NanoString Technologies, Inc.

Thank you for attending today's NanoString fourth quarter and fiscal year 22 operating results call. My name is Forum, and I will be your moderator for today's call. All lines will remain 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 1 on your telethon keypad. It is now my pleasure to pass the conference over to our host, Doug Farrell, Investor Relations at NanoString. Mr. Farrell, please proceed.

Thank you, operator, and thanks for joining us today. On the call with me today is Brad Gray, our president and CEO, as well as our CFO, Tom Bailey. Earlier today, we released our financial results for the fourth quarter and fiscal year ended December 31st, 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, future cash flows, current and future instrument orders, prospects for expanding and penetrating our addressable markets, and our strategic focus and objectives, as well as the development status and anticipated success of recent product offerings and the impact of macroeconomic factors. Forward-looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update any form of statement. Later in the call, Tom will be discussing our financial results and guidance for 2023. Be prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which are described in detail in our press release. Throughout this call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures, as well as the description limitation and rationale for using each such measure 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 home page that include a presentation of our non-GAAP or adjusted measures and selected other financial data. I'd like to remind everyone that we'll be participating in the Cal and Healthcare Conference in Boston next week. In addition to our fireside corporate discussion, Brad will also be participating in a panel focused on AI-based genomics and drug discovery on Tuesday afternoon. It will include participants from NVIDIA and generative medicine. We look forward to having the opportunity to speak with many of you then, and I'd like to turn the call over to Brad. Thanks, Doug.

Good afternoon, and thank you for joining us today. We are thrilled with the momentum that's building in the spatial biology market. NanoString currently offers researchers the most compelling portfolio of spatial biology solutions, and we believe that ongoing innovations will continue to extend our lead. As we begin 2023, we enjoy both growing demand and a substantial backlog and believe that we are poised for strong revenue growth. I'll begin by recapping some highlights from our quarter and fiscal year 2022 before outlining our priorities for 2023. 2022 was a year of transition for spatial biology as the arrival of single-cell imagers both expanded demand and shifted mix within the market. With our best-in-class Cosmic Spatial Molecular Imager, we were able to capitalize on this trend and grew our total spatial biology instrument orders by 50% year-on-year to approximately 250 systems across Cosmix and our Geomix digital spatial profilers. In the process, we broadened our customer base beyond the core oncology researchers who we've served in the past, reaching discovery researchers who've embraced single-cell biology. This has allowed us to generate about 70% of our Cognizant's orders from customers who are new to Nanostream. Our finish to the year was particularly strong. During Q4, we generated orders for more than 105 spatial SIP instruments. and began delivering the first Cosmix commercial shipments. At the year end, we had captured orders for around 180 Cosmix instruments and built a revenue backlog valued at approximately $40 million. We also saw tremendous scientific momentum as we surpassed 7,000 peer-reviewed papers enabled by our technologies, including approximately 200 using our spatial biology platforms. COSMICS was featured in the December 2022 issue of Nature Biotechnology, with a high-resolution single-cell image of RNA and protein from COSMICS gracing the journal's cover. COSMICS was also recognized as one of the top 10 innovations by the Scientist Magazine in their annual survey highlighting products that are poised to revolutionize research and advance our scientific understanding. Our spatial biology platforms also reached more mainstream media, as in the January issue of National Geographic, which contained an article on aging, which highlighted Alzheimer's research from Wake Forest University Medical Center, using both geomics and cosmics to perform high-resolution mapping of brain tissue. As we begin 2023, we're convinced that our early mover advantage, the scalability of our technologies, and our product innovation engine put us in a leading position in the spatial biology market. Now I'd like to provide an outline of our strategic objectives for the year ahead. Our first objective for 2023 is to rapidly penetrate the spatial biology market. Spatial biology was nature's method of the year just two years ago, and the field is still in its infancy. We estimate that the addressable market in spatial biology research alone is valued at $6 billion across 7,000 labs. only 5% of which have been penetrated to date. Our focus is on winning share as this market develops by capturing instrument orders and making our customers successful. We kicked off 2023 by providing important updates on our spatial biology product portfolio and roadmap at the Advances in Genome Biology and Technology Conference, or AGBT. Spatial biology featured prominently at AGPT this year, representing about 25% of the total presentations and posters. For the second year in a row, NanoStrand had the most spatial biology studies of any technology provider, almost double the number of spatial abstracts of our nearest competitor. AGPT provides a perfect venue in which to build our brand with basic discovery researchers who are still getting to know NanoStrand. We capitalized on the opportunity to be the gold sponsor for this year's meeting, and I could not be more pleased with our showing. Following the conclusion of the meeting, consulting firm DesiBio published a survey of attendees that rated spatial biology as the most exciting space, with NanoString the most mentioned company. During the meeting, we achieved three key objectives. First, we publicly demonstrated our Atomics spatial informatics platform. Atomics is a flexible, open-source, cloud-based informatics platform that provides secure, scalable storage and analysis for spatial biology researchers. Think of it as the iCloud of nanostring spatial biology ecosystems. Customer interest in Atomics is extremely high, and we have conducted dozens of Atomics demos during the meeting. Feedback from the customers was extremely positive. Those who have already ordered a COSMICS system cannot wait to get their hands on the total solution provided by COSMICS plus Atomics. Researchers appreciate that Atomics allows them to focus on the science and avoid the headaches of building and maintaining their own compute and storage infrastructure. Atomics also provides this highly scalable storage and compute power for a fraction of the upfront cost of on-site capabilities making the decision to move data to the cloud an easy one. Second, we used AGBT to unveil our COSMICS assay roadmap, which will continue to set the standard for PLEX. PLEX is the term used to describe the number of unique genes or proteins that a platform can analyze. We believe PLEX is the most critical differentiator in the spatial imager class, as it directly determines the amount of information generated from precious samples. Our belief that Plex is the number one attribute is grounded in our real-world experience. As when we have offered customers using our Cosmix Technology Access Program the choice between our 1,000 Plex assay or our cheaper and faster turnaround time 100 Plex assay, every single customer opted for the higher Plex assay. The Plex provided by Cosmix already stands head and shoulders above the competition. with our currently available 1,000 Plex assays offering twice the amount of data per sample as images from other manufacturers. As we showed at AGVT, we're pushing Plex further and faster than anyone expected. We revealed our 6,000 Plex human RNA assay, which provides 12 times the data per sample of that provided by competing platforms. To be clear, These data were not from some small-scale proof-of-concept experiment. We have worked with multiple research customers to use this assay to generate real insights. Then two of those customers were on hand at AGVT presenting and discussing their 6,000-flex data. Our 6,000-flex offering is already in full product development, and we plan to make it available through our technology access program in the fourth quarter and to begin shipping it to customers early next year. Finally, we used the AGBT meeting to highlight an exciting new collaboration with Dr. Chris Mason and others at the Weill Cornell School of Medicine, called the Spatial Atlas of Human Anatomy, or SAHA. The abstract described SAHA was selected for a plenary talk during the opening night of AGBT. As Dr. Mason described, researchers at Cornell will use the geomics or transcriptome assay to analyze tissues from 30 different organs provided by a healthy and genetically diverse population of adults. The researchers plan to make the Atlas available to researchers around the world through periodic releases, and we believe that SAHA will become an important reference database of normal tissue, which may be crucial for enabling precision medicine therapeutic approaches. Coming out of AGBT, it is clear to us that COSMICS has the performance attributes to remain the platform of choice for single-cell imaging. Our confidence and our ability to rapidly penetrate the spatial biology market has never been higher. Our second objective is to deliver more predictable revenue growth over the course of 2023. In 2022, we struggled to predict the mix of spatial biology instrument demand between our cosmics and geomic systems, resulting in inconsistent revenues. We believe that 2023 is set up to be a very different year. First, we're shipping and recognizing revenue on both spatial biology instruments, so the overall revenue will be less sensitive to mix. Second, we expect our primary revenue growth driver to be COSMICS instrument orders that we've already captured and which are currently in backlog. We plan to execute a meter rollout of COSMICS instrument shipments designed to provide excellent customer experience as we scale up manufacturing, installs, and training. We will start with a manageable number of installations during Q1, increasing the pace in Q2 and then remaining at a relatively steady pace over the balance of the year. This gives us a high degree of confidence in the predictability of our revenue growth in 2023. Our third strategic objective is to demonstrate continued progress towards cash break-even. This is a prime directive for the company, and everyone on our team knows it. During Q4, we made hard choices to optimize our cost structure heading into 2023. We reduced our headcount from about 800 employees to about 700 employees. For 2023, we're guiding revenue growth in the range of 34% to 41%, which we are expecting to deliver while modestly lowering our operating expense. driving a substantial improvement in our adjusted net loss for the year and an improving financial profile quarter by quarter throughout the year. We exited 2022 with more than $195 million of cash and equivalents and believe that with these resources in hand, we are well positioned to sustain our operations to break even and profitable growth. I'd now like to turn the call over to Tom to review the details of our financial results and to provide our financial outlook for the year. Thanks, Brad, and thanks all for joining us today. For the fourth quarter of 2022, revenue was $34.4 million in the middle of our guidance range. Q4 spatial biology revenue was $14.8 million above the upper end of our spatial revenue guidance range. Our cumulative COSMICS SMI order book as of December 31st was approximately 180 systems, including about 80 new orders received in Q4. We shipped the first 13 COSMIC systems to customers in Q4, generating revenue of approximately $3 million, leaving us a backlog of over 165 systems we expect to ship in 2023, with a revenue value of approximately $40 million. Q4 Geomics revenue was $11.4 million, a 23% sequential improvement. Geomics Instrument revenue is $5.4 million, reflecting over 25 new systems shipped. Suburbals revenue was $6 million, Q4 annualized geomics pull-through was about $73,000 per system. At the end of Q4, our geomics installed base was approximately 350 instruments with about 20 instruments installed during the quarter. Q4 end-counter revenue, which includes all of service, was $19.6 million. End-counter instrument revenue was $2.5 million. Consumables revenue was $12.1 million, and Q4 annualized end-counter pull-through was approximately $44,000 per system. At the end of Q4, our end counter installed base was approximately 1,120 instruments, with about 15 instruments installed during the quarter. Turning to margins and expenses, commentary reflects non-GAAP or adjusted results, which for Q4 exclude the impact of stock-based compensation, depreciation, litigation, and certain non-recurring restructuring and severance expenses. Please refer to our press release as well as the how our non-GAAP or adjusted measures are prepared. Q4 adjusted gross margin was 43%. Our Q4 adjusted gross margin was impacted by manufacturing variances held on our balance sheet, due mainly to underabsorbed labor we expensed in Q4, together with the reduction in our workforce. Inclusion of these additional charges in Q4, cost of goods sold, impacted our Q4 adjusted gross margin by about 8 percentage points. Q4 adjusted R&D expense was $15 million, a decrease of 4% year-over-year, and adjusted SG&A expense was $27.5 million, an increase of 4% year-over-year. Q4 adjusted operating expense trends reflect the initial impact of expense reductions we implemented in Q4, balanced by investments we continue to make in our spatial biology manufacturing capacity and efficiencies, and in our spatial biology product development field support commercial initiatives. Our Q4 adjusted EBITDA loss was $27.7 million. We exited the quarter with approximately $196.5 million of cash, cash equivalents, and short-term investments. Transitioning to our 2023 outlook, we expect 2023 revenue of $170 to $180 million, representing annual growth of 34% to 41%. Our range includes spatial biology revenue, 2022. End counter revenue, which includes all service and other revenue, is expected to be in the range of $75 to $80 million, a 6% decline at the midpoint of the range as this more mature part of our business moved into cash cow boat. We expect about 40% of total revenue to be recorded in the first half of 2023 and about 60% in the second half. Seasonality will be strongly influenced by the pace of cosmic shipments, which will steadily increase over the course of the year as we increase our capacity to manufacture and install COSMICS instruments. We expect to clear a current order backlog of over 165 units by the fourth quarter. We expect 2023 adjusted EBITDA loss to range from 65 to 75 million, a significant improvement compared to 2022. More substantively, in the second half of the year, as our spatial biology revenue grows on a reduced operating expense base, we expect adjusted gross margins will be beyond as these systems begin to pull through to higher margin consumables. For the first quarter of 2023, we expect revenue will be in the range of $32 to $34 million, reflecting typical sequential and seasonal patterns in our measured pacing of cosmic shipments. Our Q1 range includes $15 to $16 million of spatial biology revenue and $17 to $18 million of encounter and service revenue. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. In closing, we feel great about our setup for 2023. Momentum in our spatial business is building, and we've established COSMICS as a market-leading spatial imager. At year end, we had a backlog of COSMICS orders valued at approximately $40 million, giving us excellent visibility to our revenue trajectory for the year. For 2023, We expect to generate healthy revenue growth while reducing operating expenses, which will allow us to work in a disciplined fashion towards achieving cash flow break even.

With that, I'd love to now open the line for your questions.

Certainly. If you would like to ask a question, please press star followed by one 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 are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from the line of Dan Brennan with Cowen. Dan, your line is now open.

Hey, good afternoon. This is Kyle on for Dan. Thanks for taking the questions. I just want to start with the encounter really quickly. What sort of baked into the guide here from a customer trends perspective? I know this isn't really a growth driver here, but what are the puts and takes we should sort of think about where this number could come in maybe higher or lower this year?

Hey, this is Brad. I'll start and I'll let Tom build on my answer. As you know, Kyle, Encounter is really a mature business that's moved into a cash cow mode of operations. It's a business that is about 80% consumables and about 20% instrumentation. So our primary focus is on maintaining the high activity levels of our existing installed base. And most of our sales effort focuses on the consumable portion of encounter. That being said, we have guided down encounter for the year. We've guided for total encounter revenue inclusive of service down about 5%. which really includes instrumented consumables down an aggregate of 10% offset by some growth in service revenue. So we are not looking for this business to be a growth driver in the future, and I would say there's probably limited opportunity for encounter at this stage to surprise to the upside. That being said, we think our guide is appropriately conservative given the stage of the business, and we don't see a lot of downside risk either.

Got it. And then moving on to cash burn, maybe. So you're targeting here for adjusted EBITDA this year. How should we think about the cash burn? How's that trend throughout the year? And given the burn, how do you plan to fund the business? And do you anticipate needing to raise capital in the next few years here?

Yeah, I would say on the cash burn, Kyle, it would be EBITDA plus a few puts and takes on the cash flow statement. But I think using the EBITDA guide as a good proxy for the cash burn would be a great place to start. Now, you would see improvement in that over the back half of the year, in particular, the cosmic shipments, a ramp over a flat base of operating expenses. And on the capital raise point note, we don't anticipate having being put into a position to have to do a capital raise. As you look out over subsequent years, the growth in our business over what is now an expense base that we feel is dialed in for the spatial biology business that we intend to support should put us in a good position to be able to get to cash flow break even on our existing balance sheet resources. So we don't anticipate needing to do another raise to fund the growth of the business.

Got it. Thank you.

Our next question comes from the line of Dan Arias with Stifel. Dan, your line is now open.

Hey, guys. Thanks for the questions here. Brad or Tom on Cosmix, can you, you know, as you guys continue to work the order book higher here, can you just talk a little bit about manufacturing capabilities and the levels at which you start to become constrained on production and then relatedly, you know, what do you think the placement and revenue recognition ceiling is for the year? after which we should think about all incremental activity being a 2024 event or an impact in 2024.

Hey, Dan, this is Brad. I'll take a first stab and let Tom build on it if he wishes. I'd say right now we're operating in a phase where we're scaling up both our ability to manufacture the COSMICS instrument And we're training our field service engineers and field application scientists on how to install, train, and activate sites. And we're doing that at a measured pace in the first quarter that's consistent with Tom's guide. As I said in my prepared remarks, we expect that pace to basically double from Q1 to Q2 and then remain at a reasonably steady pace through the balance of the year. Implicit, you asked about the ceiling and our overall kind of spatial instrument shipments for the year. I think implicit in our guide is about 280 to 300 total spatial instrument placements, by which I mean cosmics plus geomics. And I think we're in a position to handle that as a wide range of different mixes. I want to be clear that we're not baking geomics recovery into our guide for the year, but we can dial up COSMICS shipments over the course of the year if needed, if that's the way that the mix of demand continues to trend.

Okay, maybe if I could just follow up on that point on geomics. It looks like you shipped seven geomics instruments during the quarter. Obviously, the order number was higher than that. So what's driving the spread between the two? And then, you know, to your point on what you may or may not be assuming for recovery in geomics, what is the pull-through assumption that we should work with? I mean, I know you feel good about the COSMICS contribution, so just trying to understand the consumables contribution that you kind of have baked in for geomics this year.

Yeah, I think, you know, we're not currently guiding pull-through for 2023. You know, we're guiding total overall spatial revenue, so we won't be giving pull-through commentary, but I think you can look at our, we're not, to be clear, we're not building in a recovery beyond the averages that we saw in 2022. On the question of the number of geomics instruments that we shift in Q4, I think you may have underestimated it, Dan. We actually – I'll turn it over to Tom to speak to that question. Yeah, I know. When you look at the parsing of the revenue data for Q4, we shipped about 25 geomix instruments, and we installed about 20. Remember, there's always a difference between what we ship in RevRec and what we install during the quarter. But the number to think about in terms of shipments was about 25 units during the quarter for geomix, which was an improvement over Q4 sequentially by about 25%.

Do you think that that spread between installs and shipments stays the same over the course of the year?

It varies from quarter to quarter, Dan, depending upon how many we have. What our backlog of installs is at the end of the quarter and when the orders tend to come in during the quarter. So if you have a more back-end loaded quarter, sometimes we can have more orders than installs in a given quarter. That's a Q4 phenomenon often is when that happens. then we'd have a catch-up in Q1. That's why we typically talk about those numbers separately, what we've shipped and rep-rec versus installed. So keep an eye out for those in our scripts. And if you have questions on those, as we go through the modeling, we can address those. It won't always be the same. All right, I'll hop out every quarter. Appreciate it. Thank you.

Our next question comes from the line of Kyle Nixon with Canaccord. Kyle, your line is now open.

Hey, guys, thanks for the questions. Congrats on the end of the year, and good seeing you a few weeks ago. So just maybe like a multi-part question on the kind of the financials here going forward. Tom, earlier in the questions, you were talking about like the cadence of, I think, cash for an EBITDA. Could you actually just walk through like what maybe first half, second half could look like with the EBITDA? I think it was like 65 to 75 million loss for the year. And secondly, with the... You know, you got this $230 million convert coming up in 25. Clearly, that's above, like, you know, that's more than the current cash balance. How are you thinking about that kind of, like, that kind of, like, you know, timing for that, like, you know, just overall? And could you think of, you know, Brad, you mentioned Encounter being a cash cow. I mean, what about maybe, like, monetizing that business to offset that, you know, a convert over there? Thanks.

Yeah, so I'll start with the pacing of EBITDA. of EBITDA, Kyle. So I think a simple way to think about that is we talked about 40% of revenue in this first half and 60% in the second half. If you think about that over kind of a 50-ish percent gross margin and down operating expenses year over year, that won't vary a lot from quarter to quarter, that would get you a So put simply, expect to see most of the improvement in the second half as compared to the first half. And then on the convert, I would say with respect to our convertible debt, our 2023 business trajectory here with the growth that we're seeing sets us up really nicely with respect to addressing the convert, in particular with the doubling of our spatial business driving really strong revenue growth over lower OPEX. In 2022, so as a result of that setup, we've got a really broad menu of potential options available for addressing the convert and for financing our business in general. We've also still got two years to go before maturity. So we'll have a thoughtful urgency. We'll have the opportunity for our business to mature and deliver great results heading into any need to address the convert. And I'll let Brad. Yeah. Hi, Kyle. I'll take the question about kind of encounter's place within administering strategy. You're right. InCounter is a cash cow business. It's no longer the growth driver that it used to be, but it still does have tremendous strategic value to the company. It's an amazing brand. It is a platform that has been historically synonymous with nanostring, and it has a huge installed base and a set of customer relationships that go with that installed base. It also provides while it doesn't provide growth, it provides tremendous cash flow with revenue on a relatively low amount of sales effort that allows us to reinvest in our rapidly growing spatial business. And it would be low to give that up. That being said, if the right kind of structure came along or someone was willing to pay real strategic value to that portion of the business, we of course would entertain it as we always would any kind of opportunity that was favorable to our shareholders.

Okay. That was great guys. Thanks so much. And yeah, just sticking with spatial. Many of the GMX customers, I guess there's like 350 units out there. I don't know how many customers have this, but most of those guys are probably thinking about purchasing one of these single-cell spatial imagers. A lot of those customers are going to Cosmix, obviously buying those, and there's a lot of bundles, as you said in the past. How is that trending lately? Are there more GMX customers skipping Cosmix altogether, kind of transitioning to competing imagers? What are you doing to incentivize those customers and entities to kind of stick with Nanostream other than just giving away free instruments or other promotions?

Yeah, it's a great question, Kyle. You know, the synergy between our two systems is incredibly strong. And we think that we've created a product portfolio that's designed to really deliver that synergy to our customers. And we really think about three platforms, right? We have Geonics, which is our whole transcriptome high-throughput system that really allows researchers to ask questions about how samples compare to each other. across multicellular regions. We have our COSMICS, which is lower throughput, but sort of a deeper studying of a small set of samples, the highest-flexed single-cell imager. And then to tie all those together, we have our ATOMIX spatial informatics platform, which allows people to put their data and studies in the same repository and use a familiar set of interfaces to query and get the most out of those datasets. So we really do encourage people to sort of purchase whichever of the two instruments is most fitting with their most urgent science. And then we believe that to the extent that they grow their capabilities, they'll be inclined to purchase another nanostring platform in the future. I mean, I think our early experience with COSMICS suggests that's working, you know, 45%. of all of our Cosmix orders have gone to laboratories that also had Geomix. Probably 30% of that 45 is the previous Geomix owners, and 15%, the other 15% of the 45, are new to NanoStream customers who bought a bundle of both systems at the same time. To incentivize those bundles, we absolutely give price breaks as we would to any large, meaningful customer. They're modest and don't impact our revenue. We treat them as really positive things. In terms of how it's been trending, though, over the course of 2022, Cosmix went from being an imager that we were selling predominantly to researchers who already knew nanostring through the ownership of a geomix, to a system that was predominantly reaching new to nanostring customers who were coming from single-cell biology or other types of science that we have not participated in yet. So I would expect the fraction of cosmics going into geomics labs to continue to go down as it becomes the first spatial system that many customers choose to adopt. And that's okay. That doesn't undermine in any way the synergy between our systems. And we will hope in due course that to come back and sell the geomic systems to those who first bought Cosmix and then later one whole transcriptome profile.

Okay, makes sense. Let me just ask one quick one before I jump. So there's been over 100 customer projects delivered using Cosmix. I think a lot of those were the TAP program. Any takeaways with respect to those sort of projects, like the reproducibility of the platform out in the field, like currently you have these 13 units out there, anything kind of tangible so far?

Yeah, I think we've had great learnings from both the TAP and the first 13 systems. Maybe I'll speak to the TAP first. You know, one of the learnings of TAP is the huge preference for high Plex that I mentioned in my prepared remarks. We had initially launched TAP with two offerings, a 1,000 Plex offering and a 100 Plex offering. Not a single researcher has opted for the 100 Plex RNA offering. It strongly validates that our strategy of making Plex the most important spec that we continue to be market leaders in. I'd say the other really big learning from the TAP program has been you know, the very broad tissue compatibility of COSMICS. At last count, 68 different types of tissue and tumors had been studied using COSMICS. It just is shown to be a tremendously generalizable instrument. You know, switching gears towards, you know, that first 13 instruments that we shipped in the Q4, we are getting great feedback and success with those first customers. Just in terms of the mix of those customers, most of them were oncology-oriented researchers. Their geographic spread was similar to our overall business. They spanned North America, Europe, as well as Asia. They were about 50% new to NanoStrand customers, 50% incumbent customers, and a good mix of academic and pharma. So they're nicely represented in it. And I think the feedback has been, you know, on the COSMICS instrument, people love the ease of use. And even relative to those people who own Geomix, they find COSMICS easier to use and easier to get trained on. There's been great feedback on the quality of the data and the consistency of the results across runs and samples. We've also started to get really positive feedback from them on Atomics. They love that it's comprehensive and flexible. They're enjoying initially using the data analysis modules that we have built into the Atomic system, but they're also beginning to load their own data analysis modules through the open source functionality that we've built in. And these groups have experiments lined up. They're sort of moving beyond the training phase and into their own science and experimentation. And, you know, I'm optimistic that utilization on Cosmix will ramp even faster than we saw on Geomix because it's an easier system to use and some of the experimental designs are more obvious. Okay. All really good takeaways. That's great. Thanks, Brad. Thanks, guys. Thank you, Kyle.

Our next question comes from the line of Martha Nazarovitz from J.P. Morgan. Martha, your line is now open. Hello.

Thanks for taking the question. So I just wanted to dig into first quarter a little bit more, you know, discuss the revenue expectations. Could you perhaps provide a little bit more color on the instrument placement, the EBITDA and cash foreign expectation?

Yeah, for the quarter we, All of them historically have only just guided for revenue, and the guide that we gave was consistent with that. And on the revenue details, we've elected to simplify our approach this year and just guide for spatial revenue. And all the rest of the components of the guidance are consistent with the commentary that we made around NCounter being managed more on a cash cow basis coming out of the fourth quarter. and the measured pacing of COSMICS instruments really being the most material impactful thing to the spatial guide in the first quarter relative to the total overall for the year. I think one more thing to add on that is from an EBITDA pacing perspective, I think in Tom's earlier remarks, he made it clear EBITDA will improve sequentially as the year goes on. Q1 will be our lowest EBITDA quarter, meaning the largest loss. And as our business grows with more and more cosmic shipments over the course of the year, we'll see that sequentially improving financial profile.

Thank you.

Our next question comes from the line of John Sauerbeer with UBS. John, your line is now open.

Hi, thanks for taking the questions. You know, maybe just to start off, any updates on China and how that formed the quarter and just how do you expect that to recover throughout the year?

Yeah, China obviously had a lackluster year overall during the lockdowns last year. You know, we started to see some recovery in the fourth quarter, and we are optimistic that we'll see continued recovery throughout 2023. NanoString built a really fabulous direct sales team in China just as the lockdowns were about to happen. We actually met that team in person for the first time at a global commercial meeting earlier this month. They are, I can say, very impressive and very energized to get out. But all that being said, China remains a relatively small part of Nanostring's overall revenue profile, maybe between 5% and 10% historically. And I hope it'll grow over time. But, you know, we're not counting on a recovery in China as a major growth driver for the company.

Got it. And I know you're not providing pull-through guidance, but any color, just now that you have the instruments out there on the Cosmex, just how we think from a high level of how you see that pull-through ramping there to get towards that targeted 70 to 75K annualized range?

Yeah, I think it's early days. I don't think we've learned enough to know whether our previous estimates of 75K annualized footprint on COSNICs are the right ones or not. There's no update there. But I guess what I will say is, you know, we've talked publicly about the long learning cycles. that we experience in geomics, which requires customers to define regions of interest and learn a certain amount of morphology to be able to process their samples quickly and efficiently. It was clear from the early training of COSMICS that by skipping that step and allowing researchers to scan the entirety of a slide, the learning curve is a lot faster. And my hope is that We will not have the multi-year cycle that Geomix has required in some cases to get insurance to full utilization, but we'll be looking at a few quarters instead. So stay tuned. We'll be able to say more about that as the year goes on.

And then last one here on my end, and appreciate the guidance around encounter and that 6% revenue decline. Just any way to think about the long-term prospect of this business, do you expect similar declines you know, year over year or the long term, or how should we think about this over the longer, the next couple years?

Yeah, John, I do think we have probably seen peak encounter revenue. You know, the installed base includes instruments that are now, some of them 15 years old. They are not being as actively used as they once were. And as the installed base ages, it's likely that pull-through across the entirety of that installed base, inclusive of the inactivated systems, will continue to come down. So it's consistent with what our guide is in 2023, and I think if you're building a multi-year model, look for a long, slow sort of sunset for encounter, much more than offset by strong growth on the spatial side.

Thanks for taking the questions and congrats on the quarter.

Thank you.

Our next question comes from the line of Bejas Savant with Morgan Stanley. Bejas, your line is now open.

Hi, guys. This is Edmond on for Bejas. Thank you for taking my question. Just in terms of the pricing assumptions baked into the guidance for 2023, given all the talk on bundling and discounts for larger customers and your emphasis on capturing the lifetime value of customers versus upfront instrument revenues, how should we be thinking about the pricing assumptions baked into COSMIC's prices for 2023? Sure, Edwin, I'll take that one. We've assumed modestly lower ASPs on instruments throughout our guide.

in 2023, so it's consistent with the rest of the guidance approach. We've taken a conservative approach to that, but it's not materially lower because COSMICS does have a higher list price and has a higher ASP than GEOMICS does currently, consistent with the other imaging products that are out that $230,000 to $240,000 per box would be a good assumption to use for spatial.

Got it. That's super helpful. And just on the note of conservatism, if we simply add the COSMICS backlog of about $40 million to your 2022 revenues of $127 million, that gets you to $167 million, which is actually pretty close to the midpoint of your guide. Are you just baking a lot of conservatism in here, or do you genuinely see potential headwinds that could materialize on either the encounter business or the geomics business based on the way you're framing your 23 outlook?

I think one of our key goals this year, Edwin, is to avoid negative surprises. And so our guidance is consistent with that approach and with the commentary that we offered at the J.P. Morgan conference earlier this year on what folks should expect. So I think that's I think we feel good about where our range is set currently in the setup heading into this year, both on the top line and on the bottom line with the improvement that we put in to expenses coming into this year.

Got it. Super helpful, Tom. And then, Brad, maybe just one for you. Could you provide some more color on your self-segmentation approach in Cosmix? And how important are these features to your customers when it comes to comparing you versus your peers? Is that a point of differentiation for you guys, or is it more or less similar across the board? And I think based on some of my conversations with researchers in spatial biology, a lot of them have noted that cell segmentation methodologies today are still suboptimal. So I was just wondering what you had in the development pipeline for improving this. Thank you.

Thank you, Edmund. That's an impressively technical and astute question. Our cell segmentation approach is different from that used by competing imagers. We have a focus on using the protein morphology markers that have been a big part of both the geomics and the COSMICS rollout to identify the actual cell boundaries and to create a more accurate assignment of RNAs to cells. than would be otherwise possible. That's enabled by, you know, an AI machine learning algorithm that identifies cell boundaries and executes segmentation. And I think right now we're market leading in that feature, though I'm sure competitors are working quickly to catch up. Cell segmentation is an ongoing area of innovation. Different tissue types have different challenges on cell segmentation. Brain tissue, for instance, is very challenging. It's very morphologically similar and homogeneous, despite the fact that neurons are very different in nature. So we are continuing to innovate on cell segmentation algorithms to continue to serve a broader and broader audience of researchers. But I think we're market-leading at this point in time.

Great. Appreciate the details, Brad. Thank you very much for your time today, guys. Thanks, Adam.

This concludes our question and answer session for today's call. I will now pass back to Doug for any final remarks. Thank you.

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