Pacific Biosciences of California, Inc.
Q2 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Pacific Biosciences of California Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Trevin Rard. Ma'am, you may begin.

[Trevin Rard:]

Thank you. Good afternoon, and welcome to the Pacific Biosciences Second Quarter 2013 Conference Call. With me today are Mike Hunkapiller, our Chairman and CEO; Susan Barnes, our Chief Financial Officer; and Ben Gong, our Vice President of Finance and Treasurer. Before we begin, I'd like to inform you that comments made on today's call may be deemed to contain forward-looking statements. Forward-looking statements may contain words such as believe, may, estimate, anticipate, continue, intend, expect, plan, the negatives of these terms or other similar expressions and include the assumptions that underlie such statements. Such statements may include, but are not limited to, revenue, margin, cost and earnings, forecast, future revenue implied by the company's backlog, expectations of future cash usage and other statements regarding future events and results. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings, including the company's most recently filed annual report on Form 10-Q. The company undertakes no obligation to update and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that today's press release announcing our financial results for the second quarter of 2013 is available on the Investors section of the company's website at www.pacb.com, and has been included on Form 8-K, which is available on the Securities and Exchange Commission's website at www.sec.gov. In addition, please note that today's call is being recorded and will be available for audio replay in the Investors section of the company's 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, and that Pacific Biosciences undertakes no obligation to update such forward-looking statements. At this time, I'd like to turn the call over to Mike.

[Michael W. Hunkapiller:]

Thanks, Trevin. Good afternoon, and thank you for joining us today. We are pleased with our second quarter results and the continued progress we're making in driving the adoption of our products. Highlights of our second quarter financial results are as follows

[Susan K. Barnes:]

Thank you, Mike, and good afternoon, everyone. I will begin my remarks today with a financial overview of our second quarter that ended June 30, 2013. I will then provide details on our operating results for the quarter with a sequential comparison to the first quarter of 2013, as well as the year-over-year comparison to the second quarter of 2012. I will conclude my remarks with a brief discussion of our balance sheet, starting with our second quarter financial highlights. As Mike said, we booked 7 systems in Q2 and ended the quarter with 10 systems in backlog. During the second quarter, we recognized revenue of $6 million and incurred a net loss of $20.5 million. We ended the quarter with $107 million in cash and investments, a decrease of $5.3 million from the balance at the end of Q1. The Q2 ending cash balance includes proceeds of $11.3 million of equity financing, offset by cash use of $16.6 million. Breaking down our revenue. Total revenue for the quarter was $6 million, higher than the $5.6 million of revenue realized in Q1 and down $1.2 million from Q2 of 2012. For instrument revenue, in Q2 2013, we recognized $2.7 million on 3 instruments and also recognized revenue from our systems upgrade, compared to $1.9 million on 3 systems in Q1 and $4.6 million on 7 systems in Q2 of 2012. As a reminder, in the first half of 2012, we were still working off the pre-commercial sales backlog. Consumer revenue was strong again this quarter. Revenue for the quarter totaled $1.9 million equal to that recognized in Q1 and up $700,000 or 60% above the $1.2 million recognized in Q2 2012. We were pleased that while we upgraded 40% of our installed base, our consumable revenue remained consistent with Q1. Service revenue remained relatively flat quarter-over-quarter at $1.4 million in Q2 2013 and up $100,000 from Q2 2012. And finally, as we discussed in our call, we do not have grant revenues this quarter as compared to $300,000 recognized last quarter and $200,000 in Q2 of 2012. Gross profit for the quarter was $1.1 million, representing a gross margin of 18%. This is up from the $900,000 gross profit and 17% gross margin recognized in Q1. The increase in profit quarter-to-quarter is largely due to greater instrument revenue realized from upgrades this quarter. In Q2 of 2012, we recorded $300,000 in gross profit and a gross margin of 4%. Moving to operating expenses. Operating expenses in the second quarter totaled $21.1 million. This spending was $400,000 lower than the $21.5 million incurred in the previous quarter and $1.7 million lower than the $22.8 million incurred in Q2 of 2012. These results are largely due to our continued efforts to realize cost efficiencies across the organization. Breaking down our operating expenses. R&D expenses of $11.7 million were relatively flat from the $12 million recognized in Q1. Year-over-year R&D expenses were $400,000 higher than the $11.3 million recognized in Q2 of 2012. R&D expenses this quarter included $1 million of noncash stock-based compensation expense. Sales, general and administration expenses for the quarter were $9.4 million, basically flat to the $9.6 million compared in Q1. Year-over-year sales, general and administration expenses were reduced by $2.2 million, primarily due to our continued attention to controlling marketing and G&A expenses, but also due to higher legal expenses incurred in Q2 2012 related to securities class action suit. Ben will provide further guidance on our ongoing expense rate later in the call. SG&A expenses for the second quarter included $1.3 million of noncash, stock-based compensation expense. Also, in the area of other income and expense, this quarter we recorded approximately $600,000 of interest expense from the Deerfield debt funding, a $300,000 increase from Q1 as the transaction was entered into midway through the first quarter. Now turning to our balance sheet. Cash and investments totaled $107 million at the end of the first quarter, down $5.3 million from the previous quarter. The decrease of our cash balance includes net proceeds of $11.3 million from the use of our ATM program in Q2. As part of this program during the quarter, we sold 4.4 million shares at an average price of $2.66 a share. There remains $9 million of additional capacity under this ATM program. Excluding net proceeds from the equity financing, cash used in the quarter was $16.6 million, reflecting our second quarter net loss of $20.5 million, less $3.9 million in noncash expenses primarily composed of $2.4 million of stock-based compensation expense and $1.4 million of depreciation. Accounts receivable increased from $2 million at the end of Q1 to $4.1 million at the end of Q2. And lastly, inventory balances decreased $300,000 from the end of Q1 to $10.3 million as of June 30, 2013. This concludes my remarks on the financial results for the quarter. I'd like to turn the call over to Ben.

[Ben Gong:]

Thank you, Susan. I'll be providing updated forecast on our near-term and 2013 financial performance. Our second quarter revenue results were in line with our expectations. We installed 3 systems in Q2, which is consistent with what we had anticipated. We started Q2 with 6 systems in backlog, adding the 7 new bookings and subtracting the 3 installations from the second quarter, we ended the quarter with 10 systems in backlog. Looking forward to Q3, we anticipate installing at least half of these systems during the third quarter as we coordinate with customers who are preparing their sites for installation. As we mentioned earlier in the call, we also booked 23 RS II upgrades during the quarter to add to the 31 we had booked in Q1. After installing 34 upgrades in Q2, we ended the quarter with 20 upgrades in backlog. We expect to install most, if not all, of those upgrades during Q3. Now regarding consumables, as we had anticipated, our consumable revenues in the second quarter were about the same as our Q1 consumable revenue which, as a reminder, was up 46% from Q4. System utilization continues to be strong, however, the impact of summer vacations on utilization has already taken effect at some customer sites and we anticipate this to continue particularly in Europe this quarter. Therefore, we expect our third quarter consumable revenues to be relatively flat compared with Q2. However, we are forecasting sequential growth in consumable sales after the third quarter. Finally, we do not anticipate recording much revenue -- much grant revenues in the new future. In total, we expect revenues for Q3 to grow sequentially from Q2 based on increasing system installations. As Mike mentioned earlier, we are expecting our system bookings for the year to at least double our 2012 bookings. Therefore, for the year, we continue to expect to record higher total revenue for 2013 compared with our revenue for 2012. With regard to gross margin, we are pleased that we were able to maintain similar gross margin in Q2 as compared to Q1 despite the drop off in grant revenue. As a result, we are increasing our forecast on gross margin for the year to be in the mid-teens, compared with our previous forecast of 10%. Our operating expense levels for Q2 came in at $21 million as expected. We continue to monitor our expenses closely and expect to maintain expenses at approximately this level for the balance of the year. Please keep in mind that our expenses can vary quarter-to-quarter due to the timing of certain research and development expenses. In addition, please note that our operating expenses have included noncash, stock-based compensation expense and depreciation expense that together amounts to approximately $4 million per quarter. As Susan mentioned earlier, interest expense for the second quarter included about $600,000 related to our debt financing with Deerfield, which is comprised of $450,000 in cash interest plus approximately $160,000 of noncash amortization. We expect to record similar interest expense for the third quarter. With regard to cash usage, we had previously forecasted using approximately $70 million in cash this year. For the first 2 quarters of the year, we have only used $34 million and we now expect to use less than $70 million in total for the year. As we noted earlier, we raised $11 million in equity last quarter, bringing our total cash raised for the year to $40 million. And as a result, we expect to end the year with at least $70 million in cash. And with that, we'll open the call up to your questions.

[Operator:]

[Operator Instructions] Our first question is from Daniel Brennan of Morgan Stanley.

[Daniel Brennan:]

The first question is on the upgrades. As the customers have the new system which gives them enhanced performance, what type of impact are you seeing that have on either the usage of the instrument from a consumer pull-through basis or the kind of how much revenue contribution did the upgrade prices paid have in the quarter?

[Unknown Executive:]

I'll do the last part first and then maybe Mike can try on some. So we recorded about $700,000 in revenue from those upgrades that we installed in Q2.

[Daniel Brennan:]

Okay. Thanks, Ben.

[Michael W. Hunkapiller:]

I think the biggest impact, short and long term is that as the throughput goes up, it just goes up, which is what the upgrade was primarily focused on. Then customers can tackle bigger projects, either larger number of smaller projects or begin to tackle larger genomes. And that's kind of what we're seeing. And we had people actually who knew the upgrades were -- they had ordered and they were going to be installed kind of held off on some of the really bigger projects for larger genomes just so they can get the added advantage of the higher throughput. We expect that trend to continue with other customers as well. The throughput is particularly important when you're dealing with larger genomes where we were somewhat disadvantaged as the throughput was lower than they would like to have had for larger genomes in the past.

[Ben Gong:]

Okay. One other thing I would just mention on that is, just sort of review, we probably increased the throughput by a factor of maybe 8x since launching the product in 2011. And in some ways, in the short term, you might think that, that would decrease the amount of sequencing that people need to do because you have increased the throughput. But in truth, in the longer term, what happens is people do plan more projects and you see the increased utilization and increase revenues that we've gotten. So you might have a certain case of someone being able to do a project for a fewer amount of consumables, but in the longer run, they end up consuming more, because they take on more because they take on more projects.

[Daniel Brennan:]

Okay. And then related to that, Mike and Ben, in terms of the pull through, how should we -- and I know this comes up on different calls, but certainly with the systems performance improving, Ben, as you just mentioned, any color how we should be thinking about like the pull-through opportunity. I mean, you clearly said that you upgraded so many this quarter that it kind of is what tempered the pull through and kind of in line with guidance. But now as you get more of these upgrades complete and customers have them for a full quarter or 2, how should we think about the usage level kind of going forward, maybe on a per box basis or any color around that front?

[Ben Gong:]

Yes, I'll take a shot. So it's still roughly speaking about $100,000 per year per system, if you do that math, and it's our goal to increase that over time. And I think we mentioned in the past that people who are utilizing their systems the most are ordering something like $300,000 or more in consumables for their system. So we have room to increase that average knowing that there's certainly capacity out there.

[Susan K. Barnes:]

It's Susan. I would just add color to that. As Ben mentioned, we're surviving the summer months. So the times are flat, but he did say we were going to guide up for the rest of the year. That's the combination of both installing in these systems and expecting some throughput pull-through increase on the current system.

[Daniel Brennan:]

Okay. And then if I can get one more last one. In terms of your doubling the bookings this year, I guess you've done, what, 4 in the first quarter, 7 now, so you're at 11 versus 12 all of last year. Mike, given the publications that you've cited and the kind of growing interest in the performance enhancements, any way to kind of help us think about the pipeline visibility or the addressable market that you're penetrating now with the improved performance like to go from the 11 you have now, doubling would just be you get 13 in the back half of the year, which is kind of flat sequentially. Any additional color to think about the visibility or the customer interest in the system that will help us get a view on kind of where this can go.

[Michael W. Hunkapiller:]

Well, I believe, to be accurate, what we said was we expected to at least double. But I think the issue that we always face with a big ticket capital item is timing on those [indiscernible], particularly this number that we're talking about, a few can be an impact. I mean, the FDA order we expected to get earlier in the year and we did, and they were hung up on a sequester issue. So they finally got a budget to work with and they placed the order because they knew they needed it in order to handle their part of the 100k Bacterial Genome Project. And so we're always faced with that kind of uncertainty. And we're just not trying to guide you into more than we know at this point on the timing of some of those. But that aside, we certainly are seeing an increased interest in the technology. And we talked about last time that our pipeline is starting to grow again. And clearly, the interest in the technology and the understanding that it actually is the most accurate sequencing technology available for the kind of genomes that it's throughput is amenable to in particular, and some of its unique characteristics in terms of read length and modified base detection make it sort of the method of choice now for a lot of important applications. And as that realization spreads, as you get more of these publications, as you get more presentations at meetings, then a wider audience gets exposed to that as opposed to what they may have heard or thought they heard early in the life of the technology. So I think we were positively encouraged by all of that. But still, like everyone else in the space with the high ticket item driving our business, want to be appropriately cautious our guidance relative to short-term numbers.

[Operator:]

Our next question is from Bill Quirk of Piper Jaffray.

[William R. Quirk:]

First off, Mike, you guys have done a pretty nice job carving out some niches within research and you highlighted several of them in your prepared comments, seems like bacterial sequencing, as well as genome finishing. If you think about some of the more recent applications and presentations that you've seen in couple of different meetings and/or in some of the press, where do you think the next niche lies or where do you expect to see some of the focus?

[Michael W. Hunkapiller:]

Well, I think we certainly see an increased use of the technology in working with larger genomes. And that's not just to finish them per se, but to go after the kind of hidden variation that's there, even in large genomes like human, of where at this point with the throughput you're probably mostly doing that in combination with some of the short read technologies. But the 2 together, the throughput that you get on the short read and the better coverage that you'd get in those difficult regions with ours gives you a much more complete look at what the variation might be. And we clearly see that as an increasing area of usage by our customers and interest even in the prospective customers. I think another area of application that we're coming into are in areas which are traditionally thought of as requiring the kind of quantitative throughput respective number reads that you get with the short read technologies, things like CDNA analysis where you're looking at transcribed genes. And there, the issue that they struggle with despite they get quantitative information on a gene, they don't necessarily get good qualitative information about the alternative splicing forms that are there, which may be crucial in terms of what genes are actually doing in a cell. And the long read technology reads through long transcripts completely, so you get that information directly rather than trying to infer it from some quantitative data, which just kind of falls fairly short most of the time. So I see that as an upcoming application. I think some of the areas in targeted sequencing, in particular disease studies associated with things like HLA locus that's involved in transplants and a lot of other issues in humans and in a lot of what are called things like the repeat expansion diseases, as I mentioned one of those in the paper -- the presentation earlier. Now that the technology for that is becoming suitable for it with the PacBio, it opens up various exploration that are difficult for short read technologies to handle if in some cases totally impossible, even almost intractable relative to the old Sanger technology which is what mostly is used in those fields right now.

[Daniel Brennan:]

And then Mike, or maybe actually a question for Ben, you alluded to it in terms of what the reagent [indiscernible] pull through in some of your larger customers are using, can you just talk to the overall installed base. And I guess the sense we got from last quarter and I'd surely love to get an updated this is that we are starting to see a more even distribution, if you will, of reagent usage across the entire installed base. In other words, there may have been some systems that you have -- are seeing more use than they had and that's becoming more prevalent and say seeing just a few champions, if you will, out there driving other reagent performance.

[Michael W. Hunkapiller:]

I think that's fair. I mean, we have certain customers who have been pretty high users for quite some time. And what we've actually been working on in different parts of the organization is getting some of the lower utilization sites up to higher utilization. And that's going along pretty well. So in general, I think it's a fair statement that we're sort of bringing up the average by getting some of the lower utilization sites up to higher utilization levels.

[Ben Gong:]

And we've got a long way to go, but we focused a lot on training those labs and helping them in essence, particularly if they were core facilities and the like, in essence, market their service capabilities in the PacBio RS to their perspective customers. And that's beginning to make a bigger and bigger difference now.

[Operator:]

[Operator Instructions] Our next question is from Amanda Murphy of William Blair.

[Amanda Murphy:]

I just had a question on the makeup of the current buyers of the platform, and I appreciate all the comments about applications, but I'm curious, are you seeing repeat buyers at this point? Just trying to get a sense of who exactly is buying the new instrumentation.

[Michael W. Hunkapiller:]

Well, we mentioned one repeat buyer this quarter, which is the FDA. So 1 out of 7 was a repeat buyer this time. We also sold our first instrument into a major pharma company. So we're beginning to see a broadening of interest into some areas that we hadn't yet penetrated. Those are some obviously conservative companies into how they look at technologies. I think it's still a fairly broad-based group of customers, both in the academic world, government labs, as well now as some increase in interest in the commercial world. So in small numbers, it's kind of hard to make too big a case out of a particular trend, but getting your first in some of these and starting to get more and more repeat orders, it's certainly a couple of very important trends we'd like to encourage and continue.

[Amanda Murphy:]

Great. Okay. And then, I don't know if I'm splitting hairs here but just in terms of the comments about the instrumentation expectations for the year, it sounds like maybe you're a little more bullish than last quarter just with this comment. Am I reading too much into that or just what's the instrumentation number that you added to the backlog, was more than you had anticipated?

[Michael W. Hunkapiller:]

Well, in terms of orders, I think that we tried to even signal last quarter that we were getting more encouraged about the pipeline. And that continues. And having closed the quarter with a match to the highest number of orders we ever got in quarter, that's a positive sign. So I think we're enthusiastic about the growth potentials. But as I said as well, we're trying to be appropriately cautious in giving you any quarter-to-quarter guidance relative to the fact that it's still a small numbers game and 1 of 2 switches from one quarter to another can make a big difference. So the statement we made about it at least doubling is I think where we think we are at this point.

[Amanda Murphy:]

Got it. Okay. And the last one. I know that some people are using the RS for sort of hybrid assembly, and I'm curious if there seems to be a few of these genome mapping type of platforms coming to market. Does that impact at all -- does that make things more competitive or is it they're not the same type of application?

[Michael W. Hunkapiller:]

Well, I'm not sure what you mean about genome -- other genome mapping technologies coming to market. Specifically, which ones are you talking about so I can comment in detail on those?

[Amanda Murphy:]

Yes, I guess just in terms of conversations with some customers you've had. BioNano Genomics has come up and I'm not sure if that would be a competitive platform to some of the applications that people are using the RS for or not.

[Michael W. Hunkapiller:]

Well, what I call the optical mapping approach is something similar to that. So OpGen has been out there actually for a long time and I would say that BioNano Genomics is essentially the same thing with a different technology. I think a good tool for kind of checking assemblies, but really doesn't tell you anything independent of itself. You still have to have a sequence to compare that to. Look, it's not a sequence technology, it's -- the way I look at, it's a good QC methodology for assemblies. And when we've seen our technology used in conjunction with that and even in the -- we think a simple case like the bacterial world, we've done -- we've kind of matched what they had on the main bacterial chromosomes and we added the fact that we could see the mobile elements, which you couldn't see with those technologies, which are the ways that these bacteria bring in new genes for anabolic resistance or whatever that are really the source of the problems. And those techniques, because there were no references that were good for those, don't apply. And so you still need to sequencing in the first place to make any sense out of those. So I don't see them having any negative impact at all on our business, while they're useful techniques, but I think they're not sequencing techniques.

[Ben Gong:]

Amanda, just one thing I will comment, because you reminded me of something. So the hybrid assembly approach has actually been useful, especially when people are working on some larger genomes, but some of the customers have found that with our latest software, the HGAP software, they actually get better results from an accurate assembly standpoint of using PacBio-only data and not using a hybrid approach to assemble a complete genome, particularly some of these bacterial or smaller genomes. So what they're finding is just using PacBio by itself without other short read data is actually a better result.

[Michael W. Hunkapiller:]

Yeah, that's certainly true in small genomes for which we have more than adequate throughput to deal with by itself. I think if you get up to the mammalian-sized genomes, in the end, we expect to get better assemblies and better accuracy than you get with the other technologies, but we're still quite a way from being, in most cases, cost-effective for doing a PacBio-only assembly in those large genomes. And the technology works really well in that case in combination with the short read technologies.

[Operator:]

I'm showing no further questions at this time. I will now like to turn the conference back over to Mike Hunkapiller for closing remarks.

[Michael W. Hunkapiller:]

Okay. So in closing, we remain steadfast in our commitment to bringing the unique advantages of our SMRT technology and products to our customers, the scientific community in general. We continue to make progress and we see momentum building in our business, particularly in system utilization. With further product and software releases on the horizon, it will be exciting to see how this will impact both our consumable sales and new systems bookings in the coming quarters. Thank you for listening in and we will talk again in 3 months' time.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.