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spk10: Hello everyone and welcome to the 10x Genomics first quarter 2023 earnings conference call. My name is Bruno and I'll be the operator of today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Cassie Cournot. Cassie, please go ahead.
spk00: Thank you and good afternoon everyone. Earlier today, 10X Genomics released financial results for the first quarter ended March 31, 2023. 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. We will host a question and answer session after our prepared remarks. We ask analysts to please keep to one question and one follow up so that we may accommodate everyone in the queue. With that, I will now turn the call over to Serge.
spk11: Thanks, Cassie. And good afternoon, everyone. On today's call, I will start with an overview of our first quarter performance across our leading portfolio of single cell and spatial technologies. Next, I will discuss our progress, momentum, and the exciting opportunities we have ahead in each of our three platforms. And I'll share why, based on early yet overwhelmingly positive feedback we've heard from our customers, we firmly believe Xenium is the best system for in-situ analysis. Then I'll turn the call over to Justin for a more detailed look at our financials, business trends, and outlook for the rest of the year. 2023 is off to a solid start with first quarter revenue growing 17% year over year to $134 million. These results reflect the momentum we're seeing across our spatial portfolio fueled by recent launches in both Visium and Xenium and the strength in Chromium consumables. Regionally, the Americas and EMEA teams saw improvement after a slowdown in the prior year period, while APAC came in below our expectations. As we look to the year ahead, It's all about execution and impact. We're coming over the biggest and the most exciting year of product launches in our history. And our team is fully focused on driving adoption and ensuring our customer success. We're continuing to push our innovation engine with new capabilities in all three platforms. And we're working to improve scale, efficiency, and operational excellence throughout the company. All this so we can maximize and deliver on the incredible opportunity we have ahead. Now, let me share more about each platform, starting with Chromium, the unambiguous leader in single-cell analysis. In Q1, Chromium consumables continued their solid trajectory and returned to double-digit growth. This was driven by strong performance in Americas and EMEA, as nearly every assay in our entire broad single-cell portfolio grew year over year in both regions. The performance, ease of use, and tremendous scalability of our consumables portfolio across a wide range of applications and analytes is an important differentiator for 10X that creates real value for our customers and their research. This quarter in particular, we continue to see increasing traction and customer enthusiasm for Chromium Flex, the new gold standard for single-cell gene expression. With its robust fixation, superior performance, built-in multiplexing, cost advantages, and broad sample compatibility, we believe Flex will be transformative to the Chromium platform over the long term. It's very early in this launch, yet it's clear that momentum is building. We're hearing multiple examples of customers who achieved amazing results in their initial evaluations and are now planning larger studies that leverage the assays built in multiplexing to run more samples at lower per sample costs. One customer shared how Flex, the first and only single cell assay to work with archival FFP samples, revealed new signatures in bladder cancer blocks some 15 years old that are eye-opening to pathologists. The palpable enthusiasm we're seeing reinforces our belief that FLEX has the potential to become our new flagship assay for single-cell gene expression. It's drawing more researchers into the 10X ecosystem as new customers increasingly choose FLEX as their first 10X assay of choice. Just like we've always done, we're continuing to invest to broaden the menu of applications available in the FLEX portfolio to enable more samples, more scale, and more analyze. Later this year, we expect to expand our feature barcode application to FLEX to simultaneously profile gene expression and cell surface proteins on a cell-by-cell basis across multiplex samples and millions of cells. We believe the additional plug-and-play multiomics capabilities on FLEX will open up more opportunities within disease research and translational settings. FLEX is exclusively available in Chromium X series instruments. And as such, we expect placements to accelerate as more customers appreciate the power and performance of this assay. The Chromium X series is by far the most powerful tool available for single cell analysis. And we believe there's a long runway ahead with both new and existing customers. Altogether, this is why I firmly believe, despite all the progress we've made, single-cell is still just getting started. Now, turning to spatial, where both our Visium and Xenium platforms exceeded our expectations during Q1. We launched Visium only a few years ago, and since then, Visium has emerged as the clear leader in NGS-based spatial technology, used in thousands of labs and having generated the largest number of public datasets by far. Last year's launches of SiteAssist and FFPEv2 have a further accelerated adoption of the Visium platform. These new products help solve the key challenges our customers have historically faced with the Visium workflow. SiteAssist also opens up more samples and more sample types for Visium research, providing customers with a better experience and better data. This quarter, we launched protocols for both fresh frozen and fig samples, now enabling all major sample types to run on Cytosys. Demand for Cytosys remains solid in Q1. It's been particularly exciting to see these placements drive increased Visium utilization. Cytosys-based consumables became the preferred method in Q1, surpassing our instrument-free assays, a trajectory we expect to continue. And it's not just our existing power users who are adopting Cytosys. This instrument is bringing new labs into the 10X ecosystem. A large fraction of replacements in Q1 went to labs that were either new to the Visium platform or new to 10x entirely, a promising indicator of potential future growth. These trends demonstrate why we're confident SiteAssist is the future of the Visium platform. We're continuing to invest and innovate in the Visium franchise, developing new capabilities that will be exclusively available on SiteAssist. This quarter, we plan to launch Visium Gene Plus Protein Expression, empowering researchers with three analytes in one, HisPlex protein, whole transcriptome RNA, and H&E staining, all on the same tissue section. This will be the first and only assay of its kind to offer a morphology-first workflow, preserving pristine H&E staining patterns conducted upfront. Linking an information-rich image with its complementary molecular analytes on the same tissue section enables researchers to both cross-validate their findings and obtain a new level of understanding. Now, turning to Xenium, which we believe is the best performing platform for in-situ analysis. It's exciting to see the incredible momentum and traction we've built since we first started shipping Xenium in December, and we couldn't be more pleased with the initial feedback we're hearing from our customers. We set out to build Xenium so it just works in the hands of researchers, the same as our other products. To have our customers tell us this and show us through their routine use is a testament to the strength of our innovation engine and the talent and dedication of our team. Our customers have not only praised Xenium's performance and ease of use, but also the entire experience engaging with the platform. They've given rave reviews to our field teams for their support during installation and training, which shows the real impact of the commercial breadth, depth, and scale we've built over the years. It is awesome to have the key design specs we intended and marketed for launch now developed, delivered, and in regular use in the field. Researchers are seeing that it's the system's on-market features, not on-paper features, that deliver real value and lead to exciting new discoveries. To see our initial customers generate powerful results and stunning images on Xenium run after run has been deeply rewarding and motivating for our team. In fact, since the end of January, our customers have completed dozens of successful Xenium runs with their own pressure samples, ranging from mouse brain to more complex human samples across various tissues, including breast, kidneys, skin, lung, and various sample types, including fresh frozen FFP and tissue microarrays. The feedback they've shared after independently completing the entire workflow from sample prep to data analysis validates Xenium's differentiation and performance advantages across a number of fronts. To start, thanks to unique features inherent in our chemistry, Xenium delivers excellent sensitivity and specificity, which are the necessary foundations of any high-quality, trustworthy in-situ system. We compare the information and the competitors' marketing materials to our own data sets and found Xenium is currently up to six times more sensitive. Xenium also delivers much higher specificity, giving customers confidence that each transcript detected is the intended one and that there is no false or phantom genes or cells in their samples. In another comparison using a competitor's marketing data, we found Xenium delivers up to 42 times better specificity than the other platform, where six to 25% of the transcripts in each cell can be misleading. Beyond performance, Xenium's ease of use, efficient workflow, and best-in-class throughput are also resonating very well with our early customers. Researchers can use our entire slide area, enabling maximum flexibility to run single large sections, multiple smaller sections, or even tissue microarrays. With Xenium, researchers can analyze the most tissue area in the least amount of time using the fewest number of slides. In addition, Our gene panel strategy, designed to help customers answer their specific research questions, is also resonating well. Our approach combines a growing menu of targeted gene panels optimized by tissue type with the flexibility to add in large numbers of custom genes. This quarter, we will continue to expand our content menu with the planned launch of new tissue-specific panels and a multi-tissue panel optimized for cancer research. With each of these offerings, researchers can also spike in their own custom genes to ensure they aren't limited in any way by gene selection. In addition, we recently launched a fully custom gene panel for maximum flexibility. Our unique combination of pre-designed and fully custom panels is increasingly validated in the field, giving researchers the ability to measure the genes they need at high performance and high throughput. This all comes together with our differentiated approach to software and data analysis, which is the best demonstration of the caliber and performance of an in situ platform and essential to ensuring a positive customer experience and to enabling routine use. Everyone in the field has talked about how challenging it can be for researchers to handle the large amounts of data produced by in situ instruments. However, challenges like these play exactly to one of our key strengths. We have invested and built world-class software data analysis expertise since the earliest days of the company, in contrast to others who outsource this critical function. We have brought our team's proven software prowess to Xenium, and the result is yet another area where the 10X approach is a big differentiator that's making a big impact with our customers. Xenium is the only platform to feature comprehensive primary and secondary onboard analysis in parallel with the instrument run. including cell segmentation and clustering results. This enables researchers to directly access their data on the Xenium instrument immediately after the run is done without the need for on-risk post-instrument analysis or massive uploads, downloads, or data transfers. Customers who want more off-instrument interpretation can easily do so using Xenium Explorer or a wide variety of open source tools. we're confident that our differentiated approach is flexible, fast, and significantly reduces the computational burden on customers. We've built Xenium to be the best performing in-situ platform, both now and for the future. Xenium is backed by an ambitious and exciting multi-year roadmap. We've already demonstrated a number of these future capabilities, including the ability to scale to many thousands of genes. In addition, Xenium's chemistry uniquely enables isoform mapping and SNV detection real game-changers that simply aren't possible on other platforms. The real-world feedback we've received from our early Xenium users is giving us better insights faster and helping us to prioritize our roadmap so we can deliver researchers precisely what they want. Overall, we feel really good about our early progress and momentum. There is tremendous potential ahead with Xenium, and we're bringing in the whole of company effort to capture it. We've already made significant improvements in our installation and training times, and we're increasingly confident in our scaling as we move through the year. The kinds of projects our customers are already running indicate that Xenium may be one of the, if not the most transformative technologies in our industry in decades. We believe our platforms, each on their own, are by far the best in class in their respective fields. Each provides a different lens on biology and can be used together to provide even more value and reveal the deepest biological insights. Our progress across each of our platforms continues to reinforce my conviction that one day, just about all tissue samples, whether for research, clinical, or therapeutic applications, will need to be analyzed at single cell resolution, large scale, and in the right context. We firmly believe our technologies are critical to accelerating the mastery of biology and advancing human health. With that, let me turn it over to Justin for more detail on our financials.
spk04: Thank you, Serge. I'll start by reviewing our financial results for the three months ended March 31, 2023, and we'll then provide an update on our outlook for 2023. Total revenue for the quarter was $134.3 million, compared to $114.5 million for the prior year period, representing a 17% increase year over year. Given the differences in regional dynamics this quarter, I'm going to start with our revenue by geography. America's revenue of $78.8 million grew 32% over the prior year period. EMEA revenue of $28.4 million grew 38% over the prior year period. And revenue in APAC was $27.1 million, a 21% decrease year over year. As discussed on our last call, we saw an impact to sales in China at the beginning of the quarter. While we believe activity levels are recovering, There is typically a lag in reorders after such disruptions as distributors and service providers work through existing inventory. We also instituted price increases at the beginning of Q1, and customers typically buy ahead of such increases, particularly service providers, and we believe this also contributed to a larger inventory position in Q1 that customers are continuing to work through. As we shared at our investor day last December, starting this quarter, we will be providing a breakout of consumable and instrument revenue by chromium and spatial. Starting with consumables, total consumables revenue was $112.4 million, an increase of 15% over the prior year period. Chromium consumable revenue was $101.1 million, up 11% year over year, and spatial consumable revenue was $11.3 million, up 69% year-over-year. Turning to instruments, total instrument revenue was $19.2 million, an increase of 33% over the prior year period. Chromium instrument revenue was $11.6 million, down 19% year-over-year. And spatial instrument revenue was $7.6 million. As a reminder, our SiteAssist and Xenium instruments launched in Q2 and Q4 of last year, respectively, and we did not have material spatial instrument revenue in Q1 of last year. Finally, services revenue was $2.7 million, which increased 29% over the prior year period. Turning to the rest of the income statement, gross profit for the first quarter of 2023 was $98.4 million compared to a gross profit of $89 million for the prior year period. Gross margin for the first quarter was 73% compared to 78% for the first quarter of 2022. The gross margin decrease was driven primarily by the impact of shifting product mix due to newly introduced products and inventory write downs. Total operating expenses for the first quarter of 2023 were $150.4 million compared to $130.8 million for the first quarter last year. R&D expenses were $67.1 million compared to $64.1 million for the first quarter of 2022. SG&A expenses were $83.3 million compared to $66.7 million for the first quarter of 2022. The increase in R&D and SG&A expenses during the quarter were primarily due to increased personnel-related cost and operational expansion. Operating loss for the first quarter of 2023 was $52 million compared to a loss of $41.7 million for the first quarter of 2022. This includes $42.1 million of stock-based compensation compared to $26 million for the corresponding prior year period. Net loss for the period was $50.7 million compared to a net loss of $42.4 million for the first quarter of 2022. We ended the quarter with $418 million in cash and cash equivalents and marketable securities that have restricted cash. Turning to our outlook for 2023, we are raising our guidance and now expect four-year revenue to be in the range of $590 to $610 million. representing growth of 14% to 18% over full year 2022. Our updated guidance reflects our first quarter performance as well as Xenium momentum based upon the overwhelmingly positive feedback we are seeing from early customers along with better visibility into our operational ramp. With increased Xenium momentum, we expect overall company gross margin to trend lower as more instruments are sold. Xenium consumables have a gross margin comparable to our existing products. However, the Xenium instrument currently carries a significantly lower margin than our other instruments. As we continue to scale our manufacturing capacity to produce more units, the cost per instrument will decline. There are also opportunities for component cost reduction, which we have not yet undertaken, that will improve instrument margin over time. Our goal with Xenium was to make the best in class instrument To do that, we used a number of high-end components, prioritizing performance and time to market over cost. This is a strategic investment we are making, given the potential utilization for the instrument where, over time, annual consumable revenue streams could be significant. We believe these are wise near-term investments to make, and it does not impact our view of our long-term financial profile. We have now substantially completed and moved into our new operations facility in Pleasanton, a key enabler of increasing Xenium production. The timing of capital expenditures has shifted, and we expect to see final payments transact in Q2 and Q3. And in the next 12 months, we expect $60 million to $70 million of total capital expenditures, with the majority incurred over the next two quarters. We still expect a significant reduction in capital expenditures in the back half of this year and continue to drive towards becoming free cash flow positive. We will maintain a disciplined and targeted approach to OPEX spend throughout the year. However, we expect some increases over 2022 due to increased stock-based compensation expense as a result of previous equity grants, additional headcount to support new products, and increased litigation expenses as we continue to defend our intellectual property. Our strong cash position gives us the flexibility to invest in support of our strategic priorities while still protecting our balance sheet. At this point, I'll turn it back to Serge.
spk11: Thanks, Justin. Before we open it up for Q&A, I want to take a moment to thank our team who worked tirelessly to ensure our customer success. It is their relentless focus on our mission that sets 10X apart. Our products are powerful, helping to drive fundamental advances in our understanding of health and disease. We just achieved an exciting milestone as our products have now been cited in more than 5,000 peer-reviewed papers, enabling discoveries across a wide range of application areas. Underscoring that achievement, a recent article in The Economist and a December paper in Nature Medicine Both highlighted the tremendous progress made by the Human Cell Atlas over the past five years, the incredible breakthroughs enabled by our technologies, and the potential impact on the future of medicine. It's more clear than ever that it's still early days. We believe there are massive opportunities ahead, and we're in a very strong position to capture them. I couldn't be more optimistic and confident about the future. Thanks again to our team for all you're doing every day to push 10x our mission and science forward. With that, we will now open it up for questions. Operator?
spk10: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Please do also limit to one question and one follow-up. And do remember to unmute your microphone when it's your turn to speak. Our first question comes from Dan Arias from Stifle. Dan, your line is now open. Please go ahead.
spk06: Hey, guys. Thanks for the questions here. Justin, on spatial instrumentation and the $7.6 million revenue, can you help us with the split between Xenium and SiteAssist? And then on Xenium for the year, how do manufacturing constraints figure into the equation? and how we should think about just the placement cadence for the year. Should we expect that to be a pretty even step up over the quarters, or do you think there's some back-end loading there for the model?
spk04: Hey, Dan. Thanks for the question. As far as the split in our spatial revenues for Xenium and Cytosys, we don't split that out, but it was a solid quarter for Cytosys and for Xenium as well. We're quite happy with the results for both. as far as our manufacturing constraints we continue to make progress operationally we've got more visibility into the operational ramp than we do before and so we are continuing to feel more bullish as the year continues as far as us having the operational capability to place instruments at the pace that we'd like to place them according to prioritizing customer success for the rollout
spk06: Okay, and then maybe just on chromium growth, you know, Serge, if you had to take apart the drivers there and think about what's working for you this year, how would you rate the importance of the moving parts there when it just comes to availability of new products versus overall selling and operating environment versus improvement on the commercial side? And then just to translate that to the guy that you have, Justin, is low to mid-teens for chromium still the forecast for the year, or is that evolved? Thanks. Hey, Dan.
spk11: Yeah. So I think on the chromium side, globally, the conditions have certainly changed globally macro-wise. So I would put that as probably the sort of the strongest factor, especially since there is still a pretty big difference geographically if you look at the results. Pretty substantial growth we saw in EMEA and AMR. And really across all product lines. So that does suggest that there is just general underlying strong momentum behind the franchise. We did, you know, if you think about the product lines, you know, sort of the big underlying story underneath is Flex, the progress of that. It's still quite early, and that's a relatively early, relatively moderate contributor to the overall Chromium franchise. So I wouldn't put it up as sort of a primary driver. It's not yet at that scale. So that's how I would look at it. But, you know, that said, it certainly, as it's increasing, it will become one over time, especially as we think about kind of new applications, new customer adoption, kind of driving into more translational use cases. The trajectory is right. It's just still quite early in our cycle.
spk04: Hey, Dan, this is Justin. For the second part of your question in regards to chromium in the guide, when we introduced guidance on the last call, we gave a starting point for the growth by chromium and by spatial. I don't expect that we're going to update those percentages on each earnings call going forward, but in looking at the changes to our guidance range on this call, we're taking the range up by $10 million on both the lower end and the higher end. And that represents the beats that we had in Q1, including a more bullish view on spatial, specifically Xenium. As far as talking about some of the drivers of chromium, like Serge mentioned, chromium was strong in AMR and EMEA. We had overall weakness in APAC, but the growth rates in AMR and EMEA were in the 20%. And so when we're looking at our outlook for the rest of the year, We're offsetting that against the weakness that we saw in China in Q1 and that we expect to continue on into Q2.
spk06: Okay. Thanks, guys.
spk10: Our next question comes from Dan Brennan from Cohen. Dan, your line is now open. Please go ahead.
spk13: Great, thanks. Thanks for the question, guys. Maybe just on China, I know you started off and you gave a lot of color in the prepared remarks. Maybe could you just walk through a little bit kind of how we should think about the progression throughout the year, you know, any color on how the quarter ended, how second quarter started off, and just, yeah, just kind of verse your original expectations, kind of what's now included for China.
spk04: Sure, Dan. This is Justin. I'll take that to start. You know, maybe I'll just start overall with APAC. Apac overall was down 20% year over year, and that was driven by China, which was down about 36% year over year. And our business model in Apac as a whole is different than in AMR and EMEA, where we primarily sell through distributors. And in China, the distributors and customer is the service providers. And so there's two levels of sales there. inventory the service providers as we mentioned last quarter that was higher because of the lockdowns but that was exacerbated by pull forward from the price increase that we implemented at the beginning of the year and so service providers and distributors in particular do tend to have a larger pull forward in advance of price increases just due to the concentration and you know the throughput of the overall product that they sell so from what we can tell the inventory levels are still high at the service providers and distributors. We expect to see a Q2 that is roughly similar to Q1, and then we expect to see some recovery in the back half of the year.
spk13: Got it. Okay. And then maybe just on Xenium, any early surge? Appreciate the prepared remarks. We have a lot of color on the competitive dynamic or the competitive profile, if you will, sensitivity, specificity. Another metric. So kind of what are you seeing early on in Xenium's launch? Obviously, NanoString has the big backlog, and they had the early access program, so they've had a year lead. Any color on win rates? And as you look at the opportunity set, what have you learned thus far from the launch? Sounds like you're bumping up your guidance on the spatial side, but any color, maybe just in terms of the opportunity, if you think of the next few years for Xenium from what you're seeing so far early in the field?
spk11: Yeah, again, so our view of the opportunity has always been bullish, right, the overall in-situ opportunity, and that was specifically with the Xenium launch. So always the long-term potential here is massive, and that has not changed. If anything, kind of our experience with our customers, the speed with which they're eager to adopt these platforms and run their samples is only reinforcing that conviction. We are, I mean, you're right that others have been kind of talking about their products for quite a bit longer there. But when I look at the trajectory of the market right now, our placements and how rapidly our customers are getting up and running the systems, how many samples are running through these systems, and the fact that there are systems that are just built to have high throughput to enable the very, very large utilization, the trajectory is very clearly is on our side. So we're feeling really good where we are right now, just based on the early, on these early learnings and our initial experience with the customers. And it is very much, again, leaning into the strength specifically we've developed here and for the platform itself, really driving usage going forward. And so, yeah, so Yeah, we're feeling good towards a big trajectory in the moment, and also the tremendous potential as we look over the coming years.
spk10: Our next question comes from Tejas Savant from Morgan Stanley. Tejas, your line is now open. Please go ahead.
spk08: Hey guys, good evening. So Serge, maybe I'll start with Xenium, some of the themes Dan and Dan have hit upon over here. So just to kick things off, you sort of thrown down the gauntlet on the relative specs versus the competition. Do you expect to publish those data sets at some point or are any customers running similar head-to-head experiments that we can hope to see here? And would you share a little bit of color on, I know you don't like to quantify the backlog, but just from a qualitative sense, have orders increased month over month through May? And did they outpace shipments in the first quarter, i.e. did your backlog grow versus where it was at the start?
spk11: So in terms of comparison stages to your first question, as I talked about in my prepared remarks, we actually went and kind of give the benefit of the doubt to others and look through the marketing materials and kind of compare that performance against what we're seeing with Visenium. We actually, if you go to our website, you could also see those comparisons and those numbers. The challenge oftentimes in these cases is that while our system are being run at a very rapid clip, others maybe not so much. And so, yes, we do expect there's going to be head-to-heads and there's going to be comparisons. But like I said, we're feeling really good at where we currently are and the feedback we're getting from our customers. And, you know, as far as the questions of bookings and backlog, you know, we don't comment On bookings, we do feel good about our momentum. You know, our sales team is fired up with all the releases we have had with the launch of the Catalyst program, with the success our initial customers are having, really a lot of momentum in the field right now, a lot more content that's coming. And so our sales team is fired up and we're feeling good about the trajectory of this interest from customers.
spk08: Got it. That's helpful. And then a quick follow-up on Chromium and then just to clean up for you, Justin. So on the Chromium, Serge, you've talked about sort of the possibility of flex cannibalization on the portfolio here. Is it playing out as you anticipated or are you actually seeing that sample elasticity come through a little bit quicker? I know you mentioned some large sample projects here that you were looking at. And then, Justin, for you, you laid out a few sort of moving parts on the free cash flow line. But maybe I didn't catch this. Did you give a timeline around when you expect to be free cash flow breakeven? Is it potentially now a 2024 event, or do you still expect to get there by year end? Thank you.
spk11: Yeah, so Tejas, let me start with the Flex question. Now, just to emphasize again what I said earlier, Flex is quite early in its cycle. Right now, most people who have bought flex and are still buying flex, the customers are buying still the single flex version of it, meaning to kind of test it, to adopt it. A lot of customers have been running through pilots. More and more customers are coming out of the sort of the pilot phase and scaling up. And those customers are scaling up consistently into the multiplex version of these kits. But there's still a relatively small number relative to our overall Chromium franchise. And so that is to say it's too early to say which way sort of the elasticity is going to play out and on what time scale. We would expect that initially it's going to put some pressure because you kind of first you you you adopt that sort of multiplex workflow and then you start scaling up into larger and larger projects. Right. And we're still kind of in that initial phase when people are a most people are testing the testing the product. Some people are progressing further and some have now started ordering large multiplex kits. So we'll see how that plays out.
spk04: And Tejas, this is Justin. To your question on free cash flow, yes, that's still our goal, and that's what we're driving towards. We believe that we can achieve that by the end of the year. And that's, of course, not taking into account any significant non-recurring events. When we're looking at the levers, as far as free cash flow towards the end of the year, what I would see as the biggest lever there towards the end of the year would be the inflection of the xenium ramp. If we find that ramp is increasing more steeply right now towards the end of the year, i.e. planning even more units for the following year, there could be working capital strains on free cash flow. But I think that would be a good thing if we find ourselves in that situation at the end of the year.
spk10: Our next question comes from Patrick Donnelly from Citi. Patrick, your line's now open. Please go ahead.
spk05: Hey, guys. Thanks for taking the questions. Serge, maybe another one on Xenium. You know, now that you're getting some systems out there, can you just talk about the customer reception? I mean, are you seeing any cannibalization with Xenium and the rest of the spatial portfolio, or are you seeing it more Patrick Corbett- synergistic with customers looking to expand kind of build out a spatial portfolio and then any metrics you guys have in terms of backlog or any way to think about that would would certainly be helpful, but maybe just on the cannibalization side to start.
spk11: Patrick Corbett- yeah that's a good question Patrick right it's something that we've been thinking about and we have questions about. I think it's too early to see cannibalization, certainly when we look at Xenium and Visium. In fact, if anything, there's a great amount of complementarity to the platforms and to the use cases. And we're seeing customers actually buy into the full ecosystem. In fact, we have customers who are buying multiple platforms, meaning the ChromiumX, the SiteAssist, and the Xenium together, and setting up workflows that make use of all three So I think at this stage, there's a lot of complementarity. It is an open question how this will all involve. There's certainly a lot of interest right now, a lot of intense interest around Xenium with the early adopters, the technologists. And people are definitely spending a lot of their mental bandwidth now on Xenium, which might, on the margin, affect some of the experiments that might have run otherwise with, let's say, Chromium. But I think that's a relatively minor element right now. I think the platforms are largely complementary. And as the markets evolve, we'll see how it shakes out between different applications. But the overarching principle pieces that we've talked about is that regardless of how things shake out, we feel really good about our position because we have all three platforms. And this is by design. There is a reason why I invested in all three platforms.
spk05: Okay. That's helpful. And Justin, maybe a follow-up on Dan's question there on China. Can you just talk about, I don't know, any metrics you have, whether it's activity levels that you saw throughout the quarter and in April, did you see any stimulus activity as well in terms of helping out there and just, just trying to kind of get a feel for that ramp coming out? You know, obviously I assume January was very bad and then, you know, things should improve from there, but above just any color you have, that'd be helpful.
spk04: Patrick, as far as China goes, we didn't see anything as far as stimulus. In fact, with some of our customers, we saw drivers in the other direction with customers with funding and liquidity issues, and specifically some customers that were having longer payment terms imposed upon them by their customers. And so I would say more signs of headwinds there than tailwinds overall.
spk11: And maybe one thing Patrick too, I would just kind of add, the landscape in China is different than the rest of the world. We're selling there through two layers of intermediaries, through distributors to service providers. The vast majority of our business there is run through service providers. And especially given the last couple of years, uh things that tend to be kind of murky right you don't see we don't see as much into the end customer uh usage patterns and then for the last couple of years because our team's internal our china team has not been on the ground nearly as much and certainly our outside of external china team uh has only this like literally the last few weeks have been able to come back for the first time so our visibility in china generally has been um has been somewhat limited, has been murkier, but we expect to gain greater visibility in the coming quarters.
spk10: Our next question comes from Matthew Sykes from Goldman Sachs. Matthew, your line is now open. Please go ahead.
spk14: Great. Thanks for taking my questions. Maybe first, just on chromium instruments, came in a little bit lower than what we were expecting, but Serge, you made some comments about you expect sort of increased momentum in the later part of the year. Is that flex, you think, just maturing and driving Chromium X adoption, or are there other kind of tailwinds that you see for Chromium instruments specifically for the latter part of the year?
spk11: Well, so Matt, in terms of chromium, I talked about more just general momentum that we're seeing on a macroeconomic side. We were seeing a nice pickup in AMR and EMEA across basically all applications of chromium. And we generally have a reasonable expectation that that sort of will roughly continue for the rest of the year. I didn't really comment on the instruments themselves, and maybe I'll let Justin talk to that.
spk04: Hey, Matt. Yeah, I can add to that. You're right, when you look at chromium instruments revenue, it was down 18% year over year. But there's a few things there to unpack. First is, when you're looking at the chromium X and IX split at this time last year, it was weighed heavily towards the Chromium X instrument. And that was part of the high throughput being adopted by customers who had the need or wanted to use high throughput in the near future. Over time, we've been seeing the mix shift more towards the IX. And in fact, this past quarter, IX was over 50% of the Chromium X and IX split. So revenue was down. But if you look worldwide at units for the Chromium X and IX, that went up on a unit basis year over year in the low double digits. And so overall, we feel really good about the Chromium business and where it's headed. We don't think that instruments are a constraint right now for customers who want to use 10X consumables. And overall, we're focused on driving the consumables. and instruments as well, but the primary focus is on consumables. And then as far as looking forward, you know, with Flex, Flex is only available on the X series. And over time, Flex is going to drive a complete upgrade cycle as far as the customer base goes. And so that's going to be a key driver of placing primarily IXs in the future. and eventually turning over that instrument installed base to the X-Series.
spk14: That's a really helpful caller. Thanks, Justin and Serge. And then, Serge, maybe just one for you. You mentioned as you launched Xenium, the level of sort of sophistication of the components was high just given the importance of the launch, but that over time you could maybe improve the gross margin of the instrument by either changing or substituting. I'm not sure what term you use, but I'm just curious. And to what extent can you actually kind of make those components different or improve the gross margin of the instrument outside of obviously scale and larger volumes? But are there things that you can do within the component mix that can actually improve the gross margin profile of the Xenium over a longer period of time without compromising performance and everything else that goes with it?
spk11: uh i mean yes uh we certainly there's certainly lots of opportunities for that uh to for xenium we uh we have as we build the platform right now we uh optimize prioritize the performance and uh and and time to market that was our focus and we feel really proud of the instrument and how well uh it works uh but certainly going forward there's lots of opportunities for us to uh to tighten the costs and to bring those down without affecting performance
spk10: Our next question comes from Kyle Mixon from Canaccord. Kyle, your line's now open. Please go ahead.
spk03: Justin was wondering if the first quarter of 22 was like a normalized year of your comparison for the Chromium business that we're looking at here. There were a few headwinds last year, but 2Q is when the challenges really were most obvious. Just curious about that. And if you could just talk about 2Q a bit here going forward in 2023. What are you expecting for instruments growth for chromium compared to the 7% you just did here?
spk04: Thanks. Hey, Kyle. As far as last year goes, I do think that the first half of the year, when we are looking year over year, I do think it's a fairly easier compare. Right now, I do think that when we get into the back half of this year, it is going to be a more challenging compare. Q1 and Q2 last year were relatively flat to one another, and then we saw the pickup in Q3 and Q4. As far as chromium placements for the rest of the year, we're not going to guide to a specific number, but, you know, I would caution against extrapolating the Q1 results for the rest of the year. We had a price increase that went into effect at the beginning of this year. Instruments and consumables went up 5 and 8% respectively. And this past Q4 was a really strong quarter for instruments. And so let's see, I think, how the rest of the year goes on placements. Like I mentioned, Flex is going to be driving more Chromium X and IX over time, specifically the IX. Eventually, it's going to drive a complete upgrade cycle. And I think the only variable there is just the amount of time it'll take to do it.
spk03: Okay, that was great. And then the 7% I just quoted was for total chromium, just FYI, but that was great. And just following up on the pricing increases, so you did, I think consumables increased to 8% this year, right? So maybe, Serge, how is that USST progressing through the different levels of the customers, I guess, you know, the high volume, low volume, any ordering trends that you're seeing among the consumables so far?
spk11: Dmitry Mozzherin- yeah that was separated out the price, the annual price increases, the work that we do from the more like strategic trajectory of less just your demand. Dmitry Mozzherin- The first one is just you know sort of the cost of doing business. Dmitry Mozzherin- We do this annually we increase these prices, there was more obviously there was more inflation this last year, so we did a. Dmitry Mozzherin- somewhat higher increase than we have done in previous years, as far as the list of demand goes we. Our strategy is to do that through product configurations, and that's where the FlexKit and specifically the multiplexing capability of Flex comes in. That's still very much in the early stages of market penetration. As I said earlier, most customers so far are in the stage of testing the kit. A lot of them have run pilots. Some of them are now scaling up into routine use, but that's a relatively small number, especially relative to our overarching overall revenue base. So I think it's substantially early to be kind of looking at the elasticity effects of the flux kit. We'll see how that plays out over the coming quarters, but it's terrible.
spk10: Our next question comes from John Sorbier from UBS. John, your line's not open. Please go ahead.
spk09: Hi, hello. This is for John. on the quarter. So on the Xenium side, can you provide a bit more color on the cell segmentation of the Xenium? And, you know, how do you think the cell segmentation of Xenium compare with your competitors like .
spk11: Yeah, so cell segmentation is a critical component of any in-situ platform, any in-situ system. And we knew that from the very beginning. So we invested a lot in the development of cell segmentation and have taken a very kind of foundation-oriented, multifaceted approach to solving this problem. The initial release with what's currently on the Xenium platform is a really good, highly performant nuclear-based segmentation. which we strongly believe is outperforming anything else that's out there. And our customers are already generating really great results and really good insights using the nucleus-based method. And generally, we've gotten positive feedback. Now, that said, that's only the start. It's kind of the foundation. There's a lot more work to be done, a lot more improvements to build on top of this. We talked about this at AGVT. in February, the AGVT conference, where what we're doing to build on top of our current approach, and we'll be rolling out additional capabilities around membrane staining, around cytosol staining, and further improvements in algorithms going forward. So we believe we're in a really good spot right now relative to everything else that's out there, and there's a lot more improvements that we'll be rolling out as we're coming. or the coming quarters in the near future.
spk09: Thank you. That's a very great comment. Just one follow-up here, shipping there to side of this. Where are you seeing kind of like the most demand is coming from? Is it the new customer, existing customers, or what type of customer? Can you provide more detail on this? Thank you.
spk11: Yeah, so the majority of SiteAssist customers have been prior Visium users, as you would expect. But the interesting thing that we've noted is actually quite a few, like a very large fraction, are actually new to Visium completely. And actually, some of them are new to 10x entirely. So I think that suggests that there is substantial potential for Visium to go well beyond that initial user base of the Visium So they instrument less manual workflow and suggest that the market for Cytosys is actually substantial and larger than what we might have thought before. We're getting great feedback from Cytosys across the customers. We just had a customer telling us that they managed to ship dozens and dozens of slides across continents. looked really all FFP, like challenging FFP slide tissues. And it worked on, like Saito says, the data looked working every single slide. So the kinds of results that you don't like, you just don't expect. And it's really, really rewarding to see the instrument working as designed, and in many ways, even better than our initial expectations.
spk10: Our next question comes from Julia Kim from JP Morgan. Julia, your line is now open. Please go ahead.
spk07: Hi, good afternoon. So just a couple of follow-ups here. On Chromium, I think it's nice to see early signs of price losses that are playing out. Could you give us some more color on the distribution of Chromium pull-through? You know, how concentrated? Is it concentrated at top-tier customers, or are you now seeing more broad-based distribution of large-scale projects? And how do we tie that with your previous commentary on the mix of Chromium IX versus Chromium X?
spk11: um so julia the so the comments that i've made previously uh were more along the lines of we do see uh flex uh adoption but it's still very early uh in the in adoption cycle and so it's too early to comment on kind of precisely how the price elasticity is uh is playing out um obviously in the long run we do feel like there's tremendous price elasticity in this in this market and we do expect to drive into that and the flux is going to be one of the primary ways for us to do that. As far as sort of pull through and usage patterns of our instruments, I think they're fairly, I don't think there's necessarily been a huge material shift. Our customer base is not very concentrated, it's very diverse, and there's not a single customer that's a dominant sort of part of our revenue base. It's quite dispersed, it's quite robust in that sense. We do have large studies that some customers are running. There are some big, you know, multi-thousand sample publications. We also have a lot of customers who are running consistently more sort of on a one-off basis, individual samples that come in, some that are doing, you know, basic developmental biology studies that are project-oriented. So it's a fairly dispersed gamut of usage. And I wouldn't say that there's been necessarily a huge material change.
spk07: Okay, that's helpful. And then on Xenium, you know, without getting necessarily too quantitative, could you give us maybe some customer fix in your order funnel? Given the throughput advantage, are you seeing more kind of, you know, CRO customers? Or are you seeing more even distribution with the pharma and academia customers as well? And given the throughput advantage, you know, Do you think the customers will have enough samples to actually take advantage of the throughput capacity of Xenium? And how should we think about the deploy-through level of the system?
spk11: Yeah, in terms of the customer base, I'm not sure that there's a huge difference from what we've seen with our other platforms in the early stages of launch. It is a healthy mix of biotech, pharma, academia, some service providers, some CROs, for sure. We're seeing that, and it's encouraging. I mean, obviously, this is a brand new kind of platform, so the customers tend to be quite sophisticated and quite forward-leaning in terms of adoption. The question is whether people will actually have samples. Look, I mean, to some extent, time will tell, but the early indicators are that that's not an issue at all. People have been jumping in and running samples. I mean, we've had you know, multiple customers who've run through dozens and dozens of samples and many, multiple, multiple runs. And as far as, you know, what it means for pull-through, I mean, we'll see. Like, the instrument was designed sort of if you kind of do the math, the max possible pull-through is an order of a million dollars. It'll, you know, we'll, but it's way too early to comment on that. as to what sort of your average use case is going to be.
spk10: Our next question comes from Mason Carrico from Stevens. Mason, your line's now open. Please go ahead.
spk02: Hey, guys. Thanks for taking the questions. My first one on Chromium Flex. Any incremental color you can provide on feedback, Flex, from pharma customers? How are you thinking about the adoption curve and ramp of this product for pharma, you know, in 2023 and 2024 compared to your academic customers?
spk11: Yeah, that's an interesting, that's a good question, because obviously Flex has particular resonance with translational customers. And it works with FFPE samples. Now, I think at this stage it's too early to say, like, the first people who are going to be exploring this, who are in fact exploring this product, are more on the academia side. They're more on the translational side. And as they work through and validate the performance of this product, then we expect the farmer will start picking it up. That's the trajectory that all these products go through. You do need to kind of go through academia and let these products kind of go through the basis and get that validation initially. And then they naturally get picked up. So I do expect that to happen all the time, but not yet in that cycle.
spk02: Okay, got it. Thanks. And on site assist for customers who have bought a site assist instrument, let's say early on, Have you seen an increase in their Visium consumable consumption since they purchased the platform? And if so, is there an opportunity to see a benefit to Visium consumable growth in the back half of this year and as we enter 2024, given the number of placements in the second half of last year and likely in the first half of this year?
spk04: Hey, Mason, this is Justin. I'll take that one. You know, that is something that we've been looking at. The site assist, you know, improves a number of workflow issues for customers. And so even customers that are, that were buying just the regular Visium before, we looked at their usage pattern before and after a site assist purchase. And we are seeing an increase in usage post site assist purchase. And we also think that it has the benefit of bringing in newer customers who wouldn't have tried the regular Visium without the instrument. And so I think it's a little too early to extrapolate that out fully. But with the data that we have right now and what we've been able to see, it does look like it's truly driving more usage with customers.
spk10: Our next question comes from Michael Riskin from Bank of America. Michael, your line is now open. Please go ahead.
spk12: Great. Thanks for taking the question, guys. I'll just ask one, just to keep things moving. In response to an earlier question, you said something along the lines of when you're talking about what are the factors that are driving the improved performance of Chromium, you kind of cited macro condition globally particularly if you look at you know america's emea versus china so i'm just wondering if you could expand on that a little bit you know macro can mean 57 different things is it funding environment is it access to clinical uh samples um is it uh you know just expand on that a little bit um and probably both for uh america um in emea
spk11: Yeah, so I wouldn't say that necessarily it's access to clinical samples, just to kind of maybe take your last point, and just because, like I mentioned, we're seeing this effect on multiple applications, and some of them are much more discovery-oriented than translationally oriented. I would say, obviously, last year was a depressed Q1 due to various factors, and we certainly have been coming out of that. K2 was also fairly depressed. So I think it's just sort of the level of activity with these kinds of products with our customers has been picking up generally in these geographies. And I think part of it is the story that we have been kind of expecting is that people kind of are ramping up. They're getting back in the labs, starting up projects, collaborations, and that's now sort of bearing fruit. And we do see it as a, sort of continuation of the pattern we started seeing in the back half of last year. Q3 was better somewhat than Q2, and Q4 was better than Q3. And so that's how we're referring to it.
spk10: We currently have no further questions. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.
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