Ana Petrovic - Director, IR Gajus Worthington - President, CEO, Co-Founder Vikram Jog - CFO.

Bill Quirk - Piper Jaffray Dan Leonard - Leerink Partners Doug Schenkel - Cowen and Company Peter Lawson - Mizuho Securities.

Good day, ladies and gentlemen, and welcome to your Fluidigm Second Quarter 2015 Financial Results Conference Call. At this time all participants will be in a listen-only mode. Later there will be a chance to ask questions and instructions will be given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded.

Now I'd like to turn it over to your host, Ana Petrovic. Ana, you are now open..

Thank you. Good afternoon, everyone. Welcome to the Fluidigm second quarter 2015 earnings conference call. At the close of the market today, Fluidigm released financial results for the second quarter ended June 30, 2015. During this call we will review our results and provide commentary on our recent commercial activity and market trends.

Following these comments we will host a Q&A session. Presenting for Fluidigm today will be Gajus Worthington, our President and CEO; and Vikram Jog, our Chief Financial Officer. This call is being recorded and the audio portion will be archived in the Investor section of our Web site.

During this call and subsequent Q&A session we will be discussing plans and projections for our business, future financial results and market trends and opportunities, including among others, statements regarding single-cell biology and production genomics markets and our prospects and opportunities in such markets, plans and strategies for our business and product lines and anticipated results there from, expected revenue contribution from new products, anticipated product revenue trends and estimates of 2015 total revenue, GAAP and non-GAAP operating expenses, stock-based compensation expense, depreciations and amortization expense, interest expense, capital spending and currency related impact on 2015 revenue.

These statements are forward-looking and are based on our management current expectations and beliefs. As a result these forward-looking statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results.

These risks and uncertainties relate without limitation to the accuracy of assumptions underlying the financial forecast provided today. The impact, if any on our future forward operating results of organizational and operational changes and strategies, employee recruitment and retention and the manufacturing or supply of our products.

Information on these and additional risks, uncertainties and other information effecting our business and operating results are contained in our Form 10-Q for the quarter ended March 31, 2015 and our other filings with the SEC. Additional information will also be set forth in our Form 10-Q for the quarter ended June 30, 2015 to be filed with the SEC.

We advise investors to review these risk factors carefully. Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law. During the call, we will also present certain financial information on a non-GAAP basis.

Reconciliation between GAAP and non-GAAP results are presented in a table accompanying our earnings release which can be found in the Investor section of our Web site. I will now turn the call over to Gajus..

Thanks, Ana. Good afternoon, everyone. During the second quarter we continued to face significant challenges. In this call, I will explain what they are, the state of our business, our action plan and the ramifications on our guidance. Last quarter we highlighted four areas.

First we said that while we had a bumpy CyTOF quarter we were confident in the outlook for this product line. Our CyTOF products did indeed do well in Q2 and we're encouraged by the growth in this business. Second, we told you that our biomarker sales were soft and at the time we were working to assess the underlying root causes.

We believe that a significant factor was the unprecedented number of exciting new product announcements in the first half of the year. This concentrated portfolio of enabling new tools is the foundation of our growth for the next several years.

However, these in turn pulled our sales and marketing teams attention away from our core products and we fell short. As a result, we missed out on some potential market opportunities for these products. Third, we told you that our production genomics consumables were adversely impacted by lumpy purchasing patterns.

Unfortunately this was not a one quarter event. Finally, we experienced an unusually high currency headwind and this continued in Q2 as expected. In aggregate we expect these factors to weigh down growth through the remainder of the year.

We now believe it is both prudent and necessary to further reduce our 2015 revenue outlook to between $110 million to $115 million versus our previous guidance of $133 million to $143 million. I'll have more to say on this shortly, but first I will summarize our results in Q2. Total Q2 revenues were $28.6 million, up 4% year-over-year.

On a constant currency basis, total revenues were up 11% year-over-year. Single-cell biology revenues which include both single-cell genomics and proteomic product lines were up approximately 20% year-over-year due to strength in proteomics.

CyTOF performance in Q2 was strong aided by our next-generation platform Helios which was launched at the CYTO Meeting in late June. The response was extremely favorable. One out of every seven attendees requested the sales follow up.

As in Q1 we continue to feel good about the outlook for CyTOF products and expect it will contribute significantly to 2015 revenue and beyond. In contrast to Helios' bright spot, Q2 sales of our core single-cell genomics instruments declined year-over-year and sequentially.

Though last quarter these were confined to BioMark, we saw some impact on the C1 in the second quarter. In the last three months we have worked hard to understand the dynamics driving these shortfalls versus plan. As I mentioned, we believe the unprecedented number of new products launched diverted attention from core products.

This means our recovery will take longer than we thought a quarter ago. We have aggressively moved to realign our commercial activity between core and new products and we believe we now have the right plan to fix this. However, these changes take time to have effect so we do not expect to see a positive impact on revenue until the end of 2015.

Interest in our new products, especially Polaris and Callisto is high and this is important and good news. The single-cell genomics market remains in its infancy and with proper cultivation we see our new products as uniquely enabling and central to the growth of this exciting market.

The sales cycles have proven to be more unpredictable than anticipated and we are now forecasting minimal contributions to fiscal year 2015 revenues from new products.

Finally, decreased consumable sales to production genomics customers in North America drove our genomics analytical pull through below our historical range for the second quarter in a row.

As we discussed last quarter, part of this was due to competing commercial priorities and resources, something that we moved aggressively to ameliorate by naming Steve McPhail to oversee our efforts in this market another dynamic though is that we did not gain as many new production genomics customers as we had planned in the first half of 2015 due to competition from alternative technologies.

We believe our new organization will allow us to ultimately prosper in the production genomics market. These are sobering facts for sure, but nevertheless, I am confident that we have thoroughly evaluated our recent challenges and are implementing sound strategies to address them.

The reality is that our fixes will take time to have effect resulting in a substantial downward revision of our full year guidance. Our change in guidance is primarily based on the following expectations. Genomic and analytical consumables pull through range will be consistent with the first half of the year.

Minimal contribution from new products and continued pressure on core single-cell genomics instrumentations. Last quarter, we began to delineate our action plan to deliver Fluidigm back to robust growth by creating a focused production genomics team. Since then, our efforts have intensified across our entire organization.

Our key actions are, number one, continue to implement our new organization to bolster production genomics revenue and facilitate greater focus within single-cell biology. Through dedicated attention to our customer base and disciplined execution of our strategy and tactics we expect our growth in this market to resume.

Number two, realign our commercial activity with appropriate balance between new products and the continuing opportunity for BioMark and C1 sales. Number three, reorganize marketing with new leadership to support commercial activity for the BioMark and C1.

Two long-time leaders of Fluidigm with consistent track records of success have taken over the management of single-cell marketing within Fluidigm. Number four, recruit additional sales executive leadership to create structure required to meet the needs of our expanded product portfolio.

While 2015 has presented multiple challenges for Fluidigm, I know we will surmount them as this company consistently has many times in the past. High-resolution single-cell biology is only the very beginning of a long rich journey beyond the basic research lab into applied and clinical science.

We have worked hard and successfully to create the industry's most advanced portfolio of single-cell technologies across genomics, proteomics, function analysis and into next year, imaging. We will continue to work aggressively to capitalize on this considerable opportunity in front of us.

I welcome your questions after Vikram discusses our financial results..

Thanks, Gajus. And good afternoon, everyone. I will now walk you through our second quarter 2015 operating results and highlights. In the second quarter of 2015, total revenue of $28.6 million was up 4% year-over-year and 11% up on a constant currency basis.

Instrument revenue grew 13% year-over-year to $17.4 million driven by increased sales from CyTOF systems and contributions from new products partly offset by BioMark HD and C1 systems.

Approximately 90% of the BioMark HD systems sold during Q2 were motivated by single-cell research with approximately 20% of C1 systems sales combined with a BioMark HD system. Our C1 attachment rate to BioMark HD was generally in line with our historical pattern.

Our total consumables revenue, which includes IFC, assays, reagents and antibodies was $11.1 million during the second quarter, down 8% year-over-year, mainly due to lower sales from production genomics applications.

Our genomics analytical IFC pull through in the second quarter of 2015 tracked below our historical range of $40,000 to $50,000 per system per year. The year-over-year decrease was driven by lower production genomics consumable sales.

Based on our results in the first half of 2015, we are revising our genomics analytical IFC pull through range to $25,000 to $35,000 per year.

Our genomics preparatory IFC pull through in the second quarter of 2015 tracked within our historical range of $15,000 to $25,000 and our proteomics consumables pull through in the second quarter of 2015 tracked within our historical range of $50,000 to $70,000 per system per year.

Our total instrument installed base was approximately 1,485 instruments at the end of the second quarter of 2015 including approximately 710 systems is designated for single-cell biology research. Approximately 53% of the installed base was comprised of analytical systems and the remainder were preparatory systems.

Geographic revenue as a percentage of total product revenues for the second quarter were as follows; United States 50%, Europe 31%, Japan 3%, Asia-Pacific 10% and 6% other. Geographically, the year-over-year revenue growth rates for the second quarter 2015 were as follows; Europe up 20%, Japan up 161% and other up 107%. The U.S.

and Asia-Pacific were flat and down 40% respectively. Notably, we saw strength in Europe despite foreign currency exchange headwinds in Europe. In the United States, sales were tempered year-over-year mainly due to decreased consumables pull through by production genomics customers and declining core single-cell genomic instrument sales.

In Asia-Pacific, year-over-year weakness was primarily due to a tough single-cell proteomics product line comp in Q2 of last year and declining core genomics instrument sales. Net loss for the second quarter was $15.2 million compared to a net loss of $12.7 million in the prior year second quarter.

Adjusting for stock-based compensation, depreciation and amortization, interest expense, amortization of developed technology and other acquisition related income tax benefits, non-GAAP net loss for the second quarter of 2015 was $5.8 million compared to $1.7 million of non-GAAP net loss for the second quarter of 2014.

Please refer to the reconciliation of GAAP to non-GAAP information attached to the second quarter 2015 earnings release for details. GAAP product margin was 58% in the second quarter of 2015 versus 64% in the year ago period and 60% in Q1 2015.

After adjusting for amortization of developed technology, stock-based compensation, non-cash revaluation of acquired inventory and depreciation and amortization, non-GAAP product margin was 71% in Q2 2015 versus 77% in the second quarter of 2014 and 73% in Q1 2015. The decline was primarily due to manufacturing costs and deferring product sales mix.

Turning now to operating expenses; research and development expenses were $10.1 million in the second quarter of 2015 compared to $11.4 million in the second quarter of 2014 and $10 million in Q1 2015.

The year-over-year decrease in R&D expenses was primarily due to one-time acquisition related stock-based compensation expense in the prior period of 2014. SG&A expenses were $21.2 million in the second quarter of 2015 compared to $18.7 million in the year ago period and $20.1 million in the Q1 2015.

The year-over-year increase in SG&A expenses was primarily driven by continued investments in expanding our global commercial footprint. Moving on to the balance sheet, total cash, cash equivalents and investments were $127 million at the end of the second quarter compared to $134.9 million at the end of Q1 2015.

Net cash used in operating activities was $17.6 million in the first half of 2015 versus $10.2 million in the first half of 2014. The increase in the first half of this year was primarily due to an increase in net loss adjusted for non-cash items and increase use of working capital.

Accounts receivable were $21.8 million at the end of the second quarter of 2015 compared to $19.6 million at the end of the first quarter of 2015. DSO at the end of Q2 were 69 days compared to 66 days in Q1 2015. Inventory was $18.8 million at the end of the second quarter 2015 up from $17.4 million at the end of the first quarter of this year.

Moving on to our financial guidance for 2015, as we mentioned earlier in the call today, we are lowering our annual revenue guidance for 2015 to a range of $110 million to $115 million. This includes an estimated negative currency related impact of approximately 4 to 5 percentage points at the midpoint of the range.

Operating expenses are now projected on a GAAP basis to be between $123 million and $128 million versus prior guidance of $129 million to $134 million.

Non-GAAP operating expenses are now expected to be between $101 million and $106 million compared to prior guidance of $105 million and $110 million, excluding approximately $17 million of estimated stock-based compensation expense and $5 million of estimated depreciation and amortization expense. Interest expense is projected to be $6 million.

And finally, capital spending is now expected to be between $6 million and $8 million compared to prior guidance of $6 million to $9 million. I will now turn the call over to the operator to open it up for questions..

[Operator Instructions] And we will take our first question coming from Bill Quirk from Piper Jaffray. Bill, your line is open..

Great. Thanks. Good afternoon, everybody.

The first question I guess is if we think about some of the issues that Gajus and Vikram that you talked about in terms of production and consumables potentially being able to come back with a little bit more attention there and also the larger single-cell opportunity, I guess I'm a little confused why you want to take the guidance down for the genomics instruments.

Can you help fill in some blanks there? Thanks..

Sure.

So let's see, first, we do think the fundamentals of the business are intact and we remain confident that we have very good long-term prospects for the company, but to reiterate, the main drivers that account for the changing guidance, BioMark and C1 sales were weak in the quarter and as I mentioned earlier, we had an unprecedented number of new product announcements and we stand by our decision that that was the right thing to do because these products will be the foundation of our growth going forward but that did divert effort and attention from those core products in our sales and marketing team and that implies that pipeline building and sales activity and what have you didn't happen as they could otherwise and as a result we missed out on some market opportunities..

Gajus, let me jump in here. Sorry, I guess I should've been more specific. I guess I was referring specifically to the average consumable utilization by those instruments. I'm struggling to understand why that would, why you're setting a new bar from $40,000 to $50,000 down to $25,000 to $35,000 per year..

So for production genomics, our model assumes that we have some amount of attrition among our customers and we have customers who – their businesses don't pay out the way they expect them to; some of them might go out of business; some of them might move to other technologies.

In the first half we had a plan that would include adding new high volume production genomics customers and we didn't achieve that plan and as a result we're expecting the pull through to remain where it is in the first half..

Okay. Got it. And then just looking at the reset guidance here, it looks like and correct me if I'm wrong here, but it looks like you guys are assuming that BioMark sales for the balance of the year, it looks like there's going to be a handful of systems.

Is that the right way to think about it?.

We didn't break out the individual product lines between them, Bill. But we are assuming continued pressure on core genomics instruments, BioMark and C1..

Okay. Got it. And the last one is just – I don't think this was asked last quarter, but given how things were shaking out, why did you guys hold-off on the decision to pre-announce the numbers and throw the new guidance out there? Thanks..

Same answer we had last quarter, we wanted and needed the time to do the best job that we could to give as accurate guidance as we possibly can..

Okay. Thank you..

Thank you, sir. We will take our next question coming from Dan Leonard from Leerink. Dan, your line is open..

Thank you. At a high level, your operating expense forecast is now greater than your revenue forecast for 2015.

How do you think about managing that a bit differently going forward if at all?.

Dan, this is Vikram. So we always analyze our costs to make sure we are at the right level of spending for the company. And so currently as you have heard earlier today, we've identified issues that actually required us to invest in SG&A, not reduce it. And we will continue to make investments in order to position the company for long-term growth.

We consider these problems that we are facing both last quarter and this quarter and for the remainder of this year as temporary, but we are confident about our future outlook and we will continue to make investments in order to position the company for long-term growth.

But of course as our business evolves we will also continue to evaluate our spending..

Okay.

And then my follow up question, Gajus, can you reflect on why the sales cycle for your new products is elongated?.

Well, until you actually start to sell a product, Dan, it's a matter of experience and modeling and theory. We did put our best thinking into that when we made our projections and made our models.

But once you start to sell then you start to learn what the actual time it takes to develop a resolved budget, how many prospects you need to develop an opportunity, how many opportunities you need to develop a sale and now that we have that information, unfortunately we were wrong in the way that we forecasted it before.

I suppose the important thing here is that we're in process now and implementing an aggressive action plan to resolve these issues and we continue to be confident that these products are highly differentiated and they'll be the basis of growth going forward..

Do you still plan to launch that new high throughput C1 chip in 2015?.

Yes..

Okay. Thank you..

Thank you, sir. So we will take our next question from Doug Schenkel from Cowen and Company. Doug, your line is now open..

All right, guys. I have a few. So the first question is – and I'm going to round. I know the numbers are small in the grand scheme of things, but you'll get where I'm going with this directionally. You reduced revenue expectations by about another $20 million excluding FX. Let's call one-third of that the change to new products.

Essentially you originally guided, or at least last time guided us to expect that you would get high single digit millions of contributions there. Now you've told us to take that out. That's roughly a third of the cut. It sounds like we're fine on DVS.

So the other $15 million or so, recognizing there's some error bars around that, how much of it's BioMark versus C1?.

Doug, we're not breaking out to that level of guidance. But I will directionally tell you that your BioMark outlook for the year was reasonably fairly baked in, in our May guidance. So the deterioration, there's some BioMark, but the incremental news on the core genomics instruments front is primarily C1..

Okay. That's a good segue to question two. So over the course of this year --.

I'm sorry, Doug. Before you go on, maybe you know this already, there's a third component in the reduced guidance and that's lowered consumables. But you probably picked up on that already..

Yes. I baked that into the BioMark and C1 category. So let's go to C1. So you've received a number of questions over the course of this year from many of us, definitely including me about competitive launches in single-cell genomics sample prep. Until now you've been pretty adamant that you view competition as expected and validating of the opportunity.

You also have indicated that you feel well positioned. Right now it looks like competitive launches or news of launches and the release of competitive protocols is having an impact.

Do you guys agree and if so, why didn't you see it sooner and if not, how do you back that up?.

Doug, we've always assumed that competition would come in single-cell genomics market given its attractiveness. There have been a couple of companies who have started marketing their platforms to compete against C1.

We continue to believe that we'll be the market leader based on our strength of the product differentiation, application, menu and installed base. But the fact is that we haven't lost any opportunity due to the competitive pressure though it may have extended the sales cycle in certain cases. So with that said, we're not guiding specific products..

No. But it's important, Gajus. BioMark is a legacy product. We don't look at BioMark as a growth driver for you. C1 is pretty important here. So you may want to avoid giving specifics, but I think you guys, it would be useful for you to provide a little more detail on things like this. So let's go to BioMark.

Consumable utilization, you pointed to production genomics as the issue.

In the quarter did placements excluding production genomics stabilize versus Q1 and was utilization on the consumables side outside of production genomics in the range?.

Yes. So utilization outside of production genomics was within our expectations and within the historical trends.

I think the other thing you're asking, if I'm not mistaken is the connection between BioMark and C1, is that right or not?.

No. You talked about the consumable, it hasn't been great on BioMark not being great you pointed to production genomics.

Outside of production genomics was utilization of BioMark as expected?.

Yes. It was as expected..

Okay.

And did BioMark placements in non-production genomics applications stabilize relative to Q1?.

The only other area that we really focus on other than production genomics is single-cell..

Okay. So that's the question.

Did you see another drop sequentially or was it stable?.

It was reasonable stable quarter-to-quarter..

Okay. All right. So the last one, and it's a pointed one, but I think it's fair, if we think back over the last 18 months, subsequent to the immediate issues that you had with DVS, the hope was the company would mature and grow from that experience. And it looked like that's how we were trending over the course of last year.

But as we sit here in August of this year, you look back, you've now missed three of your past six quarters including the last two. And I think to some extent it isn't real clear to a lot of us that you have a precise handle on what you're up against.

You've talked about structural changes, but not much in the way of changes in leadership other than the addition of Steve McPhail and you haven't really detailed much in terms of how you're thinking about change to the incentive structure or steps to improve visibility controls and reduced distractions.

It's been a tough 18 months for Fluidigm investors.

Can you give us more about what's the action plan? And if not now, when are we going to hear more about it?.

So we've laid out the action plan in our prepared remarks and this includes continuing to execute against our production genomics organization, a reorganization of our marketing team under the leadership of two very able executives from Fluidigm, the recruiting of additional executive leadership in the sales organization and aligning focus appropriately.

That all said, we understand the significance of these issues and we're not happy about them, but we are focused on addressing them efficiently for us.

Our shareholders, our customers and our employees, everyone including the Board of Directors involved agrees that the most effective way to address the probably at hand is to continue to implement the action plan that I outlined in our remarks and I reiterated just now..

Are you considering strategic alternatives, Gajus?.

I'm sorry.

You mean by that the sale of the company?.

Correct..

So the Board and the management, understand we work for shareholders. And of course, we'll do our jobs if there is an entity that wanted to come after Fluidigm.

However, that said, we continue to believe that our shareholders are best served by Fluidigm remaining independent that we're in the best position to make the most of these opportunities in a way that will reward shareholders as an independent organization..

Okay. Thank you..

Thank you. [Operator Instructions] So we do have one final question from Peter Lawson from Mizuho Securities. Please go ahead..

Hey, guys. It seems there's a series of things that went wrong this year and it sounds like there's a series of different events and reasons.

Is there anything underlying this, that's driving this in particular, one particular thing?.

Peter, as I mentioned in the call, the main issues that we're facing are the same ones that we've outlined in Q1.

Just to reiterate, the pressure that we're seeing on poor genomics single-cell instrumentation that we believe is related to the large number of products that we've launched and diversion of attention by our commercial team sales and marketing away from our core products.

The second thing is that the lumpiness of production genomics consumables was not a one quarter event and we're now forecasting that to run through the year.

The new information is that our expected sales cycle for our new products is different from what we had thought in Q1 and that is a result of new information and that's information that we could not have had a quarter ago because we weren't yet really selling those products.

And once you start to sell them, then you learn what you're really up against. And then finally we noted that although we had a challenge in Q1 for CyTOF that actually did quite well in Q2 and we're expecting that to continue that to be a contributor.

So those are the factors that we see and as I mentioned with the exception of one of them, they're really no different from Q1 to right now..

Has there been a rotation of employees or are you really thinking about adding to kind of help rectify these issues?.

Well, I mentioned several of those things specifically, one of which has happened already. So marketing is under new leadership, a combination of two executives who have been with the company for a long, long time and who have had a long and consistent track record of success. And I'm confident they're going to do a great job with that.

We also have mentioned that we're recruiting additional executive sales leadership through our sales channel to help ensure that we have the right alignment of focus and we have enough horsepower to get after the multiple opportunities that we have.

So there is both some change in leadership and also some additional leadership that we're bringing into the team..

Have you lost important employees – any key employees?.

No. I don't think we ever comment on attrition at a specific level, but I would say that generally our employee attrition rate is not out of line with what we would've expected. In other words, I'm not singling that out as a cause for where we are right now..

Got you. Okay. Thank you so much..

Okay. Thank you. I'm showing another question coming from Dan Leonard from Leerink. Dan, your line is open..

Thanks. Just one follow up, I wanted to get in there. Gajus, you mentioned in your prepared remarks about losing to competing technologies in the production part of your business.

Could you please elaborate on that?.

Sure. Production genomics is and has always been a highly competitive market. I mean it's an established market where typically we are taking share from some existing technology and replacing it. Those technologies range. Some of them are very conventional, legacy PCR instrumentation.

There are other things like Life Tech's QuantStudio, what used to be Sequenom's iPLEX platform. You still find what used to be Illumina BeadXpress platforms out there. There's some next-generation sequencing mixed in with that as well. So there's a variety. It's a highly competitive market and it always has been.

So in this particular case it was nothing new, no new stuff that entered the market, it's just the same competitors that we've had since we've been in this market..

Okay. Thank you..

Yes..

Okay. Thank you. As I'm showing no further questions in the queue, I'd like to turn it back to Ana Petrovic for any concluding remarks..

We'd like to thank everyone for attending our call. A replay of this call will be available on the Investors section of our Web site. This concludes the call and we look forward to the next update following the close of the third quarter of 2015. Good afternoon, everyone..

And ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day..