Pacific Biosciences of California Inc (PACB) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California Second Quarter 2018 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 Second Quarter 2018 Conference Call.

Earlier today, we issued a press release outlining the financial results we'll be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com, or alternatively, as furnished on the Form 8-K, available on the Securities and Exchange Commission website at www.sec.gov.

With me today are Mike Hunkapiller, our Chief Executive Officer; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer.

Before we begin, I'd like to remind you that on today's call, we 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.

I'd now like to turn the call over to Mike.

Thanks, Trevin.

Good afternoon, and thank you for joining us today.

We are pleased with the progress we made in our overall business during the second quarter, even though our financial results were somewhat mixed.

Our consumables revenue for the quarter came in at $10 million, which was up 6% from $9.4 million in Q2 of last year.

Sequel SMRT Cell usage in the field was up over 90%, but RS II SMRT Cell usage declined by over 50%, which offset a fair amount of the gains from Sequel consumable sales.

An increasing number of our RS II customers are switching from using the RS II to using Sequel.

Given the aging of the RS II systems, we've announced that we will discontinue support for the system in 2021, and we have recently instituted a trade-in program to accelerate the customer switch to Sequel.

While this is having a short-term impact on overall consumable revenue growth, Sequel consumable revenue now comprises over 80% of the total.

As a result, we expect that the overall consumable growth will start reflecting more of the Sequel trend.

The switch away from RS II to Sequel is affecting service contract revenue in a similar manner.

Instrument revenue for the quarter increased by 20% compared with Q2 of last year.

All of the large instrument orders we received from BGI and Annoroad earlier in the year are now installed, and they are beginning to ramp up their usage.

We have approximately 275 Sequel instruments installed worldwide, and roughly 30% of those are installed in China.

Total revenue for the quarter was $21.6 million, up 7% compared with $20.1 million recorded in Q2 of last year.

While this is a little below what we were expecting for the quarter, we were otherwise pleased to see increases in instrument utilization, which we believe will help drive future instrument and consumable revenue growth.

Turning now to our product development activities.

As you may recall, we released a new sequencing enzyme and software update in Q1 of this year.

And our customers have been very pleased with the increase in performance they are getting from their Sequel Systems.

We are now poised to release another chemistry and software update in early October, one which we expect to have an even greater impact than our Q1 release on performance for applications such as de novo assembly, RNA isoform transcript analysis, structural variant analysis and targeted sequencing projects.

Internally, we have obtained average sequencing read lengths approaching 100 kilobases and sequencing yields per SMRT Cell exceeding 40 gigabases, which -- with increases in both raw single pass read and consensus accuracy.

This substantial increase in performance has the potential to open up new opportunities for SMRT Sequencing.

We have demonstrated in the past that we can achieve high accuracy on small- to medium-sized PCR amplicons, using our unique circular consensus sequencing our CCS capability.

But at the level of performance described earlier, we could provide high accuracy on individual DNA molecules exceeding 10 kilobases in length for native DNA from genomic libraries as well as amplicons.

For comparison purposes, this is similar to providing comparable raw read accuracy to that obtained with short-read sequencing technology but at 50x the read length of the short-read methods.

We believe this performance will substantially improve SMRT Sequencing's utility to provide a more complete analysis of genetic variation in large-scale population studies.

We are excited to be close to releasing this new Sequel update, and we are planning to start beta testing it with selected customers later this month.

With regard to the development of the 8 million ZMW SMRT Cell, we are pleased to report that progress has also been very good, and we continue to expect to complete development of the chip at the end of this year and begin beta testing early next year.

Initial studies using prototype versions of the chip have produced sequencing yield on test DNA samples exceeding 200 gigabases per run.

Our goal is to drive down the cost of SMRT Sequencing to allow its use in large-scale human population genetic studies in which we expect the technical advantages of SMRT Sequencing in providing a more complete understanding of genetic variation to be a compelling reason for expansion in this area.

Up to now, our customers have sequenced or planning to sequence about 2,400 individual human genomes using PacBio technology, while they are performing the vast majority of population sequencing, using short-read technologies because of the large cost differential.

Once we can demonstrate that a high-quality PacBio analysis of a human genome can be performed at a comparable cost, we anticipate seeing larger cohorts of population sequencing samples shifting over to PacBio.

We're excited that we're starting to get close to that milestone.

Now turning to other business updates.

We continue to see growing demand for SMRT Sequencing in the U.S., Asia and Europe.

Recent user group meetings at 4 sites in Asia drew over 300 attendees, and our recent PacBio symposium in Europe drew about 200 attendees.

We are more often seeing customers taking on large projects with SMRT Sequencing, as the cost of doing this project has come down.

This trend is already evident in one of our key markets, planet animal genomics.

The University of Georgia recently kicked off a project to create a 26 variety pangenome reference for maize.

While a single maize reference genome for maize was created in 2009, it was improved in 2017 using SMRT technology.

There is a large amount of diversity among different varieties of maize.

One previous study comparing kernel color reveal that 12% of gene content was not shared at all between varieties.

To put this in perspective, humans and chimpanzees share more than 98% sequence similarity.

This new study by the University of Georgia, which is being funded by the National Science Foundation, will include varieties of corn from different regions of the world, which will help scientists understand how corn has adapted to these different environments.

Maize has an incredibly complex genome with 85% of its genome comprised of highly repetitive transposable elements, and SMRT Sequencing with PacBio is the best way to sequence and characterize its 2.3-gigabase diploid genome.

Kelly Dawe, the principal investigator of University of Georgia commented, "To go from a single reference to a broad perspective on the entire genetic repertoire of genes and gene expression patterns will be a major step forward on how we approach genome analysis in crops.

It's something that has not happened for any crop at this scale."

The maize example will not be unique however.

Scientists studying many other commercially important crop species are moving from a first SMRT Sequencing derived reference genome per species to sequence numerous varieties of each species to understand their genetic diversity.

Other plant examples underway include rice, grape, cotton, sorghum and soybean, and expanded animal programs already include cattle and pigs.

On several of our quarterly conference calls, we have highlighted customer publications featuring SMRT Sequencing, which now a number in excess of 4,000.

Several of these studies have raided the covers of leading scientific journals.

Recently, sequence analysis of great ape species and koalas have joined this list.

The great ape study has helped researchers gain a greater understanding of the genetic differences that make us human, and the koala study has provided an understanding of how this vulnerable species survives subsistence on an otherwise toxic diet of eucalyptus and endemic chlamydia infection.

Recently, the National Collection of Type Cultures and the Sanger Center in the U.K. announced that they had completed SMRT Sequencing analysis of 3,000 strains of bacteria collected from infectious outbreaks during the past 100 years.

They are using the data from this project to understand how numerous types of infectious microorganisms have evolved over this time in response to antibiotic and vaccine treatments, and they expect this information to help guide development of newer treatments.

A very recent article published in Nature Biotechnology by researchers at the Wellcome Sanger Institute opens up a new opportunity for expanding our SMRT Sequencing customer base.

The article's authors reported that in the widely researched gene editing method using CRISPR -Cas9, significant problems can result from what are called off target effects.

The study used PacBio sequencing to reveal that a large number of unintended deletions and complex rearrangements can result from inducing Cas9 genetic alterations and that the genomic damage caused by this may have serious consequences.

In one experiment, they looked at the effect of editing a certain region with 3 guide RNAs and found that it resulted in 183 unique changes, ranging from small insertions to large deletions of up to 9.5 kilobases.

Genomic damage of this type is frequently undetectable by commonly used short-range PCR assays.

This means that when editing is done ex vivo, the genome must be carefully examined afterwards to identify cells with normal genes before edited cells are reinjected into patients.

Given the implications of potentially dangerous side effects from these gene-editing methods, we believe that PacBio can play an important role in the development and validation of these gene-editing tools for eventual clinical and commercial use.

And finally, we are excited to announce this week that Christian Henry has joined our Board of Directors.

Christian brings a wealth of knowledge and experience, having spent over 10 years with Illumina in senior executive positions.

During his tenure, he played key roles on the team that propelled Illumina into its industry-leading sequencing position.

In the press release announcing his appointment to our board, he stated, "I am very pleased to join PacBio's board at this exciting time for the company.

I'm enthusiastic about its truly unique SMRT Sequencing technology and potential to become an increasingly significant player in the global sequencing market." We share his enthusiasm, and we look forward to having him on our team.

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 the financial overview of our second quarter that ended June 30, 2018.

I will then provide details on our operating results for the quarter and 2018 year-to-date with a comparison to Q2 of 2017 and 2017 year-to-date, respectively.

I will conclude my remarks with a brief discussion of our balance sheet.

Starting with our second quarter 2018 and year-to-date financial highlights.

During the quarter, we recognized revenue of $21.6 million and incurred a net loss of $22.5 million.

We ended the quarter with $63.5 million in cash and investments.

Turning to revenues.

The $21.6 million of product, service and other revenue in Q2 of 2018 was $1.5 million higher than the $20.1 million of product, service and other revenue in Q2 of 2017.

Year-to-date, product, service and other revenue in 2018 was $40.9 million compared to $45 million recognized year-to-date in 2017.

As mentioned in our call last quarter, this reduction in revenue was largely due to a spike in Sequel System installations in Q1 of 2017.

You may recall, we were working down the backlog of instruments that we've built up from 2016 as we were constrained by a limited number of SMRT cells.

Breaking down the revenue.

Instrument revenue recognized in Q2 2018 was $8.5 million, up $1.4 million or 20% from the $7.1 million recognized in Q2 of 2017.

Year-to-date, instrument revenue was $15.7 million in 2018 compared with $19.8 million recognized during the same period last year.

Consumable revenue in the second quarter of 2018 was $10 million, up from $9.5 million reported during the second quarter of 2017.

Year-to-date, consumable revenues have increased to $19.1 million in 2018 compared to $18.1 million in the first half of 2017.

It should be noted that while overall growth in consumable revenues from 2018 to '19 has been modest, as Mike described in the opening, the growth in Sequel consumable sales has been significant during this period, but the growth has been muted by a significant decline in RS II consumable revenues this year.

Service and other revenue was $3.1 million from the quarter compared to $3.5 million in Q2 of 2017.

Year-to-date, service revenue has decreased to $6.1 million from $7.2 million year-to-date in 2017.

This decline in revenue is a function of a transition from higher-priced RS II service contracts to lower-priced Sequel contracts.

With regards to gross profit and margins.

In Q2 of 2018, we generated gross profit of $8.9 million, resulting in a gross margin of approximately 41%.

This compares to a gross profit of $8 million and 40% gross margin in Q2 2017.

Year-to-date, gross profit in 2018 was $16.2 million with a gross margin of 38.9%.

In the first half of 2017, gross profit was $16.9 million with a gross margin of 38%.

Moving to operating expenses.

Total operating expenses in the second quarter of 2018 totaled $30.6 million compared to $32.4 million in Q2 of 2017.

Year-to-date, operating expenses in 2018 were $61.9 million, $2.7 million lower than the $64.6 million incurred in the first half of 2017.

Noncash stock-based compensation, including operating expenses, was $4.6 million in Q2 of 2018 versus $4.4 million in Q2 of 2017, which were roughly split evenly between R&D and SG&A.

Breaking down our operating expenses.

R&D expenses in the quarter were $15.7 million, down $1.2 million from the $16.9 million incurred in Q2 of 2017.

Most of this decrease was related to higher chip development cost incurred in 2017.

R&D expenses year-to-date were $32 million in 2018, down $1.8 million from the $33.8 million incurred in the first half of 2017.

Sales, general and administrative expenses in the quarter were $14.9 million compared to $15.5 million in Q2 of 2017.

Year-to-date, SG&A expenses were $29.9 million compared to $30.8 million in the first half of 2017.

Finally, in Q2 2018, we recorded $800,000 of net interest and other expense compared to $1.1 million recorded in Q2 2017.

Year-to-date, we recorded $1 million in net interest and other expense compared to $1.7 million for the first half of 2017.

The higher expense in 2017 was related to revaluation of the debt derivative and higher interest expense, offset by lower foreign exchange fluctuations.

Turning to our balance sheet.

As I mentioned at the beginning of my comments, our balance of unrestricted cash and investments was $63.5 million at the end of the second quarter compared with $79.2 million at the end of the first quarter.

Inventory balances in Q2 came down to $23.4 million compared with $25.9 million at the end of Q1.

Accounts receivable decreased in Q2 to $7.5 million from $8.4 million at the end of Q1.

This concludes my remarks to the financial results for the quarter, and I'd like to turn the call over to Ben.

Thank you, Susan.

I will be providing an update to our financial forecast.

First, with regard to revenue, our consumable revenues came in lighter than we expected in Q2.

However, we continue to see growth in Sequel SMRT Cell usage among installed systems in the field, and we expect to have increasing consumable revenues through the second half of the year.

Instrument revenue increased as we anticipated in Q2, and our instrument sales pipeline is healthy.

However, as we get closer to launching our higher-capacity 8M SMRT Cell, we believe some customers may choose to postpone their instrument purposes.

This may cause some uncertainty in our instrument revenues toward the end of this year.

With this in mind, we are not providing a total revenue forecast for 2018.

On the other hand, with the planned launch of our 8M SMRT Cell next year, we expect to expand our share of the market in population scale human genome projects and clinical research.

And as a result, we are expecting increased revenue growth in 2019.

Moving on to gross margin.

We were pleased to see the improvement in gross margin in Q2, as we have made progress in reducing some of our service-related costs.

For Q3, we are forecasting gross margin to come in between 38% and 40%.

As we have mentioned on previous calls, the bigger lever for improving our gross margins is to drive significant increases in top line revenue so that our fixed cost in manufacturing and service will be absorbed across the higher volume of sales.

As previously mentioned, we see significant opportunity for revenue growth in 2019, which we expect to lead to more significant margin improvement.

Now moving to operating expenses.

We are managing our expenses closely, and we expect our total operating expenses for the year to come in at approximately $120 million compared with last year's operating expense of a $124 million.

Our net loss for Q2 included approximately $7 million of noncash stock compensation and depreciation expense, and we expect to continue to record a similar amount of noncash expenses for each quarter this year.

We ended the quarter with $63.5 million in unrestricted cash and investments on hand and after burning $15.8 million in cash during the second quarter.

Going forward, we expect to reduce our cash burn by increasing gross profit and controlling expenses.

That concludes our prepared remarks, and we will now open the call up for questions.

(Operator Instructions) Our first question is from Bill Quirk of Piper Jaffray.

Great.

A couple of questions from me.

First off, Ben, I just want to ask about the gross margin guidance for the third quarter.

Given that you're expecting consumables to continue to rise over the balance of the year, why -- just help me think a little bit about why gross margin should be down sequentially.

Great question.

Thanks for the question, Bill.

So Susan had mentioned earlier in the call that we had reduced our inventories [there] in Q2.

And so we've actually reduced our manufacturing output during the quarter.

And even though this provides some benefits in the longer term, it actual results in a short-term impact on gross margin because we have some under-absorbed overhead now that is going to be recognized in Q3.

So it should be a short-term issue, and gross margins should recover thereafter.

But as I mentioned in my remarks, that the big improvement should happen with more significant top line growth, which we're expecting in 2019.

Okay.

Sounds good.

Can you also -- I do appreciate the color around the mixed shift between RS II and Sequel.

In the first quarter, you had a significant slowdown in Sequel consumables usage due to the Chinese New Year.

Can you talk a little bit about what the sequential growth was in Sequel consumables?

In the Sequel consumables for -- from Q1 to Q2?

Yes.

Yes.

So the growth from Q1 to Q2 on Sequel was bigger than the total growth because we continued to see degradation in the RS consumables.

So as we mentioned, the RS consumables are now representing less than 20% of the total.

So -- I mean, like, the good news, bad news on that is that even though it's created a significant headwind, let's say, over this past year, the remaining amount to, I guess, decrease, if you will, is not as much.

And so going forward, as Mike mentioned, the consumable growth should start to reflect the Sequel consumable growth.

Very good.

And then last one from me, and it's, I guess, maybe a little longer-ranging question.

But just thinking about the 8 million feature chip being available and Mike your comments about being able to do or being able to integrate that more at population sequencing efforts, I guess could you help ballpark for us where you think that's going to fall?

I mean, we've certainly been tracking a number of the programs and quite candidly, quite a few of them are still very much in the early stages.

So it looks like there could be quite a fair amount of opportunity for you.

We agree.

I mean, we obviously have to execute on getting our cost down.

But we're -- the total package across on our systems versus what you get with short-read systems is more or less equal.

In particular, given the fact that in a single read on our system, at that point, in a single SMRT Cell, you can get all the data that you get on probably multiple runs on short-read systems because you have to do multiple runs in order to collectively get information on steps, on structural variance and on phasing, the haplotypes.

And if we can get to that point, we think that we are a major player there.

Well, obviously, there's a lot of inertia from existing plans and so forth.

But we've been actively discussing and are continuing to do that with the larger centers, what the capabilities are likely to be.

And there's certainly a fair amount of interest in doing more and more of what they do.

They're not going to stop doing short-read sequencing in that space but do more and more of it on our platform as the cost gets down.

And what we've tried to show, if you look at some of our earlier presentations that we posted on our investor website, is that we expect our ability, from a serviceable available market perspective, to grow at probably twice the rate of the overall market during the next 3 or 4 years.

And most of that growth at least above market is focused into the large human population study in human biology arena.

Our next question is from Amanda Murphy with William Blair.

So just a follow up on the upgrades that you've had on the Sequel to date.

I guess, just one -- breaking it down, the one you talked about.

Remind me, is there a price increase on a per -- I guess, are you factoring in some sort of price benefit from the upgrade and then volume coming up?

And could you say -- I'm sorry if I missed this, but did you say what exactly the next update will bring in terms of performance improvement?

Allow me -- if I remember the numbers, I'll get back to you again.

So we had some modest increase in per unit cost when we did the last upgrade but not substantial.

And we will probably have -- we haven't announced the price yet, so I wouldn't go into the details.

We'll have a similar modest increase on the price per SMRT Cell or per reaction, however you want to look at it, when we do the next release.

That's typically what we do, particularly if we introduce a new product, which is a replacement for, say, the sequencing we've used before.

And certainly, when we get to the 8 million ZMW chip, we're likely to charge more for that than we do on the current chip.

We typically tend to give a lot of that benefit to the customer because we are trying to pull their per project cost down.

But we want to make sure that we get some pick up from that as well.

In terms of the performance, I think, is the second part of your question?

Yes.

Well, as I said, we got -- we talked about the one we did in the late winter, early spring before.

But we actually have a -- as I tried to point out, a much more dramatic increase in the sequencing performance coming up with the release scheduled over the next couple of months.

And to be honest, somewhat ahead of what we were expecting in that release when we looked at it earlier in the year, thanks to just some outstanding work by our development teams.

And that's why I quoted some of the numbers that I did.

You won't get those numbers on every kind of sample that people can produce and run because some samples are trickier than others, but we're looking at a fairly substantial improvement.

And being able to take human samples of certain types and get average read lengths of 100 kilobases on those pieces of DNA is not something we would have anticipated at the beginning of the year.

And that's all really due to the improvements in the chemistry for the sequencing.

And that translates directly into increased usage -- increased yield for SMRT Cell.

And so as we start to translate a lot of that increase over to 8x the number of pieces of DNA that you can look at it once, as I pointed out, we're seeing at least on test samples and it's early yet, maybe even higher numbers than we had anticipated earlier for that too because the chemistry, a lot of it reports over the new system.

So we'll get a better reading on that as we get out into the beta test sites.

But we feel pretty good about the improvements in the chemistry that are coming along.

And then in terms of the shifts from RS II to Sequel, I feel like that accelerated quite a lot this quarter.

I don't know if I'm -- if that's the right way of interpretation.

But is there something specific that happened -- that drove, if that is the case, any -- the acceleration?

Was it the last or just kind of the ongoing improvements in performance?

Or -- I don't know.

It just feels like there was a kind of like a (inaudible) there.

Yes.

I mean, we talked about it a little bit last quarter as well.

And it kind of got started at some level, near the end of last year, as people saw the benefits of the -- from both the reliability and the sequencing output performance with the summer release that we did last year, and that got it started.

And then as they started to see the improvements from our early this year release, that helped it a lot, and it kind of builds on itself.

But as I pointed out, very recently, we've initiated a trade-in program to somewhat drive that, and part of that is just because some of those RS machines are getting a little longer than a tooth, and it's harder and harder to get parts for them and things like that.

And so you have to make a decision at some point to discontinue support for the old ones as a way of helping push the transition to a newer platform, particularly, given the benefits both for us and the customer and being able to do that and only having one platform essentially to support that's new enough to be easily supportable.

So we've -- it's a bunch of things that were ongoing and some new that relate to the recent improvement in the performance.

And the fact that we're starting to nudge people along that pathway.

Okay.

That make sense.

And then just last one on -- in terms of the 8 million chips.

So obviously -- well, presumably there'll be a benefit there in terms of pricing on the chip itself.

But just remind me again, what and/or if you've said what will be required to use that chip?

So is it a whole new system purchase?

Is it an up upgrade?

Is it -- what's kind of the process to be able to utilize the new chip?

So what we have told our customer base, I think we'd mentioned it on these calls as well, is that there will be a necessity to do an upgrade on the system.

The computer is inadequate that we have now to support that much of an increase in throughput.

And the connection into the chip is a little different because there's a lot more pins on it than the current one.

And the way that we go about carrying out that upgrade will be different probably in China than it is in the U.S. than it is in certain places in Europe.

But we've got a variety of upgrade pass in order to carry that out.

(Operator Instructions) Our next question is from Joe Munda of First Analysis.

So Mike, first off, I just wanted to touch base on -- I'm wondering, in the past, you highlighted multiunit orders in the quarters.

I was wondering if -- did we see any multiunit quarter -- multiunit orders in the quarter from customers, particularly maybe China?

And maybe a little bit of color as far as the U.S. is concerned in regard to the pace of orders that you're seeing there?

Yes.

This is Ben.

So those kinds of things are, I guess, by their nature a little bit lumpy.

We didn't have any large multiunit orders of note during the quarter.

But again, there are some quarters in the past where we've had more than one, other quarters that we didn't have any.

So last quarter, we didn't have any, for example, 10-unit orders.

Okay.

And then I guess, on the U.S., Mike, if you could provide us with a little bit of commentary.

You talked about China being 30% of the revenue.

But I mean, if you could give us some context of what you're seeing in the U.S. as it relates to PacBio as well as sequencing in general?

Well, the things we sort of highlight before is that, for us, we have, what I would say, an anomalously high percentage of our business in Asia, China in particular and somewhat anomalously low percentage in the U.S. and similar in Europe.

And the difference is predominantly what the match between our sequencing capacity and capabilities are with a lot of the usage in the 2 markets.

And a lot of what goes on in Asia, historically, for us has been in the plant and animal space.

They're just starting finally to ramp up in the human population genetic studies, and particularly in China.

But a lot of our customer base over there has been very focused on the plant and animal space and continues to be.

Whereas in the U.S., the bulk of the money is spent in human biomedical research, and similar things in Europe.

It's not that there aren't plant and animal studies here.

We have some big customers in that space in both places, but the overall bulk of the money that's after is spent in the sequencing space is in the human area.

And our cost structure for these large studies has just not allowed us to make inroads into that, other than in the level of pilot studies that demonstrate the capability of the technology.

And so our effort there, and we think we're close to making it pay off really, is to keep pushing our cost down per sample so that the cost of doing a human genome at high level of performance is equal to the way it's done now, but it gives you a very incomplete look at what genetic variation is from one sample to another.

And that's really why people are doing these big studies.

And so as we get our cost down, we'd expect the U.S. and Europe, maybe to a little lesser degree, to start growing faster than what we've seen in those areas by a lot and start to catch up with what you would expect to see, the percentage of sales geographically for a company in this space.

So that's what our strategy has been for a long time, and that's why we focus so much on getting the cost per sample down, particularly for this big resequencing projects.

And we think we're well along the way towards doing that.

And some of the recent performance increase is where we can get essentially raw data out of the machine at almost equivalent from a raw accuracy perspective of what people think they get for short reads, but do it at our level of read length, which makes it much easier to discern differences from one area of genetic sequence to another in a characterized system like human.

Okay.

That's helpful.

Just Ben, one quick follow-up.

You talked about RS being less than 20% of total consumables in this quarter.

Can you let us know what it was in Q2 of 2017?

It was over 40% in Q2 of 2017.

So the -- I think Mike even mentioned it in his remarks that the RS consumables dropped by more than 50% year-over-year.

Our next question is from Drew Jones with Stephens Inc.

Just piggybacking off of Amanda's second question.

I think you guys have talked about pretty extensive lead times for chips right now.

How do we think about that impacting the baton paths from current consumable to the new consumable when it does launch.

Is there going to be a lag that is necessitated post-launch to broad adoption because of some still extensive lead times required?

Well, that's a great question.

Yes, (inaudible) that.

Yes.

Let me take the first crack, and Susan can comment as well because we worry about this.

So one that we've tried to be very careful about is the ramp up rate that we expect out of the ATM system because this is not a case like the RS, where the people who have the Sequels and are using it for a lot of things are left in the lurch.

They -- the Sequel is still very good, particularly, as we continue to improve on the overall chemistry performance, which impacts all the sales.

The issue that we want to make carefully is that we don't want to get to the point where we don't have enough of the new SMRT Cells to support however many customers that we allowed to have the upgrades done.

And we think we're on top of that.

We just -- we weren't when we introduced the Sequel, pretty clear.

And that cost us a lot of goodwill for a long time, and it held back our ability to install a very eager set of customer's instruments.

And so that's why we've been kind of careful in giving you a guidance just to how fast we expect that to ramp up.

We will know more of that over the next several months as we go through additional passes through the fab factories of these chips.

And we started on prototype levels, we get really good results on those.

Those were not focused on trying to get high yields out of the chips.

And it's not so much that you can't pick out chips that work and the ones that don't work.

You want to have the yields to the point where you can predict how much you've got in order to ship to people.

And that, we wanted to be careful about.

And that's what you learn in the early part of that chip development process.

So as we get more confidence about where we're going, and we feel pretty good about where we are, we're not -- we haven't changed really producers of the things.

But it's somewhat more complex chips.

So we are being careful about that.

Right.

And I would just add, Drew, last time, we were switching from a prototype development shop to a high production fab in Asia.

This time, because the chip development is not new to what we're doing, we're staying within the high production shop to take the second chip forward, the second iteration of the chip, the 8 million (inaudible) chip.

So we're not doing that step, and we are being cautious.

We'll be cautious in our betas and not go out until we know where the yield and the supply is.

So that we can make sure those early system sold have the chips supply that's sustainable for them.

I would say that I don't know that we're so much worried about the low level you would support with a small number of betas.

But we really want to make sure we've got a good supply, have them in inventory before we open the floodgates.

And that's where we're trying to be, I think, prudently cautious about giving you guidance exactly on when that happens.

We expect it to happen, obviously, as soon as possible.

Everything else will be ready when we've got a good stockpile of chips.

And that is all the time we have for questions today.

I'd like to turn the call back over to Mr. Mike Hunkapiller for any further remarks.

Okay.

Thanks for attending the conference call.

In closing, we're excited about the prospects for our business as our customers are gaining momentum with the use of their Sequel Systems.

We are coming up on an exciting enhancement to our Sequel chemistry and software.

And not long after that, we're planning for the introduction of the higher-capacity 8M SMRT Cell.

We have a great team of people in place who are committed to delivering successful results this year and beyond.

Thank you for joining us, and we look forward to talking again in 3 months' time.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a great day.