Pacific Biosciences of California Inc (PACB) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California, Inc. fourth-quarter 2015 earnings conference call.

(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 FY15 conference call. Earlier today, we issued a press release outlining the financial results we will 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 reports on forms 8-K and 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 Investor 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 after the live call. I will now turn the call over to Ben.

Good afternoon and thank you for joining us today. We're pleased with our fourth-quarter results and our continued progress in driving growth in our business. In particular, the launch of our new Sequel platform has been extremely well received, which I will 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 3 RS II Systems during the fourth quarter.

The Sequel System orders came from a broad range of customers spanning academic, government and commercial entities and were well distributed across the US, Europe and Asia. Over 40% of the systems ordered represent new PacBio customer sites. We shipped 10 Sequel instruments to customers during the fourth quarter and completed the installation of 6 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 we 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 installed base grew by 28%. System utilization continues to be robust, and our average consumable revenue per installed RS II System exceeded $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 of 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 Systems than we had in 2014, reflecting our transition to the Sequel System. And we just started shipping Sequel instruments in the latter part of Q4.

Finally, we reported 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 we recorded in 2014.

Now I'd like to provide some observations and insights on our recent Sequel product launch. The 49 system orders we received in Q4 were higher than we expected. While we anticipated seeing healthy demand for Sequel Systems, the immediate uptake 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 early in Sequel's introduction cycle to project future demand for Sequel, we are 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 burn-in 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 have 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 support to customers during the continuing burn-in period for the Sequel System.

The manufacturing ramp is on track for instruments, SMRT cells and reagents. With regard to instruments, our shipping rate is not being gated by manufacturing supply, but rather, our comfort level in shipping to a larger number of customers, as I described earlier. When we are comfortable shipping higher quantities of instruments, we have the manufacturing capacity to meet demand.

With regard to SMRT cells, the gating 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 supply of SMRT 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 PacBio RS in 2011, and seeing the pitfalls of trying to go too fast, we're adopting a very disciplined 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're already exploring longer-term expansion of a sequencing capacity through even higher multiplex SMRT 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.

SMRT sequencing has the 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 analyses, often with less than desired results, making the costs of whole genome analysis much higher than the oft-quoted number of $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're in the burn-in phase with those instruments, similar to our other early Sequel customers. Roche continues to invest a significant amount of resources preparing for the expected launch of their Sequel-based clinical research instrument in the second half of this year.

Our team at PacBio has been providing training to their support personnel 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 launch and beyond.

Next week, PacBio and Roche are hosting a joint workshop at the AGBT meeting in Orlando. The invited speakers for the workshop will address both research and clinical applications for SMRT sequencing. As usual, we're looking forward to hearing our customers describe their SMRT sequencing results at the AGBT meeting, as there will be over 40 presentations and posters featuring PacBio data.

I will finish up with a brief reflection on our accomplishments this past year at PacBio. At the beginning of the year, we had set some challenging goals for our team to meet. Among those goals were to drive usage of the PacBio RS II platform, obtain ISO 1345 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 are able to sell highly capable products that can move us closer to profitability and we are poised 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 have never been more excited about the opportunity before us.

That concludes my initial remarks. I will be back with our 2016 guidance. But first, I will 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 a financial overview of our fourth quarter that ended December 31, 2015. I will then provide details on our operating results for the quarter and full year 2015, with 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 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 the combined effect of fewer RS II System installs in 2015 versus the prior year and only a 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 change in the amortization schedule related to the upfront payment from Roche.

We recorded $10 million as a milestone revenue in the third quarter of 2014. In 2015, we recorded another $10 million in the second quarter and the final $20 million in the fourth quarter.

In addition to the higher milestone revenue of 2015, we revised our amortization schedule related to the upfront Roche payment of $35 million, which resulted in additional contractual revenue of $1.9 million per quarter in 2015. This revision reflects the increasing certainty -- reflected the increasing certainty of the estimated development period for the Roche contract.

Moving to gross profit and margin, we generated a gross profit of $26.5 million in Q4 of 2015, representing a gross margin of 73%. This was up from the $4.4 million of gross profit and 26% gross margin recognized in Q4 of 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 100% margin.

Gross profit for 2015 was $53.5 million, representing 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 levels as a result of the growth of higher-margin consumable 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 expenses, operating expenses in the fourth quarter of 2015 totalled $27.5 million, an increase of $5.2 million from the $22.3 million incurred in Q4 of 2014. For the year, operating expenses 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 was the result of a one-time $23 million gain, recognized in Q3 of 2015, associated with the amendment through 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 an increase in consulting, product development and regulatory costs associated with developing the Sequel product. R&D expenses this quarter included $1.5 million of non-cash stock-based compensation expense, a $300,000 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 in expenses compared to $10 million in Q4 of 2014. Year to date, SG&A expenses increased $7.2 million, to $45.2 million in 2015, up from $38 million in 2014.

The SG&A expense increase in 2015 has been a result of professional fees associated with our Roche milestone revenue, an increase of non-cash stock-based compensation expense in 2015, and higher headcount marketing expenses required to prepare for and launch our new Sequel product. SG&A expenses in this quarter included $2.1 million non-cash stock-based compensation expense, up $600,000 from the $1.5 million recognized in Q4 of 2014. For the year, non-cash 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 recorded $350,000 of net interest and other expense, primarily related to the debt we took on in Q1 of 2013. This quarter, our debt-related expenses included $700,000 of interest and amortization expense, offset by a $300,000 gain related to the revaluation of the derivative related to the debt.

Year to date, our net interest and other expenses have totalled $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 in 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 lease.

For the year, cash in investments ended $19 million lower than 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 million at the end of 2014.

Other assets included on the balance sheet are $[50] million of future payments due from our current landlord, which will be deployed to offset costs associated with outfitting 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 $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 arrangements we entered into with customers in 2015 as part of our product transition to Sequel. This concludes my remarks on the financial results for the quarter, and I would like to turn the call over to Ben.

Thank you, Susan. I will now will be providing guidance on our 2016 financial performance.

As we previously reported, we booked orders for 49 Sequel Systems this past quarter. We will not be providing a forecast for future instrument bookings. However, we are planning on continuing to report for 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 revenues this year. On the other hand, we do not have any more Roche development milestones to pursue this year, whereas last year, we recorded $30 million in revenue associated with the milestones achieved.

In addition, the quarterly amortization of gross 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 of the $30 million in milestone revenue plus $14 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 a 70% expected increase in product and service revenue year over year.

In the near term, as we had 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 benefited from the Roche milestone revenues that were recorded with the 100% gross margin. This year, we do not have any Roche milestones 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 the low 40%s in most quarters this year. 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, stems from higher margins on Sequel instruments compared with RS II instruments.

It is 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're bringing up our high-volume Sequel chip manufacturer in the near term, and we're 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 base grows.

Offsetting some of these added investments will be fewer 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 one-time $23 million gain we 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 -- unrestricted cash on hand. We estimate that we will need to use approximately $60 million in cash to fund operations this year.

While our cash balance is at a comfortable level now, we will likely raise additional capital during the year. And with that, we will open the call to your questions.

(Operator Instructions)

Tycho Peterson, JPMorgan.

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 you expect to maybe talk a little bit more about that?

Sure, Tycho. So, the arrangement is not a royalty arrangement; it is more of a typical distribution arrangement. We sell them products, and they, in turn, sell products to their 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 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 [NexEE]? You talked about, in the pre-announcement, 40% of customers or systems going to new customer sites. I'm just wondering the degree you're getting interest from non-PacBio customers, and if you could talk a little bit about the mix of customers that are emerging in the funnel.

Sure. We're pretty pleased about that. It is a broad range of customers, as we mentioned, geographically, and across the different customer types -- academic, government and commercial.

There is certainly initial bias for the customers who were familiar with PacBio to buy systems, because they already knew about SMRT sequencing. That said, we've certainly got quite a few orders from people who are not previous RS II owners,. Even just to achieve the 49 bookings that we did, it was across both existing and new customers.

And the pipeline is just as varied as the orders we've talked about.

Okay. And are you able to quantify how many went to Roche for assay development?

It was a handful.

Okay. And then just lastly, on the manufacturing ramp, can you maybe just talk when your Belgian partner is going to start ramping production and how comfortable you are that they will hit their timelines?

We've been working with that development partner -- are you asking about [Imec] and the sense of that, or are you talking about the high-volume fab?

High-volume fab.

We've been working with them for several months, and they're hitting all the milestones. 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.

Call it middle of the year.

Okay. Thanks.

Bryan Brokmeier, Cantor Fitzgerald.

I don't know if you mentioned this before; I may have missed it. Do you expect installations to ramp off of the 10 that you'd planned to install in the fourth quarter sequentially, or is that off of the 6 that you had in the fourth quarter?

Well, we plan to ship more in Q1 than we did in Q4. So, we're going to certainly install as many of those as we can.

But just to make sure we set expectations properly, 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 our intent to ship more in Q1 than in Q4, but it will still be, let's say, a little bit of a restrained rate. And then, not too much after that we expect to be able to ship more. And once the high-volume chip supplier is up and running, that should coincide pretty well with when we feel more comfortable shipping to a broader set of customers as well.

All right. And the 40% that are -- of the bookings that are from new customers -- do those new customers tend to take longer to complete the installations than the pre-existing customers?

Well, we don't have too many data points on Sequel yet. 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 one thing to keep in mind, and for us to keep an eye out on is, the ramp of utilization, that could differ, because people who are more comfortable with SMRT sequencing might already have a number of products already queued up, and so their utilization rate might get to higher volumes faster than, let's say, new customers.

(Multiple speakers) There is the training on sample prep and [biotraumatics], and that's why Ben said earlier that we would be investing in the field based upon the installation of Sequel systems.

Okay. And I think most of what we've heard has been very positive response on the Sequel, and you've had, as you said yourselves, that the 49 was much higher than what you had 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 does this compare with what you had expected?

Well, we actually only started shipping in December, so it actually hasn't been that long. And it has been with a small number of customers.

In a sense, the kinds of issues that we're encountering are ones that you might typically expect, and they are predominantly software-related. That is why we mentioned more than once that we plan on iterating the software quite rapidly in Q1.

So, it is a burn-in period is the way we're describing it. It is probably going according to most people would have expected it to go, and we're just trying to be prudent about how we roll things out. We know that there are pitfalls in trying to go too quickly with too many people, and that usually results in disappointing some folks.

So, there are some customers who are anxious to get their systems. We realize that. But we think we're going to be better off in the long term to be more modest about the shipments this quarter than we could ship. So, we don't plan to ship all that backlog now.

And the 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.

Amanda Murphy, William Blair.

Hi, thank you. I guess just a follow-up to Bryan's question then in terms of the performance -- I realize it is early, but you had also talked to the ability to scale up the performance more rapidly on the Sequel, vis-a-vis the RS II. Again, not putting the cart before the horse, so to speak, but when should we expect that type of ramp up on the Sequel? Is that something that might happen in 2016 or is that more of a 2017 type event?

Well, probably what we will see is, in the first part of 2016, we're working on making the Sequel system robust. So, that is certainly the focus. But there are going to be software and chemistry improvements throughout the year on both Sequel, and the RS II, by the way, so we plan on enhancing 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 multi-plex chip. And so, we are starting work on a higher multi-plex chip.

Those kinds of projects are multi-year projects. That is not something that you're going to see output on in 2016.

But I think you can see from the revenue guidance and Ben's talk about the guidance that we do expect [similar] growth year over year to be significant, and that's the result of being able to deploy the Sequels and have them used in a certain amount of volume.

Yes. Okay. And then any -- just from our side of the world, when should we be looking for initial data coming off the Sequel? Is that something that might happen next week, or is it just too early to get any kind of early user feedback?

We're probably not going to get a lot of early 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. Two more from me -- first on utilization, again recognizing it is early, but given the comments on the RS II that you made on the utilization, do you have any sense at this point how we should think about modeling utilization on the Sequel? And I know you pointed to the difference between new and existing customers, but just from a modeling perspective, how should we think about that as we ramp through 2016?

I think it's maybe easier to model the steady state than the near term because the near term has these moving parts of installs and timing of people coming up to speed. In the long term, we think the pull-through revenue on the Sequel system is going to be higher than it is on the RS II, for reasons that we said before.

But in the near term, when you have periods of time where you actually are installing quite a few systems, then the modeling is not so much about the average for each system but modeling when can systems actually 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. The modeling is usually more about that than it is what is the steady state, run rate for an installed system?

Got it. And then last one, you had talked about -- and I'm sorry if I missed this -- but you talked last quarter about some reagent rentals. Are you still doing that then for people who can't get the Sequel, or do you have any trade-in programs that you're thinking about putting in place?

Yes, I don't think we do what people think of as reagent rentals. What we did is, with a handful of customers, we offered them the ability to rent RS II systems.

And so, when Susan pointed out in her script that there is something in the balance sheet in the now fixed asset area that has to do with $2.8 million of inventory moving into fixed asset, that had to do with this handful of customers that we offered RS II rentals to. But we haven't gotten into, quote, reagent rental models.

Got it. And then how about the trade-in programs going forward -- anything that you have thoughts around there?

Right now, with such a backlog in place and building, we do not have a formal trade-in program. Later, once we get through that backlog and if we see a demand for it, we may respond to the market at that point. But we have no plans currently.

Okay. Thanks very much.

(Operator Instructions)

Bill Quirk, Piper Jaffray.

Great. First question, Ben, on the guidance, can you help us think a little bit I guess about the consumables versus instruments mix for the coming year?

We expect significant revenue growth on both. The Sequel instrument shipments themselves is going to certainly drive a lot of instrument revenue growth.

And roughly speaking, the RS II install base, even if that is a steady state kind of thing, all of the Sequel systems that we install and the consumables that they buy are going to represent incremental revenue there. So, when we gave you 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 your comment about gross margin being in the low 40%s roughly each quarter this year, is it reasonable to assume that we should see some sequential improvement as we go throughout the year, or are you sticking with the low 40%s for pretty much every quarter?

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 sometimes are revenue mix. And so, we don't get as high a gross margin percentage on the instruments as we do the consumables. So, if you have quarters where you sell more instruments, you may not see the gross margin percentage increase, even though the dollars would increase.

And then I just wanted to point out, in the fourth quarter this year, there's a known thing that's going to happen, which is that amortization revenue which is at 100%, that by and large almost disappears in the fourth quarter.

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

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

There was both a combination I think we highlighted on the call that 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 the robustness that the Sequel market will address. So, that's in place, as well as there were some professional fees and elements in the SG&A expense that were related to the Roche transactions.

Okay. Got it. And then I guess this last one for me is back to Roche and thinking about the consumables for Sequel and their instruments that they're in charge of. Will you be presumably shipping them some consumables to be held as inventory, or are they going to be placing orders directly through you and then you're going to be shipping it to the end customer?

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

It does. Yes. Thank you very much.

Bryan Brokmeier, Cantor Fitzgerald.

Thanks for taking the follow-up. Just quickly, are you still booking orders for the RS II from customers who aren't going to be able to receive the Sequel for a while?

Bryan, we are. We had three in Q4. And we will probably 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 parameters and the relative cost would probably cannibalize to a large extent future sales of RS II.

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

Well, there are leasing arrangements which could spill over from quarter to quarter, but we're again talking about just a handful of transactions.

Okay. Thanks a lot.

That does conclude our Q&A session for today.

Okay. Thanks, everyone.

In closing, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers and the scientific community in general. We believe that SMRT sequencing provides the industry's most complete and accurate picture of genomes due to its superior performance in sequencing accuracy, uniformity of coverage, extremely long read lengths, and ability to characterize DNA modifications. Furthermore, by providing scientists with an ability to obtain a comprehensive set of sequence information, within a single experiment, SMRT sequencing is often the lowest cost and only research tool available to meet their needs.

We're very excited about our new Sequel system and the opportunity it presents for us to deliver SMRT sequencing to a 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 of Sequel instruments and SMRT cells.

Thank you for 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.