NanoString Technologies, Inc.

Good afternoon. Thank you for attending today's NanoString third quarter 2022 operating results conference call. My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Doug Farrell with NanoString. Doug, please go ahead.

Thank you, operator. Good afternoon, everyone. Joining me on the call today is Brad Gray, our president and CEO, as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the third quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, cash flows, current and future orders, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recent planned product launches, as well as the impact of macroeconomic factors. Looking forward, these statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from these projected, and we undertake no obligation to update those. Later in the call, Tom will be discussing our financial results and 2022 guidance. We have prepared as a supplement to GAAP financial measures selected non-GAAP adjusted measures, calculations of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP and most otherwise noted. You can also find the reconciliation of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using these in this afternoon's press release. To aid analysts and investors in building their models, We have posted exhibits under the financial information tab of our Investor Relations homepage that include a presentation of non-GAAP or adjusted measures or other selected financial data. I'd like to remind everyone that next week we'll be participating in the Speedfall Healthcare Conference in New York, as well as the Jefferies Healthcare Conference in London. We look forward to having the chance to speak with many of you then. Now I'd like to turn the call over to Brad.

Good afternoon, and thank you for joining us. Spatial biology is a dynamic field. yielding powerful scientific insights. While expansion will last a decade or more, the next few years will determine the mix of technologies in which key discoveries will be made. While there are other emerging spatial biology providers, we believe that our early mover advantage, best-in-class technology, ecosystem of synergistic platforms, and blue chip partners position us to lead. For this reason, our top priority is to maximize the number of our spatial biology instruments placed in leading research labs worldwide. During the third quarter, we made great progress on this top priority, generating orders for approximately 60 spatial biology instruments, an increase of approximately 70% compared to the same quarter a year ago. We have now sold more than 100 cosmic spatial molecular imagers and accumulated a revenue backlog valued at approximately $23 million. We expect this backlog to increase in Q4 and to set us up for robust growth for 2023. During Q3, we also advanced our scientific leadership. Images generated by our customers using the Geomics Digital Spatial Profiler were featured on the cover of not one but two of the world's leading scientific journals. The seminal description of Cosmex was published in another leading journal, and we strengthened our informatics ecosystem through a partnership with Visiopharm. whose mission is to transform pathology through AI-based image analysis and workflow standardization. The degree to which customer interest in spatial biology is trending towards platforms that provide spatial imaging at single-cell resolution has been even greater than we previously expected. The intense customer focus on single-cell imaging resulted in fewer orders for the geomics instrument, and in Q3, we captured 20 geomics orders compared to the 25 to 30 orders we had expected for the quarter. Fortunately, our cosmic spatial molecular imager is a leading product in the single-cell imager category, and we are capturing demand at a significant pace. We generated approximately 40 COSMICS orders during Q3, substantially exceeding the 25 to 30 COSMICS orders we had guided for the quarter. As a result, while we recognized less geomics revenue than previously expected, we exceeded our guidance for overall spatial instrument orders. While our spatial biology instrument orders were strong, Q3 was a challenging order for consumable sales, which were the largest contributor to the shortfall in our Q3 revenue relative to guidance. We experienced a decline in annual consumable pull-through per system for both encounter and geomix, which we believe was due to a combination of lumpy ordering patterns, customer life cycles, and macroeconomic factors. For encounter, and seemed to be driven by decreasing demand from the older systems in our installed base. For Geomix, the weakness seemed to be primarily a product of lumpy ordering patterns and the impact of a relatively large number of newly placed systems still ranting to their full consumable run rate. In both cases, weakness was exacerbated by broader market conditions, including continued clinical trial delays among large pharma customers reduced spending in cash-strapped small biotechs, and COVID-19 lockdowns in China. While we are clearly disappointed by this shortfall, I remain confident that we are set up for a strong 23 and beyond. Importantly, we have recently reevaluated our key priorities to ensure that we invest in the most promising aspects of spatial biology while streamlining our cost structure. As a result of this review, we are eliminating approximately 95 positions and reducing spend in other non-personnel areas. While these decisions are difficult, especially as we consider the impact on our people, these actions will ensure that a more substantial portion of expected 2023 revenue growth falls to our bottom line and that we are positioned to deliver on our commitment to achieve break-even without the need for additional financing. Tom will provide more details on our financial outlook during his prepared remarks. Before I hand the call over to him, I'd like to provide an overview of our progress towards our strategic objectives for the year. Given the tremendous customer interest, I will start with an update on our objective to launch COSMICS as the industry-leading molecular imaging platform. Customer interest in COSMICS has exceeded our expectations throughout the year. As we prepare to ship our first commercial systems in the weeks ahead, we are more confident than ever that COSMICS SMI has the best performance system to be a platform of choice. COSMICS leads with best-in-class performance metrics, including highest Plex RNA assays, the capability to image proteins, and robust data quality, all done in challenging FFPE tissue. COSMICS is helping us reach new customers and shows strong synergy with the whole transcriptome capabilities of GEONIX, boding well for our long-term leadership in spatial biology. In Q3, two-thirds of Cosmix instrument orders came from new to NanoString customers, showing how Cosmix is extending our customer base into discovery research. One-third of these new customers chose to adopt both Cosmix and Geomics at the same time by purchasing a bundle. Meanwhile, one-third of all Q3 Cosmix instrument orders came from labs who had previously adopted Geomics, primarily within translational research. To date, COSMICS has penetrated only 20% of the geomics installed base, suggesting many more opportunities for cross-selling going forward. In the near term, we expect our spatial instrument order mix to remain COSMICS heavy. COSMICS represents about 60% of opportunities added to our spatial instrument funnel in Q3, and we expect COSMICS to continue to account for about two-thirds of spatial instrument orders. Our beta program is progressing well, with Cosmics instruments installed and integrating with Atomics as three beta customer sites. Customer feedback has been overwhelmingly positive, and through these interactions, we've identified several training and software updates that we are incorporating into the final commercial rollout. We're concluding the validation of Cosmics and Atomics as an integrated solution, and are preparing our first commercial systems for shipments in the weeks expect to ship between five and ten Cosmic systems before the end of the year, and we can't wait to see the great science these systems will generate. Our second objective is to drive geomics CSP further into mainstream research, broadening adoption across multiple areas of research. From a scientific perspective, our Cosmic customers had a wildly successful third quarter. Papers and images generated using geomics grace the covers of two prestigious scientific journals, Nature Genetics and Clinical Cancer Research. In total, our customers published more than 30 new papers, bringing our total to more than 160 peer-reviewed publications as of September 30th. This productivity underscores the utility of geomics, particularly in translational research for human oncology and immunology. Demand for geomics instruments from translational researchers remains strong, even as discovery researchers opt for single-cell resolution of COSMICS. And translational researchers drove the vast majority of the approximately 20 geomics instruments ordered during the third quarter. We remain focused on ramping the consumable pull-through of our growing installed base of geomics systems. We've observed that customers take time to build their pipeline of spatial projects, reaching steady-state utilization 12 or 18 months after instrument purchase. While geomics consumable revenue has grown, the large number of instruments sold in the second half of 2021 and activated in the first half of 2022 have weighed on the consumable pull-through per system. We are bolstering our support for customer ramp and consumable pull-through going forward by refocusing our PhD field application specialists primarily on spatial biology experimental design, helping customers accelerate their pipeline of projects on our platforms. We expect this will benefit both geomics and cosmics pull-through in the long term. Meanwhile, we continue to invest in partnerships that enhance the geomics workflow. Using VisioPharm's AI-driven digital pathology software, Oncotopics Discovery, researchers will be able to analyze four color fluorescent images combine these images with those using traditional H&E staining to better understand the number and type of cells that are present within regions of interest. We expect the combination of these technologies will accelerate biomarker discovery and validation for both whole transcriptome RNA and high-flex protein analysis. We're committed to delivering informatics solutions that enhance research productivity, bringing us to our third strategic objective, which is launching our Atomics Spatial Informatics Platform. Spatial experiments require unprecedented bioinformatics capabilities to support image analysis, data visualization, and global collaboration. We believe that the highly scalable compute and storage capacity of our cloud-based Atomics platform is essential to drive broader adoption of spatial biology and that Atomics is an underappreciated competitive differentiator. We expect to achieve our goal of launching Atomix in the weeks ahead, as Atomix becomes available to the first customers receiving their commercial COSMIC systems. We expect to roll Atomix out to our GeoMix users during the first half of 2023. Atomix employs a flexible data structure, so it's ready to be leveraged using artificial intelligence and machine learning from day one. Together, Nanostring and VisioPharm are exploring opportunities for further integration by connecting our Atomics to VisioPharm software so that researchers can leverage artificial intelligence and machine learning to provide spatial biology for both of our spatial biology platforms. Our fourth objective for 2022 is to sustain our Encounter franchise. Q3 was a challenging quarter for Encounter. as new instrument placements and consumable pull-through both fell short of expectations. Instrument placements flowed among academic researchers, especially in Europe, and were hindered by a year-on-year decrease in the number of geomics plus encounter bundles that were being sold. Consumable pull-through was challenged by an increasing age of our encounter install base, which first commercially launched back in 2009. At this stage in the encounter lifecycle, we believe that some older systems are becoming inactive as researchers who originally purchased them transition to new roles or take their research in new directions. While the annualized considerable pull through on each active encounter system has remained relatively stable over the last 24 months, growth in the number of active encounter systems has flattened as the number of new encounters being placed approximately equals the number of older encounter systems being inactivated. While we do not view Encounter as a future growth driver, it remains an important foundational business that continues to generate great science and provide substantial cash flow to support our global commercial channel and innovation. I'd now like to turn the call over to Tom to review the details of our financial results and outlook for the balance of the year. Thanks, Brad, and thanks all for joining us today. Revenue for the third quarter was $29.5 million, reflecting a cosmically that are forecast syndicated and about a $1 million negative foreign currency impact. For Cosmix, we generated orders for about 40 new systems in Q3, adding approximately $9 million revenue backlog to be recognized in future periods. As of September 30, 2022, our cumulative Cosmix orders stated over 100 systems, translating to a total revenue backlog of about $23 million. Q3 geomics revenue is $9.3 million, Geomix instrument revenue was $4.7 million, reflecting approximately 20 new system shipments, and consumables revenue was $4.6 million. Q3 annualized Geomix consumables pull-through was about $58,000 per installed system. At the end of Q3, our Geomix installed base was approximately 330 instruments, with about 15 new instruments installed during the quarter. For our end-counter business, which includes all service, Q3 revenue was $20.2 million, End counter instrument revenue is $3.3 million, consumables revenue was $12 million, and Q3 annualized end counter consumable pull-through was approximately $44,000 for installed system. At the end of Q3, our end counter installed base was approximately 1,105 instruments, with about 20 new instruments installed during the quarter. Turning to margins and expenses, and certain other items. Please refer to our press release as well as the exhibits we have posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q3 adjusted gross margin was 57%, an improvement of 100 basis points as compared to Q3 of last year and an improvement sequentially, reflecting management of manufacturing personnel and other expenses COSMICS instrument shipments and consumables. Adjusted R&D expense was $14.5 million, a decrease of 12% year-over-year, primarily due to the capitalization of approximately $3.5 million of software-related product development costs that will be expensed in future periods. Inclusive of capitalized amounts, our Q3 R&D spend reflects continued investment in our spatial biology platforms, including hardware, primarily by investments made in spatial biology-related commercial initiatives. Q3 adjusted EBITDA loss was $26.1 million, and our cash and cash equivalents at September 30th were $230.5 million. We also announced today that we have taken steps to streamline our cost structure by eliminating selected positions and activities while maintaining key investments in spatial biology. As our business mix has evolved, we decided to take these steps to prioritize our portfolio of technologies, operational and commercial initiatives. These steps will allow us to better leverage our operating expenses while investing in our spatial biology business and will support our objective of reaching cashflow break even with our current balance sheet resources. We expect to record a charge of approximately 3.5 million in the upcoming fourth quarter related to these changes. Turning to guidance, our Q4 outlook reflects a revised mix through rates for geomics and encounter based on our Q3 experience with the upper end of our guidance ranges assuming modest Q4 driven seasonal improvement. For the fourth quarter, we expect to receive orders for over 60 spatial biology systems with an approximately 66%, 33% mix between cosmics and geomics, implying a cumulative total of over 200 spatial systems sold in 2022. Spatial biology revenue of $12 to $13 million, which we expect will derive from sales of geomic systems, the shipment of our first cosmic systems, and from consumables. We would expect approximately $7 million to come from instrument sales and approximately $5 to $6 million to come from consumable sales. We expect Q4 end counter revenue of $21 to $22 million and total Q4 revenue of $33 to $35 million. We have also updated our 2022 full year Our updated full-year outlook also incorporates approximately one month's impact of our announced cost reduction initiatives. Looking ahead to 2023, the Cosmic Systems orders we've already secured in 2021 and 2022 provide the foundation for expected revenue growth of 40% to 50% in 2023. We also expect improvement in our E-to-DA loss next year, reflecting expected revenue growth combined with a full year's impact of our cost reduction. ending 2023 with approximately $140 to $150 million in cash. We look forward to offering more details when we provide our 2023 annual guidance for our usual process in February. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. We are focused on the dual objectives of spatial biology market leadership and achieving cash flow repeat on our current resources. We believe our leadership in spatial biology is best measured through the pace of new instrument orders, and by that measure, we are having a solid year. Our successful launch of Cosmix sets the stage for strong revenue growth in 2023. We're addressing trends in our encounter and geomics business with decisive action and are streamlining our cost structure to maintain balance. With our unique spatial biology portfolio and strong balance sheet, we believe we are poised to deliver both market leadership and future profitability. With that, we'll now open the line for questions.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Kyle Mixon with Canaccord Genuity. Your line is now open.

Hey, thanks for the questions. I guess, Brad, just starting with the quarter, Could you just provide some more detail on, like, why Consumables for Geomix, you know, was lumpy by ordering was lumpy? Like, how do you kind of prevent that going forward? And you didn't mention the realign commercial team much. I mean, was any of the shortfall here due to that realignment earlier in 22?

Yeah, thanks for that question, Kyle. I'll start with a second one first. We do not believe that the shortfall in Q3 was related to our Salesforce realignment in the first quarter. We're really past the issues that that realignment created. Many of the differences we saw between territories that hadn't been realigned are now erased. The junior consumer reps have caught up to the senior consumer reps in terms of performance, et cetera. We think now that we have those execution issues behind us, we're more focused on macro and market trends and issues that are very specific to our installed base in terms of the lifecycle of the customer. So looking at the Q3 Geomix consumable pull-through, I'd say it's impacted by three different factors, which are sort of tricky to parse apart. The first is lumpy ordering patterns, and we've come to appreciate there that new sites for Geomix very often build inventory early on and then burn it off slowly over time. We know that we saw some stocking orders in the third quarter of 2020 one that did not repeat in the third quarter of this year. And as a result, you know, that's part of the explanation for the year-on-year drop. You know, the best evidence for lumpiness is the very strong Q4 seasonality that we have seen in both 2020 and 2021, where our pull-through reached over 110K. You know, that wasn't really pull-through on a run rate basis in terms of actual experimentation, but rather their stocking behavior. You know, the second issue is macro. And, you know, when we look at where our year-on-year pull-through dropped the most, we can see that it dropped the most amongst biopharma companies and within China. And we know that these groups have been under some macroeconomic pressure. The last one, and the trickiest one for us to model today, is the lifecycle impact of new sites. So it takes a lot for a geomic site to reach its full ramp of consumables. Sometimes there's logistical issues it needs to overcome, such as the purchase of ancillary equipment for slide prep or data storage and analysis solutions. Sometimes they're learning to plan new projects and picking on new concepts of spatial biology and region of interest collection. And sometimes core labs simply need to promote their new spatial biology capabilities to their local customers to build a book of business. And overall, when we look back, a new site tends to do about 60% of what its long-term run rate for consumables will be during its first year and then ramp up to 80% in the second year and 100% thereafter. Because we had a very large number of geomic systems sold in the second half of last year and installed and activated in the first half of this year, we are experiencing a wait. of relatively low pull-through systems that are still ramping up to their full run rate. So it's very tricky to assign, you know, to allocate the pull-through drop across these three different factors, but it's something we're continuing to study and that we will provide updates on in future periods and when we guide for next year. Okay.

All right. That was great. And then maybe just thinking about geomics specifically, just staying on that. Going forward, I guess spatial order is one-third, being geomic sounded like that was the expectation. Maybe just talk about your confidence in the health of that franchise and kind of the visibility heading into 23 and beyond. And I was also curious if NGS readout and WTA is that much of a tailwind as you thought that might have been last year or the year earlier. Thanks.

Yeah, I'll take the second question first again, Kyle. WTA and NGS readout now represent the vast majority of the use of the GeoMix system. 85% of our new systems are placed in front of the sequencers, and the whole transcriptome atlas assays account for something like 75% of our consumable revenue. So that's been really a successful story. We're also, you know, long-term optimistic about the value of the Geomix franchise. You know, the science speaks for itself. You know, it's no small thing to be on the cover of two different journals within just a few months' time. You know, we now have 160 peer-reviewed papers, 30 of which are being published. This, for translational researchers who are doing immunology and oncology, this is a very productive and powerful instrument. I do think the idea of single-cell imaging is sucking a lot of the oxygen out of the room right now with respect to people who are building their new spatial capabilities. But in the long term, we still believe geomics has an important place. I think the best evidence we have today for that is the strong synergy between cosmics and geomics when it comes to who's purchasing the cosmic systems, a very large fraction. of those who are buying COSMICS are either doing so with a GeoMix in a bundle or are labs who've already purchased a GeoMix and want to have complementary capabilities.

All right, perfect. And then just one more before I hop off. Just on the 23 outlook, I guess, and I know you're not going to provide much detail until the 4Q call. But, you know, Tom or Brad, a lot of this hinges upon geomics next year, including pull-through. I mean, how should we sort of think about that as we kind of model, you know, going ahead here? Thanks.

Yeah, I think that the first answer is obviously we'll provide more detail in February, Kyle. But setting that aside, what we built, our growth rate ranges, we didn't make heroic assumptions around geomics. I think that you can get to our numbers by assuming geomics repeats what it did this year for instruments and that pull-through. can get to those growth rate ranges with those conservative assumptions. So we'll comment more in February.

Okay. Got it. And just to repeat, the range was 40% to 50% growth, and I think it was the backlog for COSMICS of $23 million.

Is that correct? $23 million currently. We expect that to be about $30 by the end of the year in dollar terms. Perfect. Okay. All right.

All right, guys. I'll leave it there. Thanks so much for the questions. Appreciate it.

Thank you, Carolyn.

Thank you. Our next question comes from the line of Dan Brennan with Cowan. Your line is now open.

Great. Thank you. Thanks for taking the question, guys. Maybe just starting off with the updated guidance for the year. Fourth quarter arguably still looks a little steep. Just walk us through the visibility, particularly on geomics, and we're getting to like 12 to 13 million. in revenues versus $9 million, a little over $9 million this quarter. Just give us a sense. You know, it looks like placements are expected to double sequentially. Is that about right? Just anything on what's implied for geomics in fourth quarter and kind of what's the visibility there?

Yeah, so for fourth quarter, Dan, that $12 to $13 million range also is inclusive of the 5 to 10 cosmic systems that we expect to ship that Brad mentioned in his script. So you have to consider that when looking at that range. I think when you do that, you'll see that the range that we've established for Geomix is a conservative range that assumes that the bottom end of the range that pulled through is about the same as we saw in Q3, and at the top end is what you would characterize as a typical sequential improvement, which for Geomix has been about a 15% sequential improvement. That would be the top end of our range, which is still lower than the old range that we had before. So I think that the new

Got it. You guys talked about China and emerging biopharma in some of the remarks. Just can you remind us, like, how did China do in the quarter, and how big is that emerging biopharma business for you since you're kind of citing that as a weak point?

Yeah, so China underperformed its plan during the quarter. Tom may have the exact year-on-year numbers. China represents about 5% of our overall revenue for the company. Small biopharma represents about 15% of our overall revenue for the company. But we also cited that large biopharma, at least on the consumable side, has also underperformed. And that makes up about another 10% of our business. So I think, you know, this was not the only factor that impacted our performance. But, you know, we do have, you know, when you add those together, 25 to 30% of our business exposed to cement markets that are facing their own unique challenges.

Got it. And then when you think about Cosmix going into 23, obviously a really strong order book, a lot of momentum there. How do you see, I guess maybe since you threw out the 40 to 50%, how much does that assume additional Cosmix orders say in the first half of the year that get installed? Just wondering. You've got a lot of momentum right now, which is great, and hopefully that is sustained. But obviously there's a lot of, you know, Xenium's coming out, and you've got, you know, Vision that's on the market, and you have others that are coming. Just wondering kind of what you've baked in for kind of additional order conversion as we look ahead into 2023.

Yeah, I guess I'll repeat the little guide in February, but I think that we built that 40% to 50% range, Dan. That is a conservative assumption on what we would expect orders to be for Cosmex. next year. So you do not have to make a heroic growth assumption on COSMIC's orders to get to the revenue range, growth rate range that we articulated in 40 to 50%. Got it.

And then maybe final one, just, you know, if you think about, you guys had the investor day, you know, not that long ago, though, maybe still longer. When you look out, say, the next three to five years, I mean, you've got, you know, geomagnetic is wobbling right now, but you guys still feel good longer term. It's got a real strong place and Cosmix, obviously, you guys are excited. How do you think about the collective business, say, growing, you know, not over 23, I mean, you know, and you look at, say, the next three to five years, 20% top line growth, 30% top line growth, any range of outcomes that you would talk to about what the overall company should be able to do?

Yeah, Dan, this is Brad. I don't think we're going to establish long-term growth rates here on this call. But I think we believe we're going to be a market-leading company in the spatial biology market, which is just getting started and will grow in a very meaningful way for a decade ahead. We obviously have some transient impacts this year with the inability to recognize revenue on COSMICS, and we're still learning the consumable pull-through dynamics on GEOMICS. But the secular trend – you know, heavy growth in the spatial biology industry should drive meaningful top line growth for the years ahead.

All right, guys. Thank you.

Thank you. Our next question comes from the line of Dan Arias with CIFL. Your line is now open.

Afternoon, guys. Thanks for the questions. Brad, why do you think biopharma spending has retracted? Historically speaking, the consistency there has been well above average in the R&D setting.

Well, we've been talking about for ever since the recovery from the pandemic about a slowdown in clinical trial approval that occurred during the COVID-19 pandemic. And because the translational biology that's done on our systems is downstream of that approval, typically starting once all the clinical trial samples have been collected, you know, we have seen slower recovery in pull-through in biopharma than we had amongst academics in the time, you know, since the 2020 pandemic. That has not improved. It has remained suppressed relative to pre-pandemic levels.

Okay. But if you were, I remember you were talking about that earlier in the year when It didn't seem like that was impacting geomics pull-through at the time. Is this sort of like a follow-on effect or something that you're realizing later? I'm trying to understand the progression of the issue over the quarters.

Well, I mean, it's an issue that has been impacting both encounter and geomics pull-through, you know, ever since the post-pandemic period. I think we've talked about it most in the context of encounter because you know, the overall magnitude in absolute dollar terms for encounter is bigger than it is for geomics at this stage of their life cycles. But, you know, this is not a new issue. It's probably one that we would have guessed would have recovered by now, though we have not seen the recovery in biohormone pull-through that we would have expected as those trials completed enrollment and translational biology began.

Okay. Okay. And then you mentioned this quarter and then last quarter as well, that pull through is suffering from some of the newcomers that are just slow to ramp. What about the existing users? You know, those labs that bought an instrument in 2019, 2020, early 2021, I think there were about 200 devices or so that were installed by June of 21. So just curious how pull through is trending amongst that crowd and how it compares to the new folks that you're referencing here.

Yeah, when we look over a long period, like the trailing 12 months from the third quarter of 2022 back versus the previous trailing 12 months from the third quarter of 2021 back, they're very similar. That being said, if you just look at Q3, our pull through was down sequentially from Q2 to Q3 across all vintages of our geomix installed base. So this particular quarter, even the more mature systems that have been out there a while, you know, had lower ordering. And we attribute that to some of the other factors I mentioned in terms of lumpiness and, you know, the macro effects.

Okay, last one for me, just Tom on Cosmix. As orders continue to build here, I'm just curious what would you think about as far as a placement max for 2023? I know talking about 24 seems a little crazy right now, but just wondering what we need to sort of in our minds, penciling for backlog towards the end of the year there.

Yeah, I think that in the guidance range that we had heard, it assumes that orders are similar to this year for COSMICS and we deliver about half our backlog. So that would suggest that you'd go into 2024 with about 60, give or take, in backlog. That's based on the 40% to 50% range that we talked about. about that number, Dan.

Okay. Thank you, guys.

Thank you. Our next question comes from the line of Yichun Chan with JPMorgan Chase. Your line is now open.

Hello. Thank you for taking the question. This is Monica on for Julia. So regarding the ordered dynamics between GLNICs and COSMICs, specifically for new clients, could you provide more color into the customer preferences over which instrument to purchase, perhaps by customer type? Or would you say it's more or less equal throughout the various customers? And then how does that compare to your internal expectations?

I think you're – I had a little trouble hearing your question, but the first part I know was talking about mapping the preference for Cosmis and GEO into different customer types. So I think what we've observed so far this year, going back to 2021, we sold quite a few geomic systems to both discovery customers and translational customers. So discovery customers, remember, are those who are doing very basic scientific research, not necessarily focused on curing disease, and translational researchers are those who are doing work on human tissue samples for drug development or diagnostic development. So our geomic sales last year were pretty nicely balanced against those two customer segments. This year, those discovery customers have shown a very strong preference for single-cell imaging. And in fact, you know, COSMICS is predominantly going to discovery customers. Interest in geomics remains strong from translational customers, but, you know, given the mix we had last year, which was balanced across the two, we've seen, you know, a meaningful year-on-year drop in the total number of geomic systems we're placing.

That is very helpful. And then the second question is, you know, we're seeing a growing number of new entrants in the spatial market, especially with, you know, 10X launching their new product. Obviously, you haven't had to start with COSMICS, but as, you know, these competing platforms launch, how do you think about those dynamics going forward, and what are your most durable advantages for COSMICS versus some competitors? Thank you.

Yes, I heard the question that time. So, we feel really great about the position of COSMICS and the durable advantages that it has. I mean, I think, first, we picked the RNA Plex has a key specification where we are currently market leading and we expect to remain market leading. So we do 1,000 different RNAs at once. Most of the other competing imagers do about half that. The second area we distinguish ourselves is on protein imaging, where we'll launch with a 60-plex offering, and we've demonstrated already an ability to go to 100-plex. That is a feature that most of the other imagers are not able to offer their customers. So we feel... very good about the competitive profile of COSMICS. And I think, you know, so far we have a very good win rate in those instances where customers are evaluating our offering against others.

Thank you. Thank you. Our next question comes.

Go ahead.

No, go ahead, operator. You broke up a little bit there.

Sorry about that. The next question comes from the line of Catherine Schulte with Baird. Your line is now open.

Hey, guys. Hey, guys. Thanks for the question.

Hey, Catherine.

Hello, Catherine. Yes, first, I think you said the number. Yep. Can you hear me?

Yes, we can, Catherine.

Perfect. I think he said the number of active encounters is remaining about flat as new systems are being offset by older systems that are being retired. Do you have any sense for why these systems are being retired? Is there a replacement cycle dynamic within accounts, or are users stopping encounter-based research, and if so, why?

Well, the two major reasons that we see people no longer use their encounters are one, the individual who purchased that encounter and who was responsible for experimentation on it moves from one job to another. And two, the science moves in a different direction, perhaps away from bulk chain expression to some other area of science. And when we look back across our installed base and we look at where those systems are inactive, is highly correlated with the age of the system, because as you can imagine, with every cumulative year after an instrument has been placed, the cumulative probability of the employee who bought it leaving goes up, and the cumulative probability of the science going in a different direction goes up. So there is a life cycle to these systems that's totally independent of their usable life. I mean, we have active systems that are around there from 2012 still, you know, running assays, but every year, the possibility that the researchers move in a different direction increases.

Got it. And then on pull through, we've heard some of your peers talk about some weakness on the consumable side as well, just given maybe more pronounced seasonality and inventory work through. So, can you just talk through, you know, how activity levels trended throughout the quarter and maybe how October looked just to get a better sense for which of those were transitory and which of those dynamics are likely to stick around?

Well, you know, we don't have perfect visibility into activity levels. Our systems are not connected with the telemetry that allows us to monitor their use remotely as some of our competitors are. So, I can't really speak to that question, Catherine. I think our early October trends are consistent with the guidance that Tom gave, which is to say we are not expecting a substantial transitory recovery in the fourth quarter, and we have not built that in our guidance.

Got it. Thank you.

Thank you. Our next question comes from the line of Tejas Savant with Morgan Stanley. Your line is now open.

Hi, guys. This is Edmund on for Tejas. Thanks for taking the questions. The first question for me is what's embedded for your encounter franchise and your updated guidance? And given some of the dynamics that you observed in the quarter, would thinking about encounter next year as flat year over year be the right way to think about it?

prep remarks and another comment. So we built the guidance at the bottom end of the range for consumables at what the Q3 pull-through was. And at the top end of the range, you could assume about a 10% sequential improvement in pull-through, which is typically what we would see on a seasonal basis in a normal year. So consistent with the comment that Brad just made about us not assuming any improvement in the macro factors, that's what that reflects. So that's how the overall guidance was built. for Q4 and we'll give more commentary on next year as we get into the February timeframe, but the growth rate ranges that we assumed for the 40 to 50% range assumes the typical flat instrument year over year that we typically assume So that still would suggest there would be some growth, but not any growth in the pull-through ranges that we experienced this year that were built into those preliminary assumptions.

Got it. And understanding you want to hold 23 guidance until later, but how are you thinking about academic budgets heading into next year in light of the upcoming midterms in the U.S. and other government priorities such as energy subsidies in the U.S.? ?

We have not, in our commentary about next year's growth rate, factored any major changes then to academic research funding in one direction or the other. And we'll keep an eye on it, but spatial biology is a relatively new field that I would hope would be funded pretty well. And you can see, I think, that through some major recent initiatives, there's a huge new brain mapping effort that's underway that's being run out of the Allen Institute up here in Seattle that represents a major application of spatial biology technology that's just got, I think, half a billion dollars in research funding over multiple years ahead. So my hope is, regardless of what the budget does overall, the application of new technologies like spatial will be at the top of the priority list.

Got it. Appreciate that. And one final question for me. Appreciating the fact that China is only about 5% of your total business, you've also talked about the fact that you want to expand your exposure in the region. So I was wondering if you think back about all of the headwinds that you saw during COVID and the ongoing headwinds in the region, has your international expansion plan in China or your approaches changed in any way? And do you plan on further expanding from that 10 plus direct sales in the region in the next 12 months?

Yeah, our international expansion plans have not changed. Unfortunately, the investment we've made and the great team we've built in China haven't really yet had a chance to prove what they can do because of the rolling lockdowns that we've experienced over there. But I still have a high degree of confidence that they will succeed when things kind of cool down with the virus. And we don't have any plans to reduce our pace of investment.

Great. Thank you very much for the time.

Thank you.

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Very good. Thank you everyone for joining us today. A full transcript should be available as well as a replay in the next couple hours. You can access that by dialing 866-813-9403. The conference ID code 931170. Thank you again. This concludes our call.

That concludes the NanoStream third quarter 2022 operating results conference call. Thank you for your participation. You may now disconnect.