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spk11: Hello and welcome to the 10X Genomics First Quarter 2022 Earnings Conference Call. My name is Katie and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I'll now hand over to your host, Cathy Corneau, Investor Relations and Strategic Finance to begin. Cathy, please go ahead.
spk10: Thank you and good afternoon, everyone. Earlier today, 10X Genomics released financial results for the first quarter ended March 31, 2022. If you have not received this news release or if you would like to be added to the company's distribution list, please send an email to investors at 10xgenomics.com. An archived webcast of this call will be available on the investor tab of the company's website, 10xgenomics.com, for at least 45 days following this call. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release 10X Genomics issued today. and in the documents and reports filed by 10X Genomics from time to time with the Securities and Exchange Commission. 10X Genomics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. Joining the call today are Serge Saxinov, our CEO and co-founder, and Justin McInerney, our Chief Financial Officer. With that, I will now turn the call over to Serge.
spk03: Thanks, Cassie. Good afternoon, and thank you for joining us. On today's call, I will start with an overview of our performance during the first quarter. Next, I will discuss our progress and momentum with customers and share an update on our upcoming product launches, including more detail on Xenium and the exciting opportunities we have ahead across all three platforms. Then, I will hand the call over to Justin for a more detailed look at our financials business trends, and outlook for the rest of the year. Revenue for the first quarter totaled $114 million, up 8% year over year. These results reflect the slow start we experienced in January and February, largely driven by the impact of the Omicron surge, and played out as we described during our year-end call in mid-February. As we moved into March, the effects of Omicron had largely abated outside of China. and customer productivity started to resume. We're now back on site with our customers, and the excitement for Chromium and Vision portfolio and pipeline is palpable. In recent weeks, I've personally had the opportunity to visit a number of our customers in person, which has further reinforced my conviction in the long-term growth trajectory for each of our three platforms. So while we'll continue to navigate some near-term headwinds, I have more confidence than ever in our enormous opportunity ahead. Every day, we're seeing more customers and more studies that all point to the same thing. 10X is replacing the legacy toolkit of biological research and transforming how we understand and ultimately master biology. During the quarter, we continue to see solid demand for chromium instruments led by the sustained enthusiasm and broadening appeal of the Chromium X series. We're actively working to upgrade our current customers to ensure they have access to the most powerful tools available for single cell analysis. The upcoming launch of our fixed RNA profiling kit, which will be exclusively available in Chromium X series, help drive instrument demand with new customers and accelerate the replacement cycle among existing customers as expected. Turning to consumables, our high throughput kits deliver strong growth. Increasingly, customers are adopting HT kits to scale existing studies with more samples or more cells. We're also excited to see our customers designing new experiments specifically for HT. at a size and scale previously considered unattainable. We believe the strong adoption of our HD kits, robust reorder rates, and the growing number of new labs conducting pilot studies or applying for grants demonstrates the value researchers gain from high-throughput single-cell analysis and is a great indicator of future growth. We also saw solid demand across our broad portfolio of standard throughput single-cell consumables this quarter. The performance and breadth of our offerings covering gene expression, immune profiling, epigenetics, proteins, and multi-omics is unrivaled and helps drive growth with both our most seasoned labs and our newest adopters. Multi-Om in particular continues to be among the fastest growing products in our history, experiencing broad adoption across a diverse set of applications. We believe the combination of our product performance, easy workflow, and diversity of applications creates real value for researchers that no other company can match. Moving on to Visium. In Q1, we continue to see solid demand for both fresh frozen and FSP. While it remains early in its lifecycle, we're encouraged by the wide adoption of Visium as the ideal spatial discovery tool. In fact, according to the Museum of Spatial Transcriptomics paper published in March 2022 edition of Nature Methods, Visium has been cited in more publications than any other spatial biology tool. and has been used to generate nearly 125 public datasets. No other method has even half as many. The Nature Methods paper also noted that more institutions have published using Visium than using the next three other spatial methods combined, demonstrating the breadth of Visium adoption. This confirms our view that Visium is the leader in spatial biology. Overall, we executed as planned in Q1 and look forward to building momentum as we move through the year. Our team is focused on three key areas to deliver in 2022 and to accelerate growth into 2023 and beyond. First, driving our extensive new product pipeline. Second, scaling our commercial organization. And third, strengthening our operational capabilities. Let me share more on each area, beginning with R&D. where we're continuing to drive our strong cadence of technological advancement and product development. As we showcase at our second annual experience event in February, we have a very exciting and ambitious pipeline in each of our three platforms. Starting with Chromium. Chromium has long been the leader in single cell analysis, yet we continue to see a massive opportunity ahead. It's evident by the rapid growth and diversity of experiments, applications, and publications that single cell methods are replacing are replacing the conventional toolkit for measuring biology. To make chromium accessible to every biology lab in the world, this year's pipeline is focused on new products that drive broad adoption, remove bottlenecks, and give researchers a more flexible and streamlined workflow. In the near term, we're particularly excited about two new kits that we believe will help realize the expanding potential of single-cell analysis, remove obstacles to larger-scale multi-site studies, and open up more single-cell applications in translational research. This includes our fixed RNA profiling kit, which has the potential to be transformative to the single-cell franchise over the long term. This product resolves a common challenge our customers currently face working with live cells. With this kit, researchers can fix their tissue at the time of collection and store it until they're ready to begin their single-cell workload. In addition, researchers can batch and multiply samples, as well as analyze gene expression of surface proteins from the same cell for multi-omics analysis. This product also offers significant performance advantages, including higher gene sensitivity than any of our flagship assays, and is the most sequencing-efficient assay in our chromium portfolio. Our upcoming nuclear isolation kit is another example of how we're easing the chromium workflow for our customers to help them run more samples and more kinds of samples. Many samples present a challenge for single-cell analysis due to the difficulty of dissociation or encapsulation of individual cells. This can be because some tissues are particularly difficult to work with or because researchers would like to freeze their samples at collection to be processed for single-cell analysis later. To address this challenge, many researchers have turned to nuclei, which can provide single-cell information from such samples, but at the cost of much more difficult and unpredictable sample prep workflows. Despite these difficulties and the need for highly specialized expertise, nuclei analysis has been rapidly growing in popularity. And now, our nuclei isolation kit will greatly simplify this workflow so more researchers can access single-cell data from frozen samples and challenged tissues. We believe this kit will help accelerate the adoption of multiple chromium assays, including Multium and ATT&CK, which require single nuclei as input. We're now taking pre-orders for both products, which we expect to begin shipping over the coming weeks. Turning now to Visium. We expect to round out a core set of the capabilities on the Visium platform with several new products focused on enabling more analytes through the introduction of Visium Plus Protein, more samples with the launch of our Visium site-assist instrument, and more resolution with Visium HD. Our Visium Plus Protein product enables simultaneous gene expression and high-flex protein analysis on the same tissue. It also offers larger capture areas and an improved workflow to give our customers more flexibility and confidence. We're looking forward to launching this product mid-year. In addition, we're excited for the upcoming launch of the Visium site assist instrument, which will simplify the logistics around the Visium workflow by bridging the gap between histology and molecular biology. Site assist will also open up the archives of tissue samples already stored on preexisting slides, significantly expanding the number of samples that can be run on Visium. We expect to ship site assist next quarter. And finally, Xenium. As we announced in February, we plan to ship the first instruments by the end of the year. We have already received extremely strong interest in the platform from many customers eager to be among the first to receive a Xenium, and we feel great about the large funnel of opportunities we're building. We're very excited about the competitiveness and differentiation of our initial launch, as well as our plans to unlock the full capabilities of the platform through our extensive product roadmap in the years ahead. Through our close partnership with customers and our Cortana access program, we have unique insights into the capabilities and features researchers are looking for. Customers have told us they need a HyPlex easy-to-use and scalable platform that can differentiate cell types and states in the tissues of interest and measure the right genes and pathways. To enable this, we're developing Xenium to have great performance across all key metrics, including multiplex levels, sensitivity, specificity, and throughput. And in particular, we know from customers that high throughput is critical because it determines whether the instrument is practical for routine use. We've designed our Xenium analyzer to have the highest throughput of any in-situ instrument in its class. We believe Xenium will enable researchers to analyze the most tissue area at single molecule resolution in the least amount of time. We also believe having all three methods, single-cell, spatial, and in-situ together will be a real advantage for the research community and a real differentiator for us. Most in-situ experiments currently make use of Chromium or Visium data. We are in the best position to deliver seamless experience to customers across all three platforms, and this will be reinforced by our support team, who consistently receive rave reviews from customers. Because this is an emerging field, researchers know their needs will evolve over time, so they want to trust a partner that will innovate and grow with them. Our track record here is unparalleled. Much like we've done with our chromium roadmap, we'll enable more allies, new classes of measurements, and truly transformational capabilities on the Xenium instrument as we move forward post-launch. We're committed to delivering rapid product advancements to ultimately establish Xenium as the unequivocal leader in in-situ analysis. We're able to develop world-class platforms through the strength of our internal product development and intellectual property. We already have over 200 patents issued and pending in the in-situ field, including the key patents that will enable features that we believe will be extremely valuable to researchers, including high throughput and high sensitivity. With respect to our overall patent portfolio, we recently passed the extraordinary milestone of having more than 500 patents issued and almost 1400 patents issued and pending. As we have said before, it is our policy not to license our patents, but to differentiate ourselves from our competitors by protecting our sole right to own and practice our intellectual property. With our robust pipeline across all three platforms, we're on track to make 2022 the most exciting year of product launches in our history. Now, turning to commercial. Throughout the company, we're thrilled to be back in person with our customers. For the past two years, the inability to connect in person in their labs and at conferences has challenged the proliferation and adoption of new technologies, including single cell tools, especially among mainstream biologists who are new to the 10X levels of scale and resolution. Yet we know the number of researchers interested in single cell is rapidly increasing, as evidenced by the growing number of new customers entering the 10X ecosystem. either as instrument owners or as Halo users. We believe the pandemic has made it more challenging for many of our Halo customers to scale and become routine users of single-cell analysis in their research. There can be many reasons for this, whether it's the challenges of working with live tissues or second-order COVID-related impact, like supply chain constraints or labor shortages, the reduced staffing levels, and limited opportunities for training, collaboration, or best practice sharing. A core part of our strategy is to enable as many researchers as possible to become routine users of single-cell. We have found that customers who own instruments consistently grow their usage over time. We're focused on driving instrument placements with both new customers and with Halo users. We also want to ensure our existing customers have the best technologies for single-cell analysis, which is why we're focused on upgrading researchers with Chromium controllers to our Chromium X series. We have now established a broad base of installed instruments representing a great foundation for future growth. And while we've made good strides within academic labs, we see a large opportunity ahead both with our existing customers increasing their usage and with new customers entering the ecosystem. We're gaining traction throughout pharma and seeing strong growth among biotechs who are increasingly adopting single-cell and spatial methods. And as we look ahead, we're also continuing to expand the breadth and depth of our commercial team. We're on track to add nearly 100 new roles and to finish the year with a commercial team of more than 500 employees worldwide. We're continuing to gain traction with a dedicated tissue specialist who onboarded last year. And as we prepare to launch Xenium, we've deployed a separate specialized market development team dedicated to spatial and in situ. This should ensure the rest of our commercial organization maintains focused momentum on growing adoption of our current on-market portfolio. Before we move on, I want to acknowledge Brad Cratchfield, our Chief Commercial Officer, who we previously announced will be leaving the company by the end of the year. Under Brad's leadership, we have built and scaled a global commercial organization that is a real differentiator for 10X and an excellent foundation for future growth. While he's not joining us on today's call, Brad continues to lead the commercial team through this transition period. We have initiated the search for our next CCO and have proactively made several changes to the commercial team in advance, including realigning regional leadership and welcoming a new head of commercial operations. I want to thank Brad and the entire commercial team for their focus on execution and unwavering commitment to our customers. And finally, turning to operations and the work we have underway to expand and strengthen our manufacturing capabilities. We're continuing to make substantial investments in our global operations network, by adding production capacity and new capabilities to differentiate products and support the long-term growth trajectory of the business. Since opening our manufacturing center in Singapore, we have continued to ramp production at the site. We're also building out our new Pleasanton facility and look forward to co-locating more of our R&D and operations teams to enable tight collaboration and fuel our rapid pace of innovation. In addition, our team is working hard to proactively manage our global supply chain in what remains a very dynamic and challenging environment. We're working closely with our partners and are continually evaluating our ability to source key components. We're also expanding our distribution network and carry options to help alleviate global logistics constraints. We believe our efforts and investments to scale and fortify our operations and supply chain are essential to supporting our growth and enabling a product roadmap. Our team is fully focused on driving our innovation engine, scaling our commercial organization, and advancing our operational capabilities in 2022. We're bringing the whole company effort to delivering this year and building momentum for 2023 and beyond. I want to thank the entire Tenex team for their hard work, focus, and dedication to our customers and to our mission. Now, let me turn it over to Justin for more detail on our financials.
spk09: Thank you, Serge. Total revenue for the three months ended March 31st, 2022 was $114.5 million compared to $105.8 million for the prior year period, representing an 8% increase year over year. Consumables revenue was $98 million, which increased 5% over the prior year period. Instrument revenue was $14.4 million, which increased 30% over the prior year period. Service revenue was $2.1 million, which increased 31% over the prior year period. Looking at our regional results, revenue for the Americas was $59.7 million, increasing 15% over the prior year period. EMEA revenue for the first quarter was $20.5 million, increasing 7% over the prior year period. Finally, APAC revenue for the first quarter was $34.3 million, in line with the prior year period. As we shared on our earnings call in mid-February, we had a slow start to the year driven by the Omicron surge in certain geographies. This was especially pronounced with our academic research customers, which represent approximately three-quarters of our revenue. As we moved into March, the effects from Omicron largely abated in North America and Europe. While the operating environment was improving in these regions, COVID-driven lockdowns in China towards the end of the quarter severely impacted lab activity there. While these lockdowns had minimal impact in Q1, we expect they will more adversely impact Q2 revenues. Additionally, our Q1 results in Europe reflect the impact of a process breakdown in the region's logistics cold chain that led to intermittent assay performance issues. Our support team was able to trace the root cause of this sporadic issue back to products that had fallen out of required refrigerated temperature ranges. This breakdown resulted in a number of European customers receiving products that had spoiled and needed to be replaced. We have implemented additional safeguards in our logistics operations, and we are working with impacted customers in the region. Turning to the rest of the income statement, gross profit for the first quarter was $89 million compared to a gross profit of $88.8 million for the prior year period. Gross margin for the first quarter was 78% compared to 84% in the prior year period. The declining gross margin was primarily driven by change in product mix, increased manufacturing and logistics costs, and higher accrued royalties. We expect our gross margin will trend slightly lower during the year due in part to changes in product mix and the impact of inflation and increased supply chain costs. Total operating expenses for the first quarter were $130.8 million, an increase of 32% from $99 million for the first quarter of 2021. The increase in operating expenses was primarily driven by higher personnel expenses, including stock-based compensation, increased research and development expenses and infrastructure costs, partially offset by a decrease in outside legal expenses. R&D expenses for the first quarter were $64.1 million compared to $41.9 million for the first quarter of 2021. SG&A expenses for the first quarter were $66.7 million compared to $56.9 million for the first quarter of 2021. Operating loss for the first quarter was $41.7 million compared to a loss of $10.2 million for the first quarter of 2021, primarily due to the impact of increased personnel-related expenses. This includes $26 million of stock-based compensation for the first quarter of 2022 compared to $16.2 million for the first quarter of 2021. Net loss for the period was $42.4 million compared to a net loss of $11.6 million for the first quarter of 2021. We ended the quarter with $539 million in cash and cash equivalents and marketable securities. net of restricted cash. Our strong balance sheet is an advantage, especially in the current environment. Now, turning to our outlook for 2022, we continue to expect our full-year 2022 revenue to be in the range of $600 million to $630 million, representing growth of 22% to 28% over full-year 2021. Looking at Q2, we are still experiencing some lingering impacts from the cold chain driven spoilage in Europe, which we expect to be fully resolved by quarter end. Additionally, we are continuing to navigate near-term impacts driven by the macro operating environment, which include second order COVID effects, supply chain and logistics risks, and most significantly, lockdowns in China, which are scheduled to end in mid-May. Looking beyond Q2, we are optimistic about the remainder of the year, the enthusiasm from our customers for our product portfolio and pipeline remains strong. As the operating environment continues to improve and our newer product launches have an increasing impact on revenue, we expect to see an acceleration of growth in the back half of the year. We still expect our annual revenue split to be about 40%, 60% for the first half and second half of the year, with slightly more weighting to the back half of the year, reflecting the Q2 factors we just mentioned. At this point, I'll turn it back to Serge.
spk03: Thanks, Justin. Our conviction in the vast opportunity ahead and our long-term growth potential is as strong as ever. One of the central learnings and perhaps the greatest revelation of the last several years of biological research is the pervasive cellular complexity that underlies just about every biological system. There is now a growing appreciation that eventually all tissues will need to be analyzed with single-cell context and at large scale. We believe it's going to be true for research, for clinical, and for therapeutic applications. Our goal is to bring this future forward. This is why we have been investing aggressively in our three platforms, Chromium, Visium, and Xenium. Together, they encompass all the major technological approaches for addressing cellular heterogeneity at scale. Having all three approaches under one roof will create tremendous value for customers who will benefit from the integrated experience, our track record of technological advancement, and our focus on customer success. And while we're proud of what we've accomplished so far, relative to where we're going, we're just getting started. Our team is driving hard to execute this year and to finish with momentum that will strengthen our position to accelerate growth in 2023 and in the long term. We know what the end point is, and we're confident we're the best company to deliver on it.
spk02: With that, we will now open it up for questions. Operator?
spk11: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to remove your question, please press star followed by two. And please limit your questions to one question and one follow up and ensure your phone is unmuted locally. We take our first question from TJS Savant from Morgan Stanley. Please go ahead.
spk01: Hey guys, good evening and thanks for the time here. Serge, maybe to kick things off on Chromium, can you share some color on where you stand in terms of the upgrade cycle for your base controller users? And then have you seen utilization of customers who upgraded to the X or the IX earlier in the cycle start to trend up here? And then any color you can share on the Halo user ordering trends as well would be helpful.
spk03: Yeah, so on terms of the X upgrade cycle, so we're in the early stages of that. As we said before, when we first introduced the X, it was really aimed at the top, like top-end, top-tier, top 10% maybe or so of our customers who are interested in sort of the leading edge of single-cell analysis, doing things at high throughput. We have since learned there's more interest across our customer base, and a lot of new customers have been onboarding with the X. Since kind of later in the quarter, and especially this quarter, we announced that fixed RNA profiling is going to be available specifically on the X. That has spurred kind of more interest in an upgrade across our entire customer base. It's still quite early, I would say, but, you know, it's on a meaningful trajectory to go in that direction, especially as we head further into this quarter. The, let's see, what was the second question?
spk01: It was on utilization at customers who upgraded earlier.
spk03: Yeah, it's too early to tell at this stage. I mean, certainly the people who are interested in the X in the first place would tend to be earlier customers. And so they would naturally be kind of have higher usage patterns to begin with. So at this stage, it's too early for us to kind of to place a precise estimate of the usage patterns and to differentiate between kind of the selection versus the actual usage of these. And but, you know, directionally it's kind of trending in the right direction. And, you know, as far as HALO and instrument owners is concerned, you know, the dynamic is not really materially changed from what we've seen before, at least historically to say given all the sort of noise in the last quarter. But, you know, having said that, we're always driving new instrument placements. That has been our focus. And the key thing, and this has been very consistent, we've seen the key thing is that the instrument owners keep doing well. They keep increasing the usage. They keep adding, scaling up their experiments. And that pattern has been consistent across the years and continues to be the case. And so, yeah, certainly our goal is to keep adding instrument, making instrument, adding more, selling more instruments to existing customers, whether they're Halos or not, and also driving new people into the ecosystem with instruments.
spk01: Got it. That's helpful. And Justin, just a quick follow-up for you on the guide. I think I heard you say the lockdowns in China are expected to end in May. So is it safe to assume that you're expecting a full recovery to normalize activity in China in the back half of the year? Or are you assuming a more conservative sort of slope of the recovery there?
spk09: We're expecting this to normalize in the back half of the year. And just for reference, China was about 18% of our revenue in Q1, about 15% of our revenue last year for the full year. And really the biggest impact that we're seeing right now is in Shanghai and the surrounding area, and that's 30% to 40% of our revenue in China is in that area. And so there has been an impact. in q2 and we are expecting it to start lifting here later in this month and we are expecting it to normalize in q3 and q4 very helpful thanks for the time guys we take our next question from dan brennan from cohen please go ahead dan
spk05: Great, thank you. Thanks for taking the questions, guys. Maybe the first one just on the updated guide or some color that you provided. So it seems like, Justin, so if typically it's 40, 60, but maybe a little bit below that. So if we say like 39 to 40, it seems like Q2 is somewhere in the 110 to 135 range, which would imply, you know, pretty good ramp, even a bigger ramp in the back half of the year. So maybe on that back half year, could you just give us a sense of how we think about the impact from some of the new products, Chromium X, and kind of the fixed kit and the new client kit. And then just to be clear, I guess, the HD product, that's not going to impact 22, right? That's going to be all in 23. And then I have a follow-up. Thank you.
spk09: Yeah, so I'll start, and then, Serge, you can add some color. But as far as looking at first half of the year compared to the back half of the year, you know, we have some specific headwinds that have impacted us both in Q1 and in Q2. So as we head into the second half of the year, we're largely expecting those to go away. And then typically with new product launches, for any one product in the quarter that it launches, we don't expect a huge impact to revenue, but we have multiple new product launches that are going on throughout this year. And we have newly introduced products as well that have been picking up traction over this year. And so all of those point to and support acceleration in Q3 and Q4.
spk02: Great. Okay.
spk05: Maybe then just on the new products then, just a little more color. So just on the X, Serge, you talked about initially thinking 10% of the customers might want it. It sounds like it's a bigger percentage today. Maybe could you just speak to just – Is it, I presume, just kind of the core labs that are adopting that? Is that appealing more to pharma? Just how much bigger than that 10%? Maybe if you can give us a sense, and then B, the fixed kit and the nucleic kit, the decision to roll out the fixed kit only on the X, presumably a lot of smaller researchers might want that ability to do the fixing too, so why not broaden it out, I guess? And any color on how those kits might appeal to open up biopharma more, whether this year or going forward?
spk01: Thank you.
spk03: Yeah, so on the first question, like the short answer is like every customer in terms of Chromium X, where we see it going now. And remember, we have the X and we have the IX, which is kind of coming into somewhat lower price point. And yes, initially the interest was from the top tier of customers, but we saw kind of as in the second half of last year, really the interest has been across the board. Sure, the core labs are sort of natural purchasers as well people on the forefront of single cell research. But, you know, we've seen new customers coming in kind of almost by default. If they have funds, they're only going for the eggs. And for sure, when we look at biotech and pharma, that's where the demand has been very much focused on the egg series. So that's why kind of as we kind of looked around, we definitely see it being applicable kind of in a very broad fashion. It is, you know, there's a lot of sort of improvements under the hood in the instrument itself. And so ultimately, as we think about where kind of the world is going and where we want our customers to be, where the customers themselves want to be, it's just better for everyone no longer to have to convert to this new technology. And so that was a big part of our thinking and a big part of why really fixed RNA profiling is also only compatible with the eggs. we do see the X, especially the IX, being very broadly adopted kind of across the board.
spk05: If it's possible, Steve, one last one in. Just in terms of HD and Xenium, you talked about the profile of Xenium being superior to what's on the market and how well Visium is doing. I don't know if you've framed this in the past, but when we think about the aggregate opportunity for HD and for Xenium versus your core Visium product, how do we think about, like, you know, the relative opportunity set? Is it just any way to help frame that? I know you're not breaking these numbers out within the model today, but just at least on a relative basis when we think about the magnitude.
spk03: Yeah, I mean, directionally, like, I'm feeling at this point that, like, vis-image D relative to standard visium has a much higher potential, like a multiplicative potential, as we think, you know, again, for the future. And in xenium, we feel very, very strongly about its potential, especially when we think about the long-term. I mean, they're somewhat different use cases, and I think they're going to be largely complementary. I think both HD and Xenium are, you know, substantially higher opportunities than what we are currently, would be currently seeing with standard resolution vision.
spk02: Great. Thank you.
spk11: We take our next question from Derek DeBruin from Bank of America. Please go ahead.
spk07: Great. Thanks. This is for Derek. I want to follow up on the Xenium. You commented a couple times you're expecting to ship it by the end of this year. I take it you're not quite at the point yet where you're taking orders, or maybe if you are, could you give us a sense of, you know, when you anticipate to start building that order flow, that order funnel? and any expectations you can have for, you know, you could reel about how many placements you expect in year one, sort of is it going to be a little bit of a slower launch because it is a little bit different, sort of what customers are you targeting with initially, just any more color on that initial ramp?
spk03: Yeah, so we're not taking orders yet, although we've had a lot of discussions and engagements with our customers around it, and The interest, as we said, is very strong, and so there's a lot of kind of very nice pipeline of customers that's forming. As far as kind of the numbers that we expect to put out there, I mean, our focus is going to be on customer experience, very much so. So that's going to determine more than anything else the numbers that we're going to be shipping. That's going to be the focus for the first couple of years of being on the market. From the perspective of demand, it looks incredibly encouraging at this stage. And as we kind of project what people are interested in doing near term and in the mid-term and the long term, I think the trajectory of this platform is looking incredibly strong.
spk07: And anything you can disclose in terms of the financial, the ASP, the gross, you know, the margin profile, anything like that?
spk09: We haven't disclosed the exact pricing on that. These earlier placements, they are going to be lower margin. It's a complicated instrument. It's going to be higher touch. As far as the quantity, the focus initially is not going to be on quantity. It's going to be on customer success. When looking at the financials, I expect a low financial contribution this year just due to what the initial focus is going to be.
spk07: Okay. And, Justin, if I could please in a follow-up, what you disclosed in the prepared remarks regarding the issue in Europe, I was going to keep going through a little bit more detail on that. You know, how do you know there's not going to be any lingering impact? Could you give us a sense for the scale of it? You know, are you sure that these customers are sort of going to be fully able to recover it. Just sort of walk us through exactly what happened there, you know, was it on the QATC side on your front or someone in the shipping, just to provide more color and that would be helpful.
spk09: Yeah, so this was a very complex and intermittent issue, you know, really a multivariable problem to figure out. But our products need to be shipped in a temperature-controlled environment. So that's both while it's in transit, and when it's being stored. And so we found that in part due to pressures on the overall global supply chain that includes increased delays, and then also some processes on our side along with our partner that needed to be tightened up operationally. What this led to was shipments sporadically falling out of those temperature controlled ranges. And then when they got to the customer, it wasn't apparent to the customer that the product had spoiled until they actually ran the experiment. And so when we looked at this and troubleshot it and got to the root cause, we implemented some additional safeguards, both to improve the monitoring ability for the shipments in transit and in storage, and then our processes and quarantine procedures when we detect that that product has fallen out of the temperature controlled ranges. And then when we look at the impact, you know, the number, the amount of products replaced was relatively small. We're talking a couple million dollars in Q1, about a couple million dollars planned and executed already in Q2. But the bigger impact was while we were troubleshooting with these customers, They stop, you know, there's a delay in ordering while they work through the troubleshooting, gets the root cause, and then we ship them the replacement, and then they do the experiment again with the replacement.
spk02: And so, you know, really those are the key impacts there. Great. Thanks, guys.
spk11: The next question comes from Julia Quinn from JP Morgan. Please go ahead.
spk12: Hi, good afternoon. Thanks for taking the question. So first off, a follow-up on the Chromium XIS upgrade cycle. Can you maybe give an update on the current, you know, placement mix between existing and new to 10X users? And then over what timeframe do you expect the majority of your Chromium users to upgrade to the X and IX? And do you think that the fixed RNA profiling kit, is that enough? to lift near-term bottleneck, or are there other remaining bottlenecks that you are hoping to address with, you know, additional?
spk03: So in terms of the mix, so far, yeah, so far the mix has been roughly similar, like 50-50 to the new and existing customers for the X, and that has started to shift. obviously because of the fixed RNA profiling kit. And I think that's going to, like I said, it's going to drive quite a bit of this replacement cycle. It's a little hard to predict at this stage necessarily how long it will take to get the majority of the customer base to switch. We'll have to kind of see how the next couple of quarters proceed. But we feel based on the initial interest and fixation, and ultimately high throughput that I think it's going to be a fairly rapid cycle to get to that point. As far as removing bottlenecks, I think fixed RNA profiling is going to be one, certainly one big enabler. As I mentioned, the Nuclei kit is another enabler, in fact, to kind of remove the bottlenecks. other solutions or approaches that, you know, we're working on, we have always been working on, whether it's developing new protocols, sharing protocols, or new products. So it's not going to be necessarily really every bottleneck that our customers have, but it will certainly be a big enabler at this stage.
spk12: Got it. That's helpful. And then in terms of converting the Halo users, Do you think that, you know, the pandemic impact has been the main hurdle in terms of helping these customers ramp? And is your current, you know, upcoming new offerings enough to convert them? Or do you think it would take some other initiatives to convert these Halo users?
spk03: So we've always been focused on placing more instruments, and we're going to keep doing that. As far as there's... It's hard to question the sort of the notion that the pandemic has made it more challenging for them. I think that will certainly help. I think new product capabilities will help customers with the scale up as well, like the one, you know, we were just talking about. And, you know, it's our goal to keep doing things. The other big thing here, too, is that just having our salespeople, our commercial team on site, is something that has been missing for a while and is now, you know, now that we have people on site, they can actually engage with customers and help them scale up. And I think that's another sort of accelerant that we anticipate to be meaningful going forward.
spk12: Great. Last one from me on Xenium. So I understand the initial launch menu is going to be 400 plex with a path to 1,000 plex over time. Are you able to specify, like, over what timeframe you can get to that higher plex menu? And do you think that, you know, 400 plex is enough to get your initial traction because, you know, the system is positioned more for validation and not for discovery? Is any color on that?
spk03: Yeah, so we haven't talked about the timeline to get to other plex levels. But we do feel pretty strongly that having the right genes in these panels is really important. So, you know, all the current platforms that exist out there will be used for validation. And what is necessary, and having a slightly higher plex level is actually not going to help you nearly as much as having the right genes in your panel. And we're focused on making sure we have the right kinds of panels for the right tissues. And this is where also it helps us quite a bit to have kind of close relationship with our customers and also having a lot of internal expertise that has derived from our Chromium and Visium experience to put those together.
spk11: Got it. Very helpful. Thank you. We take our next question from Patrick Donnelly from Citi. Please go ahead, Patrick.
spk08: Hey, guys. Thanks for taking the questions. Justin, when you talked about the potential near-term impacts, looking at 2Q, you mentioned COVID still lingering. Can you just talk about, I guess, what you're seeing on that front, what the customer activity looks like? I assume it's lower on the totem pole of headwinds versus the cold chain logistics in China, but you did call it out, so I just wanted to check on that and hear what you're seeing in the field.
spk09: Yeah, so as far as impacts for Q2, you know, we talked about LDR. That's a headwind in both Q1 and Q2, specifically in Europe. And then as far as COVID impacts from Q1 to Q2, really in Q1, that was an AMR and EMEA impact. In Q2, it's the China lockdowns that are the primary impact there. And then just overall, as we've talked about over time, you know, the second order impacts, which are really, you know, not having to do with closures or shutdowns, you know, but it's more just impact on growth rates due to, you know, people not being in person, manpower, supplies, things like that. But, you know, generally we have seen improvements there. Like, we were back in person. you know, when we were looking at mid-March, and so, you know, that has been improving, but again, it's more of an impact on growth rate than it is on the current state.
spk03: Yeah, and I'll add here, too, is like, I mean, one of the big things that has been happening literally over the last two months, less than that, is like we, the people are back in person at conferences. This, again, this has not existed before, and there's this whole sort of almost fervent of activity that we're seeing happening with customers. and now with our field teams as well. Now they can interact with people and kind of initiate, kind of pick up on projects that have been laying dormant for a while or, and this is important, like initiate new projects. Again, this is something that has been more challenging kind of to do over the last two years as like as people have dealt with various types of impacts. And now seems like there's kind of more momentum at least based on our interactions, our field teams kind of being out there interacting with customers and also them interacting with each other. So there's sort of this kind of, that has been a challenge and that has been, we expect that to start kind of abating as we go into the second half of the year.
spk08: Okay. That's helpful, Serge. And then, Justin, maybe just one on the margins here. You mentioned margins, you know, the product mix brought it down a little bit. I assume the cold chain stuff didn't help. I guess as you look kind of in the balance of the year and even more in the midterm, you've talked about some of the new products being a little lower gross margin. What's the right way to think about the margin profile as we progress this year and then even in a kind of steady state for the company?
spk09: So as far as gross margins go, we are expecting it to trend lower this year, not by a significant amount. Some of the increases that we've seen on material costs and supply chain costs, are already in the Q1 results, but there still remains additional risk for the factors that we've called out before, just increased raw material costs, increased logistics costs as well. And then as far as product mix, that's a big driver as well. We've talked in the past about our newly introduced products and products that we have in the pipeline having a lower gross margin than existing products. This is true with the Chromium X and IX. It'll be true with Xenium when it launches as well. And so really those are the biggest factors on gross margin.
spk11: We take our next question from Matt Leroux from William Blair. Please go ahead, Matt.
spk00: Hey, good afternoon. A couple on HD. Perhaps I missed it, but I know last quarter you mentioned HD was expected to launch at the end of 2022. So is that still on track? And I think last quarter you also mentioned that you were seeing sort of folks that were waiting for HD, that maybe that was putting some pressure on Visium demand. So I just wonder how that has trended throughout the quarter as well.
spk03: Yeah, so we don't have an update on the timing, still working towards launching near the end of the year. And on the second question, yeah, for sure, that definitely has been in effect. We've been seeing customers are waiting for HD. I mean, there's definitely a lot of customers that are jumping in and doing the standard definition of Visium and getting great results and great data and ramping up, but certainly more and more people are kind of really kind of looking forward to HD.
spk00: and um and yeah there's certainly likely to be some amount of stalling uh of standard vision on the stage okay uh and then justin actually just thinking about the uh i guess sgna in particular obviously it's another big year for hiring uh sgna because maybe a little later what we thought it'd be in the quarter are you uh having difficulty filling any roles, or is that maybe just kind of in line with kind of a typical step down? How would you think about, you know, SG&A building throughout the year?
spk09: You know, as far as if we just look at the sales and marketing piece, we expect to hire over 100 folks in sales and marketing this year. And so that has been tracking along. Pretty well, just looking at how we've been able to grow from Q4 into Q1. SG&A overall, obviously, you know, much smaller amount of hires in G&A. But, you know, even though we are growing quite rapidly in SG&A overall, like, we have been able to find folks and hire them there. R&D is really the hardest area that we found to hire in overall.
spk02: Okay, thanks.
spk11: The next question comes from Matt Sykes from Goldman Sachs. Please go ahead.
spk06: Hi, thanks for taking my questions. Maybe just following up on Matt's last question, just for overall OPEX trends as we think about it over the course of the year, just given the number of product launches you're getting through this year in terms of R&D trends over the course of this year and maybe into next, how are you thinking about the OPEX cadence over the course of this year?
spk09: So this year in particular, we're building ahead for the Xenium launch. On the sales and marketing side, we're starting to hire those support staff now. So you're seeing increases now that are really towards the end of the year. And then the heads that we hire towards the end of the year, I'd really think about those as enabling 2023. So there definitely is a higher ahead impact for sales and marketing in particular.
spk06: Got it. And then, Serge, maybe a big picture question for you. You've talked in the past about the potential complementary nature of having the three platforms when Xenium launches. As you think about longer term with Xenium in the market, do you think that could help reinvigorate or reaccelerate growth in particularly Visium or any other platforms as customers kind of see the entire ecosystem?
spk03: Well, so yeah, I see there's definitely synergistic and I think it goes both ways, kind of relationship between the platforms. And again, Chromium and Visium exist on the discovery side of the world much more so, and Xenium is going to exist on the validation side. And certainly, like I said on the call, Xenium naturally, like basically every, you know, just about every paper you see now within C2 makes use of Chromium and Visium data. And so as people kind of are, pushing toward Xenium and doing these in situ experiments, there's a natural, there's going to be a natural use cases to also draw in and run, run Chromium and Visium experiments to kind of map things out and discover the right, the right markers, the right cells and cell types. So we do see both of those kind of the, you know, all the platforms, all the different platforms are actually kind of pushing each other. I also kind of want to emphasize the customer experience, again, from the same perspective, given that so much of the use integrate actually makes use of all these data types together, that having a single customer experience is going to be quite important and valuable to customers as they go back and forth between the platforms.
spk02: Great. Thanks very much.
spk11: This now concludes the Q&A session and thus concludes the call for today. Thank you all for joining. Please disconnect your lines now.
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