of ramifications beyond cost, software ramifications and what have you.

To summarize, to your question, there will definitely be a requirement for reducing the cost per sample as we move forward. It will really be driven a lot more by the requirement of the science and the requirement of the biology than it will be a comparison between the cost of the sample preparation and the cost of the sequencing.

Okay. And maybe one more. So, BioMark placements are clearly up year-over-year, but I think if we go sequentially through the year there is not a ton of growth. It does look like the pace of BioMark is being placed for non-single cell purposes has either plateaued or maybe even slowed versus earlier in the year, given the offset in growth associated with placing BioMarks for single cell purposes.

So, recognizing that most of the focus is increasingly on single cell, but also recognizing some of the competitive concerns in areas such as SNP genotyping and some digital PCR applications. I'm just curious how you're thinking about some of the non-single cell applications on the analytical side, how that's captured in guidance. And I guess going back to Bryan's first question about the mix of C1 driving BioMark placements, does your guidance continue to assume that there will be continued growth in the number of BioMark placements in 2014 versus 2013?

Thank you.

So, the main focus outside of single-cell genomics is production genomics. Indeed, these are opportunities where there are fewer numbers of aggregate instrument opportunities, but it is a great business because the pull-through per instrument, as I mentioned in the prepared remarks, can be literally orders of magnitude higher than what we experienced in a research setting.

So, those opportunities are different from single-cell in that this is not a brand new market we are enabling. These are established markets where we are taking market share and it's been effective. Production genomics had a very nice quarter in the fourth quarter and it definitely also contributed to growth in BioMarks. And it's a worldwide phenomenon, Europe, Asia, North America.

So, I would necessarily infer that we didn't have some sequential growth throughout the year from BioMarks. And also would also say we've only begun to scratch the surface of our opportunity in production genomics. Our penetration of the $285 million opportunity that we've outlined is quite small. It's a small percentage of that overall opportunity.

Now, going forward our expectation is the BioMark is going to continue to be what it established itself as, which is the preferred solution for doing gene expression profiling of single cells. And, again, this market is in a very early phase of growth and so we indeed expect BioMarks are going to continue to enjoy a lot of popularity with this field. And as they've also shown, they have shown amazing robustness in and around next-generation sequencing, as well.

So, our guidance certainly assumes we will have growth in the single-cell genomics market and also assumes that we have healthy some uptick in production genomics.

Peter Lawson of Mizuho Securities.

Just got a couple questions. I apologize if they've been addressed. Just wondered if you could help us a bit more around the SG&A, and how that's going to trend through the year, and R&D? And then does OpEx guidance include stock options?

To answer your last question first, yes, the OpEx guidance does include stock options, and we separately gave you the stock option, stock-based compensation expense in 2014 to be between $12 million and $13 million, and I also mentioned that substantially all of that is reflected in OpEx.

The other thing we said that directionally compared to -- in contrast to historical growth rates, directionally R&D is expected to grow at a much faster clip than SG&A in 2014.

What is (audio distortion)?

We haven't broken out the dollar amounts, but we did allude to the fact the rationale for spending the R&D was to capitalize on the momentum and continue to deliver on the momentum of single-cell genomics, and so roughly between 75% and 80% of the R&D efforts in 2014 will be devoted to single-cell genomics.

Just finally around DVS, when can you disclose what happened in Q4?

I'm sorry, could you just repeat your question?

Just around the DVS acquisition. When can you disclose what happened in Q4?

You mean the performance in Q4?

Yes. Exactly.

Subsequent to the audit, so when we filed our SEC filings last week they had been reviewed through the nine months ended September 30, 2013. So, once we get them under our belt, we will have the full year end statements audited and I think thereafter we will be in a position to disclose the Q4 results.

You can't give us any number around the Q4 number?

No, we are not planning on doing that on this call.

Thank you.

Bill Quirk of Piper Jaffray.

Good afternoon, everybody, Dave Clair in for Bill. I was just curious in terms of the CyTOF instrument, is there an opportunity for Fluidigm to develop a sample prep instrument to go in front of that?

Absolutely. There is a lot of technological synergy between our microfluidic capability and the analytic proteomic capability of the CyTOF technology.

I can't be very specific about that right now. One of the things that -- well, I guess I can give you one thing that we have talked about. Fluidigm has done quite a bit of work and we have published on this in doing microfluidic cell culture. And cell culture very, very often is upstream to cellular analysis of the type that you would do with the CyTOF machine.

By integrating cell culture together with the analytical modality there are things-- well, first off you could have much more tightly controlled and potentially much more sophisticated cell culturing which would allow you to do things like stem cell differentiation or test out therapeutics, or what have you, followed by single cell analysis. That's one thing that comes to mind immediately, but generally we are really excited about the technological synergy between our platform and the CyTOF.

Okay. Thanks for that. And then can you talk about the traction you're seeing in the bio banking and the clinical lab markets? And how many reps are you planning to add for the production genomics business?

Yes, we highlight those areas because we have seen meaningful traction in both of them. In the clinical setting it's quite varied by application. The access array has done quite well, particularly in this past year as a sample preparation engine on the front end of next-generation sequencing for a wide range of clinical applications, and we continue to see a lot of opportunity there.

The bio banking, maybe we think about that more broadly as sample identification. And bio banking is one of several different vertical market segments that require sample identification. You can think of it -- any entity that is running lots and lots of samples and needs to keep track of samples coming in the door and data going out and be able to link those two together has a requirement for sample identification.

And whether that be a clinical application or be an industrial application, bio banking is certainly one of them. You want to be able to tag essentially the attributes of the sample that you took in the door. Was it a 30-year-old Caucasian with cancer, or was it a 45-year-old person of Asian descent, that type of thing. There's a lot of information there that goes together with the sample.

In any case historically this has been done with physical labels and barcodes and there's a movement afoot now to switch to molecular bar coding reading off somewhere between 24 and 96 SNPs per sample and given that number of SNPs there is an astronomically huge, it would take several thousand earths of people before you would have two people that would overlap with the same SNP signature. So it's a really good way to keep track of samples. And we see that opportunity not just for bio banking, but really in a lot of different segments where sample ID is necessary.

We are adding people. We haven't disclosed how many that is, but it is not a huge number. The production genomics business is really characterized by a more limited number of opportunities as compared to research that require more B to B type selling, oftentimes a very high level. These can be vice presidents or C level folks who are running operations. But when they purchase, they turn on a huge number of samples.

Okay, and just one last one here. In terms of the R&D pipeline, it looks like you're obviously ramping up R&D spending quite a bit here. Is there anything we should be looking for in terms of new products this year?

Please stay tuned. The innovation engine of Fluidigm is running very strong and we don't announce new products until they are ready to go, but stay tuned.

Thank you.

(Operator Instructions)

The next question is from Sung Ji Nam of Cantor.

Was wondering if you could provide color around the timing for the single-cell whole exome sequencing and whole genome sequencing applications?

Yes, the single cell whole genome will be towards the end of the year and the single-cell whole exome will be more or less in the third quarter, say in the second half.

Great. And then going back to the production genomics business, was wondering -- you talked about the penetration is still very small. How competitive is that market and is your growth in that market largely coming from competitor displacements, or is the market itself growing at a fast rate? And then if you could also talk about switching costs, and if that is a hurdle for either of your competitors to displace you and vice versa? Thank you.

So, it's highly competitive market. It's an established market. As I mentioned in the prepared remarks, unlike single-cell genomics, this is not a market that we are creating. It's an existing market with our existing solutions typically already in place and already in use, so it's highly competitive.

And the overall market is growing but not by very much. There are some things like sample ID that are enjoying growth, but other things are probably in aggregate like maybe Ag-Bio that are probably actually down a little bit. So, our growth is not because the market is expanding, it is because we are displacing conventional technologies.

And, as you can imagine, that is not easy. So, we have to bring and we do bring a compelling solution to the table in order for an operations to decide if it's going to turn off of bank of instruments and switch to something like a BioMark. You have to have a very, very compelling value proposition.

Our rule of thumb is you have to be about an order of magnitude better, all things considered, in order for somebody to be willing to make a switch like that. We're fortunate we have that kind of advantage over the more conventional technologies, and those include things from other vendors and more traditional solutions. And sometimes solutions that are provided by next-generation sequencing providers, but are cumbersome and difficult and expensive on a per sample basis.

So, we win there by having a strong value proposition versus other solutions and by displacing the current install base. Now, the switching cost is high so that is why we have to be so much better in order for it to make sense. What happens when we get installed is that that switching barrier now confers to our benefit. And indeed our observation, and we have been in this market now for about half a decade, is that when people adopt they are with you for a long time.

Matthew Palmer of Oppenheimer.

First one is probably best directed at Vikram. For modeling purposes, how should we think about the long-term gross margins and operating margins? Do you still expect steady state operating margins in the high 20s to low 30s? And second to that, how does this answer change with the acquisition of DVS?

Hi, Matt. In terms of gross margins, we have consistently said you should use the high 60s as a modeling assumption for a variety of reasons that we have outlined before in the short term, having to do with the impending move in Singapore. And, secondly, we wanted the flexibility to keep dry powder to take advantage of price elastic markets. And thirdly, should we decide to get regulatory approval of any of our instruments that may have an impact on margins. So, for all of those reasons, we continue to encourage you and ourselves to use the high 60s as gross margin product margin.

In terms of operating margin, we have not really publicly disclosed that. We have talked about the fact we have best-in-class gross margins and there is nothing unusual about our business that should cause us to incur higher than industry average OpEx. So, we expect to be able to generate best-in-class operating margins, but since we're so close to the DVS acquisition, we will have more guidance that would take account of the DVS business most likely in our Q1 2014 earnings call.

Okay. Great.

On CyTOF, are the probes, theprice of the probes, are they significantly different from the fluorescent flow cytometry probe costs?

Yes, they are within range of that. There is a wide range of cost of fluorescently labeled probes to begin with. It depends on how exotic the antibody is, and it also depends on how many colors you are trying to do simultaneously.

The more colors you are trying to do and the more antibodies you are trying to then get to bind effectively, the more expensive everything gets. So, I think if you look at it that way, like the comparison of the metal conjugated antibodies versus the cost of attempting to do, say, a dozen or so fluorescently tagged antibodies, it compares favorably.

Thank you.

Tycho Peterson of JPMorgan.

Can you maybe just give a little bit of color on utilization assistance for sequencing versus typing and expression?

Yes, so you mean utilization of C1 systems, I assume you mean utilization of C1 systems for -- Tycho, was that the question? Sorry.

Sequencing versus typing.

Yes. So, the utilization for gene expression on the front of the BioMark is probably highest of all. The simple reason for that is that cost per sample is the lowest. And there are a couple of other effects too which is the time is much, much lower than it is to go through a sequencer and then finally the data analysis is the simplest. So, we see the highest overall C1 utilization in terms of the number of samples you plow through the machine in that mode.

Now, on a revenue basis though it's a little bit more complicated because the value per sample that we confer is actually higher as you start doing sequencing with it. So, even though the number of samples that go through the C1 to prep in order to do next generation sequencing -- in this case I'm talking about RNA, because we really haven't seen any effect in DNA sequencing even though the number of samples might be lower, number of cells that is, the value per cell is higher. So, in broad strokes it kind of tends to be awash.

And then on the UK grant, $250 million, how much of that do you think is split between single cell and other categories, and does DVS capabilities increase your chances of bigger grants going forward?

MRC didn't break out what the ratio would be between the three things that were funded. The other two things were -- one of them was medical imaging and the other was dementia. We made some qualitative remarks; of the three, the largest funding would be to one of those other two. So, it's probably less than one-third of that.

Having said that, unlike the MIH single-cell analysis common fund, they really specifically called out that they meant this funding could be used in large part for capital expenditures, as opposed to technology development. So it probably represents a richer opportunity for the vendors, and for Fluidigm in particular, as a result of that qualification. There is no question that CyTOF could play in nicely to these proposals.

It is not why we acted on this opportunity. We acted on the CyTOF because of the science that enabled what we were seeing from the customer base, the growth that they were experiencing and how synergistic their people and their culture and the technology was with ours. But there is no question that we expect folks from the UK to be putting in grant applications to acquire CyTOF.

Last one just on pipeline, anything you can say on a single-cell haplotyping? We've obviously seen publications on it, but how are you thinking about that opportunity?

You can do some of it already actually. Haplotyping generally is understanding if the SNPs that occur, do they occur on the same aleal or not? That is something that is very difficult to tell without -- what you can do, you can try the software but it's difficult to do unless you are actually reading SNPs off of the same molecule.

We can do some of that right now actually with the Access Array. It depends on how close the SNPs are to one another and if they need to be within a few hundred base pairs maximum in order to get that haplotype information, but it is something we can start to do right now.

As we move to whole genome, whole sequencing, we will be able to do even more of it. This is best done with long read technologies. So, something that has 1000 base pair read or even longer than that would make this application even more tractable. So, for that reason, we are interested in some of these new technologies that show some promise, but not a lot of data yet, that could have really long read lengths.

Thanks a lot. Congratulations on the quarter.

Bryan Brokmeier of Maxim Group.

Just a follow-up on the accelerated R&D investments. Are any of those due to better position your technology for CyTOF, such as the sample prep instruments that place ahead of it that you mention as a potential opportunity, and will we see a similar ramp in R&D by DVS in 2014?

So, we made our R&D plan and then budgeted. We were planning as a stand-alone enterprise, which really was the only -- just fluid, that was really the only assumption we could make because, you really can't ever count on an acquisition happening unless and until you have actually signed the documents. So, all of that R&D activity was directed at our own platform.

It turns out that some of the things we have prioritized, and I mentioned cell culture a few times, could be synergistic but it won't be immediate. It will be something that will require additional work to integrate with the CyTOF platform. I have to defer to -- I will just repeat what Vikram said a moment ago. Will be more fulsome about the combined OpEx and about DVS' OpEx for 2014 probably at our next earnings call or Q1 earnings call.

Thank you very much.

I am showing no further questions. I would like to hand the call back over to Un Kwon-Casado for any further remarks.

Thank you. We would like to thank everyone for attending our call today. A replay will be available on the investors section of our website. This concludes the call and we look forward to the next update following the close of the first quarter of 2014. Have a good evening, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.