Fluidigm's (FLDM) CEO Gajus Worthington on Q2 2016 Results - Earnings Call Transcript

| About: Fluidigm Corporation (FLDM)

Fluidigm Corporation (NASDAQ:FLDM)

Q2 2016 Earnings Conference Call

August 4, 2016 17:00 ET


Ana Petrovic - Director, Corporate Development and Investor Relations

Gajus Worthington - Chief Executive Officer

Vikram Jog - Chief Financial Officer


Sung Ji Nam - Avondale Partners

Bryan Brokmeier - Cantor Fitzgerald

Alex Nowak - Piper Jaffray

Doug Schenkel - Cowen


Good afternoon, ladies and gentlemen and welcome to the Fluidigm Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Ana Petrovic, Director of Corporate Development and Investor Relations.

Ana Petrovic

Thank you. Good afternoon, everyone. Welcome to the Fluidigm second quarter 2016 earnings conference call. At the close of the market today, Fluidigm released financial results for the second quarter ended June 30, 2016. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Following these comments, we will host a Q&A session.

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

During the call and subsequent Q&A session, we will discuss plans and projections for our business, future financial results and market trends and opportunities, including among others, statements regarding the anticipated impact of recent organizational changes and other business strategies; expectations with respect to our new President and Chief Operating Officer; expectations for the single-cell biology and applied markets and our prospects and growth opportunities in such markets; our anticipated product launches, including the addition of imaging capability on our mass cytometry platform; and impact of our product pipeline; the expected timing of product launches; the impact of product performance; our views of competitive market position and the impact of competition; seasonality and product revenue trends; our expectations with respect to the levels and timing of revenue growth in the third and fourth quarters of 2016 and anticipated contribution to revenue growth from new products. And current estimates of 2016 total revenue, including in particular, expectations with respect to revenue growth in the second half of 2016; the seasonal and/or unusual nature of certain SG&A expenses, GAAP and non-GAAP operating expenses, stock-based compensation expense, depreciation and amortization, interest expense, capital spending, cash, cash equivalents and investment balances and currency-related impact on 2016 revenue.

These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results. Information about these risks and uncertainties and other information affecting our business and operating results are contained in our annual report on Form 10-K for the year ended December 31, 2015. Our quarterly report on Form 10-Q for the quarter ended March 31, 2016, and our other filings with the SEC. Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended June 30, 2016 to be filed with the SEC. We advise investors to review these risk factors carefully. The forward-looking statements in this call are based on information available to us as of today’s date, August 4, 2016. Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law.

During the call, we will also present certain financial information on a non-GAAP basis. This non-GAAP financial information discussed during the call excludes the impact of, among other items various non-cash or one-time charges. Fluidigm has chosen to provide this information, because it believes it enhances an understanding of our ongoing economic performance and because it permits investors to perform comparisons of operating results in a manner similar to Fluidigm’s internal operating analysis. Certain reconciliations between GAAP and non-GAAP results are presented in a table accompanying our earnings release, which can be found in the Investors section of our website.

Our estimates of forward-looking non-GAAP operating expense includes estimates for stock-based compensation expense, depreciation and amortization, loss on disposal of property and equipment, future changes relating to developed and acquired technologies, other intangible assets and income taxes. Among other items, certain of which are presented in the table accompanying our earnings release. The timing and the amount of certain material items needed to estimate that non-GAAP financial measures are inherently unpredictable or outside our control to predict. Accordingly, we cannot provide a quantitative reconciliation of non-GAAP operating expenses without unreasonable effort. Material changes to any of these items could have a significant effect on our guidance and future GAAP results.

I will now turn the call over to Gajus.

Gajus Worthington

Thank you, Ana. Good afternoon, everyone. Before we get into results for Q2, I would first like to welcome Chris Linthwaite to Fluidigm as our new President and Chief Operating Officer. Chris’ executive management experience is highly relevant for us. He has been President of several divisions at Life Technologies and Thermo Fisher Scientific, including most recently, genetic sciences. I have gotten to know Chris over the last several months and I am certain that his combination of operating savvy, strategic thinking and passion for customers will be instrumental in driving growth at Fluidigm. The Board and I are very excited to have him in the Fluidigm and can’t wait to dig into all the aspects of our business with Chris. So, with that, let’s get started.

Earlier today, we reported revenue of $28.2 million for the second quarter of 2016, down approximately 2% from the year ago period. Product revenue from research customers was $15.5 million in the quarter, down approximately 13% or $2.4 million year-over-year due primarily to lower C1 instrument revenue. Product revenue from applied customers was $9.3 million, up approximately 19% or $1.5 million year-over-year, driven primarily by higher proteomics and genomics analytical instrument revenue.

Primary headwinds and tailwinds were respectively C1 instrument weakness and strength in our applied market business. We acknowledged earlier this year that our new competitive entrance – on the single-cell genomics would impact our C1 business, particularly in the first half of the year as we work through our doublet fix and towards enabling another order of magnitude increase in our throughput. These dynamics have played out mostly as we anticipated, but we did see an increase in competitive intensity in the second quarter.

As we have previously discussed, our formation of a robust commercial team to focus on applied markets was one key action in returning to growth. We are pleased to see good growth from these efforts in the first half of the year. Still, it takes time for new commercial reps and management to settle in, generate pipeline and realize the full fruit of that effort. We continue to expect year-on-year growth from this team in the back half of this year.

Overall, in the second quarter, two of our expected growth drivers for 2016, revenue from products launched in 2015 and consumables revenue from applied markets grew compared with the year ago period. We are disappointed, however, that our third expected driver, single cell biology revenue, declined approximately 4% in the quarter compared with the year ago period. This decline was a function of lower C1 instrument and consumables revenue. Notably, most of the decline in C1 revenue for the second quarter was due to lower C1 instruments revenue. C1 consumables also declined, but this effect was relatively minimal year-over-year in both growth and absolute dollar terms. C1 revenue performance among research customers was generally as we had anticipated, but was somewhat weaker than we had anticipated among applied customers. Earlier this year, we noted that new competitive dynamics in single cell genomics would have some impact on our C1 business, especially as we work through our IFC doublet issues that we are happier now receding. In the second quarter, there was more competitive presence in the C1 marketplace as some customers took time to evaluate new platforms. The greatest impact was in the customer segment interested in doing single-cell surveys.

This is an important market segment and we have our own roadmap to address it. Enabling an order of magnitude increase in throughput over our existing high throughput chips will allow C1 to play in this segment, while also delivering unmatched breadth of applications and the opportunity for higher depth, high quality analysis of smaller samples. We like that value proposition. We believe that C1 remains the gold standard in single-cell genomics and that its breadth and data quality will continue to be critical capabilities for that field. We know from our own extensive development work that all single-cell analysis techniques have trade-offs. When throughput increases, this can often come at the cost of increased doublets. As the field knows, throughput is a function of the raw input, but also of the number of analyzable cells. Further, we know from C1 that sensitivity, the number of genes or transcript that you can acquire from each cell, can make a crucial difference in one’s ability to understand or even to cluster those cells at a granular level. Some of these trade-offs are likely to become clear as its new market segment matures.

Meanwhile, Fluidigm continues to make progress on executing its C1 pipeline portfolio. In May, we introduced our 15th application for C1 single-cell TCR sequencing, an immunology application that enables in-depth profiling of T cells at single cell resolution and provides a novel approach to interrogate the functional response of each T cell.

Last month, we shipped our small-cell high throughput IFC to our early access customers. This IFC allows capture of up to 800 cells, of 5 microns to 10 microns in size, which we expect to be particularly enabling in the field of immunology. This IFC is based on the already high performing architecture of our small cell 96 IFC as well as newly optimized chemistry for our high throughput chips. We are encouraged by the very positive results from our customers so far and expect to begin shipment of these IFCs to commercial customers in late September.

Finally, we continue to expect the launch of the optimized medium cell high throughput IFC this year as well as our IFC enabling another order of magnitude throughput increases in early 2017. While we expect C1 instruments to remain challenged in the third quarter of 2016, we believe our investments and execution on our C1 product pipeline will enable us to regain traction in the fourth quarter.

Speaking of traction, our proteomics product line continued to deliver solid growth. In fact in the first six months of 2016, our proteomics product line has grown over 40% compared with the year ago period. In both the second quarter and the first half, growth was driven by strength in biopharma. In June, we established a customer inspiration center in Canada to provide firsthand demonstrations of our mass cytometry technology and applications to interested researchers worldwide. In the future, we also plan to implement a certified training program for users of this technology and offer demonstrations of all Fluidigm instruments.

In July, we moved into our new R&D and manufacturing facility in Canada to support our commercial and product pipeline for proteomics. In addition to providing state-of-the-art R&D facility that expands our manufacturing capability by at least a factor of two for our proteomics instrument portfolio, including not only Helios, but also our imaging mass cytometry system. You have heard me talk in the past about the evolution of our mass cytometry platform to enable an imaging capability. Our collaborators and early access customers have indeed published on these methods over the past few years. I am very pleased to announce that we are approaching the planned release of this product in the fourth quarter of this year.

The Imaging Mass Cytometry system, incorporating CyTOF technology is comprised of a mass cytometer, together with a tissue imager and enables true high parameter single cell tissue imaging. This system provides a depth of cellular characterization that is unmatched by today’s standards, which are currently only typically limited to less than half a dozen parameters. Our confidence in customer interest in this breakthrough technology has grown throughout the year and is supported by our pipeline outlook, billable backlog and feedback from our early access partners.

Another bright spot was our applied markets group, where growth was principally driven by instruments in the second quarter compared with the year ago period. This was mainly due to higher proteomics and genomics analytical instrument revenue. This instrument strength offset a continued decline in Access Array consumables, which had a significantly negative effect on our pull-through for genomics sample prep systems and fell below our historical range. As we mentioned on our last earnings call, we are in the process of transitioning customers away from the Access Array to Juno and anticipate this shift to have a temporary impact on sample prep pull-through.

From an Applied market standpoint, we are pleased that in July, we received ISO 13485:2003 and ISO 9001:2008 certification for the design, development, manufacturing and distribution of single cell genomics and high throughput genomic systems. The certified Singapore facility manufactures instruments and IFCs for analysis of single cells and nucleic acids from blood, tissues and tumor samples, while the certified South San Francisco facility designs and develops instrumentation in IFCs and manufactures high-performance genomics reagents and conjugated antibodies. We believe these certifications are a significant milestone for Fluidigm, laying the groundwork to expand our business further into clinical applications.

Earlier today, we also announced the launch of the Juno targeted DNA sequencing library preparation system, a system that redefines library preparation workflow from extracted DNA to NGS-ready amplicon libraries. The system supports a range of panel designs from targeted multiplex panels, covering a few genes to more comprehensive panels of up to 4,800 amplicons from hundreds of genes, with the ability and flexibility to easily add new markers over time. The system has a capacity to easily scale up to thousands of samples per week with a significant improvement in workflow, alter the largely manual low-throughput laborious NGS library preparation workloads used today.

For 2016, our revenue guidance of $124 million to $128 million is unchanged. However, our expectations of pacing have changed. While we are clearly disappointed not to have achieved revenue growth in the second quarter, we did deliver on our expectation for approximately 45% of our 2016 revenue we communicated to you last quarter. However, the gradual recovery we anticipated in our C1 business entering the year is now pacing slower than initial expectation. Primarily as a result of that change in our thinking, we now anticipate year-over-year revenue growth to be concentrated in the fourth quarter and third quarter revenue to be approximately flat sequentially. This compares to our broader previous expectation of year-over-year revenue growth concentrated in the second half of the year.

When we entered the year and provided our guidance range, we expected single cell biology would be a growth driver for the year, we believe there are several scenarios under which we could deliver on that forecast. Our considerations included the pacing of our C1 business, including expectations regarding competition and the timing and availability of the components of our IFC product roadmap. Our thinking also included our expectations around the strength we anticipated in our proteomics franchise including a cautious probability we could launch our Imaging Mass Cytometry system during the year. While the pacing of the C1 franchise is obviously lagging the expectations we had entered in the year by about a quarter, we are incredibly excited that our proteomics R&D and development team has hit their marks across the year to enable us to launch the Imaging Mass Cytometry system. Coupled with ongoing strength in our Helios line, we believe this could contribute significantly to our 4Q growth. We already have backlog, well in advance of our planned product launch and confidence in our launch schedule.

In summary, we are working aggressively to execute on our strategic initiatives and capitalize on the single cell biology opportunity ahead of us. Fluidigm continues to have the most comprehensive portfolio of products enabling this exciting field, which we believe positioned us to deliver solid results in 2016 and beyond.

I will now turn the call over to Vikram.

Vikram Jog

Thanks Gajus and good afternoon everyone. I will now walk you through our second quarter 2016 operating results and highlights. For the second quarter of 2016, total revenue of $28.2 million was down 2% year-over-year. For the first six months of 2016, total revenue was $57.2 million, an increase of 3% year-over-year. Total instrument revenue of $13.2 million decreased by 9% or $1.3 million year-over-year in the second quarter, mainly due to lower revenue from C1 and accessory systems and lower average selling prices. Approximately 60% of the BioMark HD systems sold during Q2 were motivated by single cell biology research and approximately 40% of C1 systems sold in the quarter were combined with the BioMark HD system.

Total consumables revenue of $11.5 million which includes IFCs, assays, reagents and antibodies increased by 4% or $416,000 year-over-year for the second quarter, mainly due to higher revenue from genomics analytical IFCs and proteomics reagents, partly offset by lower revenue from genomics and for prep IFCs. Our genomics analytical IFC pull-through for the second quarter tracked within its historical range of $25,000 to $35,000 per system per year. While our genomics preparatory IFC pull-through tracked below its historical range of $15,000 to $25,000 per system per year. Our proteomics analytical pull-through tracked within its historical range of $50,000 to $70,000 per system per year.

Total service revenue of $3.4 million increased by 17% or approximately $485,000 year-over-year in the second quarter. Product revenue by customer, which excludes service revenue for the second quarter of 2016 was as follows; product revenue from research customers was $15.5 million, down approximately 13% or $2.4 million year-over-year, mainly due to lower C1 instrument revenue; product revenue from applied customers was $9.3 million, up approximately 19% or $1.5 million year-over-year, driven primarily by higher proteomics and genomics analytical instrument revenue. Our total instrument installed base was approximately 1,765 instruments at the end of the second quarter, of which approximately 890 systems were designated for single-cell biology research. Approximately, 910 units of the installed base were analytical systems, with the balance comprising preparatory systems.

Geographic revenues as a percentage of total revenue for the second quarter 2016 were as follows: United States, 49%; Europe, 30%; APAC, 14%; and 7%, other. Geographically, the year-over-year total revenue growth rates for the second quarter 2016 were as follows: APAC, up 7% and other, up 17%; Europe was down 6%; and United States, down 3%.

GAAP net loss for the second quarter of 2016 was $18.6 million compared with a net loss of $15.2 million for the year ago period. Non-GAAP net loss for the second quarter was $9.9 million compared with a $5.8 million non-GAAP net loss for the year ago period. GAAP product margin was 55% for the second quarter of 2016 versus 58% in Q1 of 2016 and 57% for the year ago period. Non-GAAP product margin was 70% for the second quarter of 2016 versus 72% in Q1 2016 and 71% for the year ago period. Both the sequential and year-over-year decreases in non-GAAP product margins were mainly due to lower instrument average selling prices.

Turning now to OpEx, research and development expenses were $10 million in the second quarter of 2016 compared with $10.4 million for Q1 2016 and $10.1 million for the year ago period. The sequential decrease in research and development expenses was driven primarily by lower compensation costs.

SG&A expenses were $23.8 million for the second quarter of 2016 compared with $25.5 million for Q1 2016 and $21.2 million for the year ago period. The sequential decline in SG&A expenses was mainly due to lower personnel costs. The year-over-year increase in SG&A expenses was mainly due to higher headcount.

Moving on to the balance sheet, total cash, cash equivalents and investments were $86.4 million at the end of the second quarter of 2016 compared with $95.2 million at the end of Q1 2016, a sequential decline of $8.8 million. Accounts receivable were $18.9 million compared to $19.6 million at the end of the first quarter of 2016. DSO at the end of the second quarter 2016 was 60 days compared to 61 days at the end of Q1 2016. Turning to cash flow, net cash used in operating activities was $7.4 million for the second quarter of 2016 versus $7.8 million in the first quarter.

Now, moving on to our financial guidance, our full year 2016 financial guidance is unchanged from our prior guidance and includes revenue from our Imaging Mass Cytometry system, which we expect to release in the fourth quarter. For the full year 2016, we expect revenue to be in the range of $124 million to $128 million. Currency related impact on 2016 revenue is expected to be minimal.

Operating expenses on a GAAP basis are projected to be between $132 million and $137 million. Non-GAAP operating expenses are projected to be between $114 million and $118 million. Our non-GAAP operating expense guidance excludes approximately $5 million of estimated depreciation and amortization expense and $14 million of estimated stock-based compensation expense. Interest expense is projected to be $6 million. Capital spending is expected to be between $4 million and $6 million. Total cash outflow for 2016 is expected to be between $25 million and $30 million, including capital expenditures of approximately $4 million to $6 million. Cash, cash equivalents and investments are expected to be approximately $70 million to $75 million at the end of 2016.

And with that, I will now turn the call over to the operator to open it up for questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from the line of Sung Ji Nam from Avondale Partners. Your line is open.

Sung Ji Nam

Hi, thanks for taking the questions. Gajus, I am assuming your research business is largely exposed to global academic spending. And if that’s the case, could you give us some color in terms of what you are seeing as far as academic spending is concerned globally. Specifically, Europe, Asia and Japan given there is a lot of mixed outlook coming from your peers?

Gajus Worthington

Well, I would say that the only consistent pattern ex-U.S. right now is in Japan where it continues to be a very challenged research environment and that’s been – that’s gone back multiple quarters and we have cautioned repeatedly that we won’t be counting on growth out of Japan until we see that repeatedly. And this past quarter was consistent with previous quarters and that it was highly volatile. In Europe, we haven’t seen anything, any pattern which we would care to call out at this point in time as it relates to the availability of funding generally. I know there has been some commentary about that from some of our comparables even going back last quarter. But in general, as it relates to our business, the drivers there are really things that relate to us specifically our markets, our opportunities and not secularly to funding generally. So, I guess to summarize, the only territory which we see a consistent pattern which we could therefore call out is in Japan and that’s been well documented.

Sung Ji Nam

Okay. And then my follow-up is for the Imaging Mass Cytometry product line, you expected to launch later this year. Understanding that there is good backlog historically, it’s taken a few quarters if not more for significant revenue recognition coming from new products. So, I was wondering if they are being currently – if that system is in Early Access Program currently. I am just trying to get a sense of what gives you confidence that you will see meaningful – you will see some impact from that product line? And then also could you speak – could you talk about what the list price might look like in comparison to your rest of your mass cytometry products? Thanks.

Gajus Worthington

Sure. So, my confidence for the IMC release and its contribution to revenue is manifold. So, let me take you through the various elements. So first, the R&D development and manufacturing team in Markham has done a fantastic job of consistently hitting their milestones. And as a result, we are very confident in the schedule for the fourth quarter, schedule for completion of the system, its availability and manufacturing. In addition – and this is I think unique in our experience. We have meaningful backlog that’s been generated in the first half of this year. And of course, we expect that even more backlog will be generated in the second half of this year. We are heading into our launch, which means then that begin to fulfill our revenue obligations, we need to ship. On top of that, we have a very strong pipeline. In addition, we have beta units out of our customer sites right now. As you may remember, we shipped our first alpha units or prototypes at the very end of 2014. And so we have actually a pretty good set right now of customers that are up and running on this platform and generating data. They have been actually publishing off of it. Some of those publications are quite meaningful, like major biotech and what have you. There are also presentations recently at CYTO posters and podium presentations from the Imaging Mass Cytometry system. All of that has led to a significant amount of commercial groundwork that’s been going on over the past year that contributes to word-of-mouth among customers and opportunities that we have now in our pipeline of confidence in the customer base based on data that’s been shared between peers. And as I mentioned earlier, this has really manifested and most importantly, in backlog. So, based on all those factors and I realized there are a bunch of them. But that’s a big part of the reason why we are very confident that this will be a contributor in the fourth quarter.


Your next question comes from Bryan Brokmeier from Cantor Fitzgerald. Your line is open.

Bryan Brokmeier

Hi, good afternoon. I apologize if I missed this, but third quarter was a bit below expectations, I understand your plan for launching the imager, so what gives you the confidence in being able to achieve your guidance that you have provided earlier this year?

Gajus Worthington

Sure. So if I were – the way I would interpret your question there Bryan, is that if we are looking at a third quarter that is sequentially flat, that implies a pretty meaningful up-tick between 3Q and 4Q, just to put a finer point on it. So I think I will come at it that way. And if you want to come back because an element of your question that I missed, I will be happy to clarify. So there are multiple elements that give us confidence in the guidance and also what it implies for the fourth quarter. The first is that we always have a seasonal up-tick in the fourth quarter in our business. That’s common in our industry. It’s in biopharma, it’s a result of budget flush in academia that it can be – it’s generally related to the use of fiscal year budgeting. And it’s very predictable, it’s very consistent. There is nearly always an up-tick that’s fairly meaningful sequentially between the third quarter and the fourth quarter. In addition, as I mentioned in the prepared remarks, we are expecting some traction with the C1 based on our plan and specifically the initial adoption of the small cell high throughput chip, the availability of the medium cell high throughput chip and the impending availability of the 10-K solution that will come out of the C1. I should also note that the launch of TCR sequencing on the C1 which we announced today is a really important application in immunology and immunotherapy. And it’s already generating interest in academia and in biopharma. Third piece is that we expect continued strength in proteomics. And that includes a bolus of initial revenue from the Imaging Mass Cytometry system. That’s the availability of the system itself. And then in addition, there were upgrades of existing Helios customers if you enable them to capitalize on the imaging function. Last thing that I will note there Bryan, is that we said last quarter that in the first half of the year we expect to do roughly 45% of our year in the first half. And the first half of this year tracks accordingly to roughly the midpoint of our guidance.

Bryan Brokmeier

Okay. And this afternoon, you announced the hiring of Chris, I see his positions, but I am not really that familiar with them, what does he sort of bring to the table, what are his skill sets that may allow him to quickly come up to speed in the company and really start to affect sales for the company?

Gajus Worthington

Well, it’s a long list. So first off, highly relevant domain experience in genomics, in genetics, in cell biology, his exposure to that as a President and executive level manager going back to Invitrogen Life Technologies and more recently, Thermo Fisher Scientific. Another major piece, which is a big part of what we are looking for was experience, successful experience in driving growth of already meaningful businesses to much higher levels. We really in the search – which I conducted over a long period of time we were looking for somebody who had a demonstrated track record in taking businesses that were already in the hundreds of millions of dollar range to much higher levels and dealing with the attendant, organizational complexity, the maturation of process and discipline and what have you. Also we were looking for somebody who was in alignment with our culture to continue to bear the standard of Fluidigm, both internally and then with our customer base. I could go on, but that’s a pretty good foundation for why I feel Chris is a really important element of our, frankly our growth plan going forward.


Your next question comes from the line of Bill Quirk from Piper Jaffray. Your line is open.

Alex Nowak

Great. Good afternoon everyone. This is actually Alex Nowak filling in for Bill today. I apologize if this was already discussed, but I jumped on the call late, do you think there are any competitive dynamics in single cell that could explain why C1 instrument revenue declined in the quarter, I know a recent competitor just came out earlier this year and there is already starting to be some reports emerging on their technology?

Gajus Worthington

Well, we noted in the call that – in the prepared remarks that the C1 was one of the main drivers of our shortfall during the quarter. And indeed, a chunk of that is related to intensified competitive dynamic, which the fact that there is a competitive dynamic is not a surprise. It was more intense in Q2 than our initial planning had indicated and we expect that to continue in Q3. So there are few things that I want to note about the C1 though as we go forward. The consumable impact in the second quarter was actually relatively minimal. And that’s important because what that indicates is that our customers are continuing to use the C1. So it’s not as if they are shutting these things off. That’s a really important thing to take home. The second thing is that the performance in revenues, actually stratified somewhat based on the segment. So in research, for the first half of the year, it was as we expected and that’s really important also because it indicates that in that environment – and admittedly with reps and folks on the ground, who are more experienced with the C1 that it’s doing what we expected it to do. However, it was more challenged and applied and why might that be. Well, the applied team is newer. They have been on the ground now for six months thereabouts and still C1 and some of the single cell technology is new to them and we are still building a pipeline there. We are still doing work there. So maybe not surprising that would be more challenged there in applied. So indeed, the business was impacted by competition in the second quarter and we expect that trend to continue in Q3. However, as we execute on our product roadmap, we expect there to be an improvement. And I will reiterate where those improvements come from. They come from TCR sequencing, which is driving interest in biopharma, its driving interest in academia. It comes from the small cell high throughput chip, which is in the – being tested by customers now and will be released later this quarter, the medium cell high throughput chip that is on track for our fourth quarter delivery. And finally, the anticipation of our order of magnitude increase in throughput solution. So hopefully, that gives you a more complete picture about what the competitive dynamic, how it stratifies and what we are doing about it.

Alex Nowak

Yes. That’s actually very helpful. And then just a second question, the Chinese precision medicine program includes the funding component for single cell analysis, I was just curious if you are seeing any orders or even sales coming from this program already?

Gajus Worthington

China has done well in the first half of this year and we are expecting it to be a – to continue to do well in the back half of this year. And the funding, I think we have noted for quite some time that we expected funding availability specifically earmarked for single cell to pop-up internationally so the funding coming out of China is not a surprise to us and some of that is starting to get released and some of that will play out frankly over the course of years. We expect there will be more announcements domestically and around the world with specific allocation for single cell funding. This is what – one of many things that gives us confidence in the growth of the market over the long-term. Just to switch continents on you, the NIH has indicated that they are soliciting proposals for – from the common fund for another round of activity related to single cell biology. We think that’s actually a very important signal that the NIH is going to follow-up their initial common fund that was dedicated for single cell biology was something perhaps even more substantial.


Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.

Doug Schenkel

Hey guys. Thanks for all the color on the Q3 to Q4 ramp logic. I am sure you guys appreciate the guidance implies that you are thinking that revenue growth would need to go from a range of $28 million to $29 million per quarter over the first three quarters of the year to about $41 million in Q4, which would represent about 33% year-over-year growth. Again, you have provided a lot of color on kind of the logic behind this. So, I don’t mean to be redundant and I am not asking you to repeat what you have already said. But I think we have to come back to this again, because I think you guys sort of acknowledged the recent track record hasn’t been pristine. And this Q3 to Q4 jump is pretty outsized even recognizing historical norms for seasonality. So, with that in mind, can you provide something more specific on any of the following things like what do you have in backlog dollars that you expect to come in Q4? How much specifically of this is attributable to Imaging Mass Cytometry given one of the questions earlier that kind of pointed to the fact that typically it does take a little while for an instrument to get going? Again, not trying to be difficult, but this seems – on the surface, pretty aggressive. And I want to give you, I guess one more opportunity to be a little more specific on why we should take comfort that this is a doable number?

Gajus Worthington

Sure. So, there are a couple of things that you mentioned there that I can be more clear about, but not necessarily breakout dollars and cents for each component here. But regarding the ramp of initial products and this is something that we have talked about before and in general, I think we have always been very cautious about that. There are really material differences in the IMC launch and its commercial outlook for the remainder of the year versus anything that we have done historically, most notably that we do have meaningful backlog heading into the back half of this year. That backlog will grow. It has happened absent to commercial launch. It has happened absent to any salespeople who were specifically focused on this platform. It has happened largely organically and that is through word-of-mouth and through the endorsement that the technology has gotten from peer-to-peer. So, it is very logical that we would be able to repeat that performance in the back half of the year in terms of generating backlog. We did nothing better, but we will do a lot of things better. We are going to have a product launch. There is amounting publications and information that are publicly available from our initial users. They are becoming more vocal. They are talking to investors, not on our behalf, but we know that as they tell us this that they are being contacted by them. So they are referenceable at this point as well. So anyway, without giving specific dollars, its meaningful backlog that we already have and we know that, that will grow through the back half of the year.

And then in terms of our ability to recognize revenue, because we have enough of these platforms out in the field already, many of the kinks that often exist in figuring out what value is or how you would go through the accounting rigmarole to make sure that you can confidently recognize revenue, we are well advanced on certainly much more so than we have been with a brand new system in the company’s history. So, the math that you described of a meaningful uptick, it incorporates a meaningful contribution and the bowl is really of revenue from the IMC launch, which for the reasons I described earlier, we have high confidence. And then if you layer that on top of a sequential increase between Q3 and Q4 that is consistent with history. You can get to the kind of growth that we are – that this implies for the fourth quarter.

Doug Schenkel

Okay. Vikram, I think a question for you, just looking at the gross margin performance in the quarter, I mean we knew this wasn’t going to be your best gross margin quarter ever. But I think this is the weakest gross margin quarter we have seen this decade. Can you just talk about – I am just having a hard time when I kind of model out the components here getting to these levels, can you talk about gross margin in the quarter?

Vikram Jog

Yes. So, thanks Doug. So, as we have consistently said, we have always encouraged analysts to model us at the high – in the high 60s for gross margin and that’s what we would encourage you to do. We do that internally. So, the rest of the – and we don’t specifically give guidance on gross margin, but we have given and reiterated guidance on OpEx and cash flow for the year. And internally, we have consistently modeled ourselves at the same number that we encourage analysts to model us at.


I am showing no further questions at this time. I would now like to turn the conference back to Ana Petrovic.

Ana Petrovic

We would like to thank everyone for attending our call. A replay of this call will be available on the Investors section of our website. This concludes the call and we look forward to the next update following the close of the third quarter of 2016. Good afternoon, everyone.


Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. You may now disconnect.

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