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spk04: Hello, everyone. Welcome to the 10x Genomics second quarter 2023 earnings conference call. I will now hand the call 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 second quarter ended June 30th, 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. Connectionomics 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.
spk08: Thanks, Cassie, and good afternoon, everyone. On today's call, I will start with an overview of our strong second quarter performance in both single cell and spatial. Next, I will share an update on our progress and momentum in each of our three platforms, highlighted by our customers' tremendous enthusiasm for and rapid adoption of Xenu. I will then turn the call over to Justin for a more detailed look at our financials. business trends, and outlook for the rest of the year. We delivered a strong second quarter, with revenue growing 28% year over year to $147 million. Our results were driven by growth across our single-cell and spatial portfolios, led by solid performance and execution in Americas and EMEA, and strong demand for instruments across all three platforms. This was partially offset by continued headwinds in China, as Justin will discuss. The clear highlight this quarter is our momentum in spatial biology. In Q2, we leveraged our manufacturing scale and expertise to quickly ramp Xenium shipments, yet even so, orders outpaced shipments. Not only is Xenium increasingly recognized as the best performing platform for in-situ analysis, but we have also continued to see strong demand for a vision suite of spatial discovery tools. This quarter's results reinforce the strengths that have always differentiated us, the velocity of our world-class innovation engine, backed by our broad commercial and manufacturing scale. We continue to work to improve efficiency and drive operational excellence throughout the company so we can maximize and deliver on all of the incredible opportunities ahead. Now, let me share more about each platform, starting with Chromium, the unambiguous leader in single-cell analysis. In Q2, driven by strong performance in Americas and EMEA, Chromium consumables once again delivered double-digit year-over-year growth, despite ongoing challenges in China. The performance, scalability, and ease of use of our broad consumables portfolio is an important differentiator that continues to resonate with researchers and drive demand. In particular, we're seeing momentum continue to build for Chromium Flex. We're now one year into this launch, and it's clear we're still just getting started. The increasing traction and enthusiasm from our customers further strengthens my conviction that Flex has the potential to be transformative to the Chromium franchise over the long term. Looking ahead, we expect to launch a feature barcode application for FLEX later this quarter. This new assay will enable researchers to simultaneously profile gene expression and cell surface proteins on a cell-by-cell basis across multiplex samples in millions of cells. This is part of our long-term plan to broaden the menu of applications within the FLEX portfolio by enabling more samples, more scale, and more analytes. As we expand the capabilities available in FLEX and more customers see the power and performance of this assay, we expect it will keep driving placements of Chromium X series instruments. We're seeing strong demand for the X series as placements increase sequentially and are up robustly year to date. We're pleased with the continued traction we're seeing for the X series across a broad range of researchers, whether they're new to 10X, first-time instrument owners, or existing chromium controller users upgrading to this powerful tool for single-cell analysis. We believe the positive momentum we're seeing for our chromium instruments and consumables reinforces the long runway we have ahead, both within our initial home court of cellular atlasing and beyond. We have established strong beachheads in translational and biopharma applications. but it's still very early relative to the expected large potential. Two recent papers highlighted the power of our single cell portfolio in translational research, revealing particularly inspiring insights into the future of cancer care. In Nature Medicine, researchers published a new gene signature uncovered with 10x tools that could help determine the persistence of CAR-T cell therapy. And a study in the journal Blood showed how 10X single-cell analysis, together with the power of AI, could provide a crystal ball for predicting drug response in chronic myeloid leukemia. It's awesome to see the continued growth of our Chromium portfolio in translational research. We believe our first-to-world single-cell FFP capabilities exclusively on Flux will help open up even more single-cell research in translational and biopharma settings moving forward. Now, turning to spatial, where both our Visium and Xenium platforms delivered very strong growth during the second quarter. In Visium, we continue to see robust demand for our SiteAssist instrument, which is now one year into launch. It's clear SiteAssist has removed three key workflow challenges with the initial manual Visium assays. By giving researchers a better experience and a better workflow and better data, SiteAssist is driving increased demand and spurring more routine use of the Visium platform. In fact, this quarter, sales of our SiteAssist-based consumables doubled our instrument-free assays, reinforcing how SiteAssist is now the preferred method for Visium research. With Cytasys as the foundation, we continue to invest to expand the breadth of capabilities available on the Visium platform to enable more analytes and more applications. This quarter, we launched our Visium Cytasys gene and protein expression assay. Our unique morphology-first workflow enables researchers with three analytes in one, Hyplex protein, whole transcriptome RNA, and H&E staining. all on the exact same tissue section. In addition, our team continues to make excellent progress on Visium HD, which will be offered exclusively on SiteAssist. This ambitious project has been as exciting as it has been challenging. But these are precisely the types of challenges 10x is built for. And the data is looking spectacular. We can't wait for our customers to experience the power of unbiased whole-transcriptome spatial discovery at single-cell scale resolution. We look forward to sharing more updates on VisimHD as we get closer to launch. Now, turning to Xenium, which we firmly believe is the best performing platform for in-situ analysis. What this quarter's results demonstrate is the momentum we have as we bring the whole-of-company effort to capturing the full Xenium opportunity. We have momentum with researchers, as more and more labs independently complete their own Xenium experiments and gain immediate access to powerful, high-quality data. We have momentum in manufacturing and operations, where we ran production faster than we initially expected. We have momentum with our commercial team for the high velocity of orders during the quarter and the continued focus on delivering a world-class customer experience. And we have momentum with our product roadmap as we've continued to expand our broad menu of targeted and custom gene panels and deployed new firmware and software updates to deliver even higher levels of sensitivity and throughput. This incredible progress is a testament to the strength of our innovation engine, the scale and expertise of our manufacturing network, the breadth and depth of our commercial function, and the talent and dedication of our team. With our unique combination of differentiated chemistry, high-end sophisticated components, and powerful onboard software, Xenium is a premium instrument carefully engineered to optimize performance straight out of the box and well into the future. We invested to build a best-in-class system so we could deliver best-in-class performance. With every run, researchers are seeing directly that Xenium's real differentiation was never in the rhetoric, it was always in the results, which they are now routinely generating in their own labs with their own precious samples. We built Xenium to just work in the hands of researchers, the same as our other products. What that means is Xenium just works with very high specificity, ensuring the vast majority of signals are true biological transcripts rather than misleading noise. In our analysis data sets, Xenium's full discovery rate was less than 1.5%, which we believe is best in class. This excellent performance has not been corroborated by multiple customers. Xenium just works with high sensitivity, even on difficult tissues, enabling researchers to reliably measure their genes of interest, even when those genes are lowly expressed. We expect that sensitivity will get even more of a boost with the latest version of our onboard software, which we released last month. Xenium just works with best-in-class throughput. Xenium enables researchers to analyze the most tissue area in the least amount of time using the fewest number of slides. Our recent software update builds on our already leading throughput. Researchers can now run 12 one centimeter square tissue sections in about a week. Based on a competitor's user guide and recommended run time, it would take six weeks to scan the same amount of tissue. Xenium just works on a broad range of tissues, from mouse brain to more complex human samples, including breast, brain, colon, skin, lung, lymph node, and more. Xenium also generates high-caliber results on various sample types, including fresh rodents, FFP, and tissue microarrays. And Xenium boasts an efficient and easy-to-use workflow, which we've heard some customers describe as easier than Chromium. Xenium just works with a broad menu of fit-for-purpose and customizable gene panels to help customers answer their specific research questions. We're now shipping five pre-designed validated panels and expect to launch three more by the end of the year. 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, in Q2, we launched a fully custom gene panel to give researchers maximum flexibility. Our differentiated menu of pre-designed, partial, and fully custom gene panels is increasingly validated in the field and resonating well with researchers who appreciate the ability to study their exact genes of interest. In fact, more than half of our panel orders to date have incorporated some level of customization. As part of our exciting and ambitious ZM roadmap, we're also planning to launch a 5,000 Plex panel in mid-2024. Generally, more Plex comes with more tradeoffs. As you dial up Plex, you may need to dial down sensitivity, specificity, and throughput. This can lead to Plex quantity without data quality. With Xenium's unique chemistry, however, we can scale to many thousands of genes and still deliver high levels of specificity, sensitivity, and throughput, all of which are critical to the utility of these assays. And lastly, Xenium just works with its differentiated approach to software and data analysis. Xenium is the only platform to feature comprehensive primary and secondary onboard analysis in parallel with the instrument run. This means researchers can see their results on a Xenium instrument immediately after the run is done, without requiring massive uploads, onerous downloads, time-consuming data transfers, or expensive cloud subscriptions. Customers who want more of instrument interpretation can easily do so using Xenium Explorer or a wide variety of open-source tools. We build Xenium to be the best performing system for in-situ analysis, both at launch and for the long term. Beyond our gene panel pipeline, we're driving a robust multi-year Xenium roadmap that we expect to feature in-demand applications like isoform mapping, SMV detection, xenografts, CAR-T tracking, and gene fusions, among many other applications. These differentiated capabilities can be uniquely enabled by Xenium's chemistry. Altogether, this remarkable combination of features is earning rave reviews from our customers. One even told us he jumped for joy when seeing his Xenium data for the first time. This enthusiasm from our customers, along with the system's proven strength, performance, and momentum in the field, should reinforce the fact that 10X is leading the way in spatial biology and has been for a decade. Through our internal investments and acquisitions of emerging companies such as Spatial Transcriptomics, ReadCore, and Cartana, we have built incredible products, developed foundational intellectual property, and have deep experience with customer insights that have been instrumental to our technology leadership. At 10x, we absolutely relish the opportunity to help funders and scientists take their ideas and transform them into products that can be used by researchers to fundamentally change our understanding of biology. Our unwavering commitment is to our mission and to driving innovation to push science forward. We have invested well over $1 billion in research and development to bring new tools to researchers, and we will always strive to do what is right by our customers. That means delivering breakthrough products that perform as promised. After all, there is no cutting corners when it comes to cutting-edge technology. We've made the necessary investments in both R&D and IP to build a premium product that delivers exceptional performance. Seeing this validated time and again by our customers has given us even greater confidence in the potential of this product to lead the next revolution in the life sciences. I firmly believe that Xenium may be one of the most transformative technologies in our industry in decades. It's up to us to lean in and capture the tremendous opportunity we have ahead. Seizing this opportunity is our top priority, and we're going to leverage our strong foundation, broad commercial reach, and solid financial profile to deliver on the full promise and potential of this technology. Before turning the call over to Justin, I would like to give an update on our intellectual property portfolio, which is an essential part of our innovation engine. During the quarter, we achieved a significant milestone as we now have more than 2,000 patents issued or pending, including more than 70 issued and allowed in the second quarter alone. Of these, more than 350 relate to in-situ technology. As we have said, it is our general policy not to license our patents to others, but to protect our sole right to own and practice our patents. We will be steadfast in our focus on protecting the inventions that scientists have worked so hard to create, as our innovation is what fuels and funds the development of future TENX technologies that benefit researchers and ultimately patients around the world. We are executing on our mission with a solid foundation built on incredibly strong fundamentals. Our team is fully dedicated to driving growth, improving operational excellence, and leveraging the unique strengths that have always set 10X apart. With that, let me turn it over to Justin for more detail on our financials.
spk16: Thank you, Serge. I'll start by reviewing our financial results for the three months ended June 30th, 2023. Then I'll provide an update on our outlook for 2023. Total revenue for the quarter was $146.8 million compared to $114.6 million for the prior year period, representing a 28% increase year over year. Starting with consumables, total consumables revenue was $112.5 million, an increase of 15% over the prior year period. Chromium consumables revenue was $100.8 million, up 11% year over year, and spatial consumables revenue was $11.7 million, up 70% year over year. Turning to instruments, total instrument revenue was $31 million, an increase of 110% over the prior year period. Chromium instrument revenue was $12.9 million, down 8% year over year. driven by lower sales of Chromium Connect, while the total number of Chromium instruments sold in the quarter increased year over year. Spatial instrument revenue was $18.1 million. Our Visium SiteAssist instrument launched at the end of Q2 last year, and our Xenium instrument launched in Q4, so we did not have material spatial instrument revenue in Q2 of last year. Services revenue was $3.4 million. which increased 74% over the prior year period. Moving on to our revenue by geography, America's revenue of $91.5 million grew 29% over the prior year period. EMEA revenue of $31.2 million grew 22% over the prior year period. And revenue in APAC was $24 million, a 33% increase year over year. We continue to face challenges in the APAC region, again, largely driven by China. On our last call, we had said we expected Q2 performance in China to be roughly similar to what we experienced in Q1. However, we saw further pressure in the region beyond what we had anticipated. We are not immune to the challenging macro economic environment in China right now and believe this impacted demand and exacerbated the dynamics we've been seeing with inventory levels. We continue to focus on driving demand with our end customers in this market while working with our distributor partners as they manage inventory. Turning to the rest of the income statement. Gross profit for the second quarter of 2023 was $99.6 million compared to a gross profit of $86.9 million for the prior year period. Gross margin for the second quarter was 68% compared to 76% for the second quarter of 2022. The decline in gross margin was driven primarily by the strength we saw in Xenium placements this quarter. As I shared on our last earnings call, in the early quarters of Xenium adoption, we expect overall company gross margin to trend lower as more instruments are sold, given that the Xenium instrument carries a significantly lower margin than our other instruments. As customers ramp up their Xenium utilization, the Xenium consumables, which have a gross margin comparable to our existing products, will become a larger portion of the revenue and increase our overall margin over time. Total operating expenses for the second quarter of 2023 were $163 million compared to $150 million for the second quarter last year. R&D expenses were $71.5 million compared to $70.7 million for the second quarter of 2022. SG&A expenses were $91.5 million compared to $79.3 million for the second quarter of 2022. The increases in R&D and STNA expenses during the quarter were primarily due to increased personnel-related costs and operational expansion. Operating loss for the second quarter of 2023 was $63.4 million compared to a loss of $63.1 million for the second quarter of 2022. This includes $45.7 million of stock-based compensation compared to $36.3 million for the corresponding prior year period. Net loss for the period was $62.4 million compared to a net loss of $64.5 million for the second quarter of 2022. We ended the quarter with $391.4 million in cash and cash equivalents and marketable securities, net of restricted cash. Turning to our outlook for 2023, we are raising our guidance and now expect full year revenue to be in the range of $600 to $620 million, representing growth of 16% to 20% over full year 2022. Our updated guidance reflects our second quarter performance, as well as continued Xenia momentum with better visibility into our operational ramp. This is offset by the weakness we've seen in APAC, primarily driven by China, and reflects the continued challenges in APAC we expect for the rest of the year. Our drive towards becoming free cash flow positive has instilled a cost discipline that has helped us effectively manage our headcount and other spending across the organization. I've mentioned before that one of the biggest factors in becoming free cash flow positive would be the slope of our Xenium ramp. To support a steeper adoption curve, we will need increased operational capacity, inventory builds, installation capacity, service and support. This quarter continues to add to the early enthusiasm and demand that we are seeing for Xenium. It deepens our conviction in the long-term potential for spatial biology. We are leaning in even further to this opportunity and believe such investments will be foundational to our long-term growth. but they will come with near-term impacts to our gross margin and cash flow objectives. As it relates to other items impacting our free cash flow, we still expect a significant reduction in capital expenditures in the back half of this year. When looking out over the next 12 months, we are anticipating about $35 million to $40 million of total capital expenditures. About one-third of this relates to the final payments for our new operations facility in Pleasanton, which we expect to transact in Q3. While we see a path to becoming free cash flow positive by year end, we believe that now is the time to prioritize the investments in driving Xenium adoption. We will continue to focus on disciplined spending and managing our strong cash balance. At this point, I'll turn it back to Serge.
spk08: Thanks, Justin. Before we open it up for Q&A, I want to take a moment to thank our team. At 10X, we continue to push the bounds of what's possible, which is both exceptionally challenging and profoundly rewarding. It's been especially energizing for us to see the incredible customer enthusiasm and momentum for Xenium, which will usher in a new era of genetic analysis. I personally believe this technology has the potential to be as big as anything in the history of the life sciences. While it's still very early, we're starting to see a broader understanding and appreciation of the power and potential of spatial biology and single cell more generally to revolutionize human health. In fact, Eric Topol, a highly regarded physician scientist and author of several bestselling books on the future of medicine, recently described spatial biology as the hottest field in life science for making new discoveries about human health and disease. Testimonials like these validate, once again, our conviction in the endpoint. In the not so distant future, we expect just about all tissue samples will need to be analyzed at single cell resolution, large scale, and with spatial context. We believe we have the best products and technologies to achieve this vision. And as a result, we're uniquely positioned to bring the future forward. We're bringing the whole of company effort to ensure we get absolutely everything out of the incredible opportunity we have ahead. With that, we will now open it up for questions. Operator?
spk04: Thank you so much. Ladies and gentlemen, we're now going to move into the Q&A session of today's call. If you haven't done so already, please hit star 1 on your telephone touchpad, and that will put you in our queue for questions. With that said, we'll go ahead and get started with Patrick Donnelly from Citi. Go ahead, Patrick.
spk03: Hey, guys. Great. Thanks for taking the questions, guys. Serge, maybe one on Xenium. As that adoption continues to pick up, can you just talk about what you're seeing in the market in terms of feedback when you get competitive wins? Is it a focus on the specs being superior? Is the market just big and early enough that it's less of that head-to-head competition in terms of sales? And then any color, yeah, I think you mentioned orders outpace sales a bit, but any color on order growth or trends there would certainly be appreciated.
spk08: Fantastic. Thanks for the question. So, no, I mean, the market is definitely competitive. And like we said before, up until recently, there was generally kind of confusion out there in terms of what to expect. There was a lot of aspirational claims that were put out there. And the change in the dynamic over this quarter and the last two quarters, I would say, is around the fact that people can now see for themselves which systems work and how well they work. And in particular, the reviews that are coming back on Xenium are incredibly positive. The quality of the data, we talked about it. I talked about this in my preliminary remarks. We made our own analysis of the sensitivity of specificity of the data quality, and that's being now confirmed in the field. And that's resonating really strongly, and the word is spreading. It's also the fact that people are actually able to get their runs in very quickly, get the data off the instrument. In fact, we hear, like, an example of a customer who does a run, finishes on a Saturday or Sunday, and then on a Tuesday is actually presenting that data at a conference. It's a remarkable kind of turnaround, and I've, you know, it's hard for me to think of a technology that has that kind of a ready uptake, and that's what's really, really resonating, and the word is spreading now. among customers. So I think that's by far the sort of the primary dynamic, the fact that the, that Xenium works, works out of the gate and that the data is really, really high quality, resonating, you know, all kinds of products that we're hearing from, from the field. So, you know, this is, it's, it's early days, but it's clearly all the signs are showing that there's, there's a huge potential and a huge sort of momentum and excitement that's building.
spk03: Okay. That's helpful. And then probably one for Justin, just on China. You know, not surprising here, maybe a little bit of further pressure in the region. Can you just talk about, I guess, what you guys are seeing there? I know, you know, you talked a little bit about the end customers. You guys go through the distributors, service providers. Maybe you're not quite as close to the end customer. But I guess what are you hearing? And then as you adjusted the guide, I think you said a little bit of headwind from China, you know, maybe Xenium moving up. Can you just talk about, you know, what the moving pieces were in that $10 million bump? Thank you, guys.
spk16: Yeah, sure, Patrick. So first, I'll start with China. China definitely underperformed relative to our expectations for this quarter. And the macro environment there is really challenging right now. And overall, the demand has been soft in that region. And we also believe that this environment exacerbated what we've already been seeing with inventory dynamics that we spoke about earlier. And so we don't expect the situation there to improve for at least the next couple of quarters. And going to the guidance, this is incorporated in our updated guidance range. You know, despite the issues that we saw in APAC, primarily driven by China, AMR and EMEA have been strong. And so when you look at our updated guidance range, we're assuming that AMR and EMEA chromium will end the year somewhere in the mid-teens year-over-year percent growth. And then as pressure in APAC continues, we expect really the average of Q3 and Q4 in APAC to be roughly flat to what we saw in Q2 with a little bit of a decline in Q3. And then just, you know, overall looking at worldwide spatial, you know, it's maintaining the strength that we saw in Xenium This this quarter, we also had a really strong quarter for site assist as well. But at some point I would expect that the demand for site assist. To come down a little bit, just like we have a bolus of demand at any kind of new new product launch. And so the combination of those things is roughly holding spatial flat. at a worldwide level from Q2 through Q3 and Q4. Okay.
spk05: That's very helpful. Thanks, Justin, Serge. Thank you.
spk04: Next up, we have Dan Arias from Stifel. Dan, go ahead.
spk10: Thanks for the questions. Maybe just to follow up, Patrick, there on Denium. Serge, can you comment on your own manufacturing capabilities? I mean, it sounds like you're pushing hard to ramp and expand what you can do there pretty quickly. When do you envision being at the point where production shouldn't be considered a constraint on placement?
spk08: Yeah, so, Dan, we have been investing in operations like we said. It's been initially when we came to market, we were very measured in kind of our approach. We have certainly scaled up to a new level of production right now, and that's what Justin kind of was alluding to in terms of as we look toward the next couple of quarters. Last quarter, my shipments, I mean, demand outpaced shipments. So, you know, it's going to be sort of a dynamic thing. We're still working to, you know, to scale up and especially to prepare for, you know, for next year and beyond.
spk10: Okay. And then maybe on the flex kits, can you just talk about the extent to which you're seeing that product have the ability to sort of change the economics of single-cell work? maybe in a positive way just in the sense that you could open up the scope and drive some elasticity there or in a negative way just in the sense that until a customer scales the size of the experiment maybe the revenue per sample is lower than it was in fact it seems like it should be so the puts and the takes on flex and just the economics of single cell work would be really helpful yeah uh so flex has definitely been scaling up uh in terms of adoption it's still
spk08: a relatively minor component of the overall single-cell portfolio. We're seeing, certainly we're seeing examples of projects that are emerging that are incremental to what was possible before precisely for the reason you mentioned and that you get to a lower price per sample. People are certainly putting sort of the dots together and organizing these projects. So it has an incremental effect. It does also have an effect where For people, if they're limited in samples, then they could end up spending less money for running the same type of study. And then there's also studies where people are limited by budgets and they simply run more samples. We are, you know, if you look at the, in terms of the reaction number basis, flux is contributing in a substantial way to increasing numbers of reactions that people are running in total. it is like you're alluding to, it's not necessarily going to be manifesting itself on the top line. In fact, it's going to create a little bit of top line pressure while that's happening initially. But we think that overall that pertains, this dynamic pertains great possibilities for the future as people expand the kinds of studies they can do as they can drive toward lower price per sample, with larger and larger studies.
spk05: Okay. Thank you, Dan.
spk04: Next up, we have Dan Brennan from TD Cohen. Go ahead, Dan.
spk14: Hey, good afternoon. This is Kyle on for Dan. Thanks for taking the questions. I saw one on site assist here. Can you provide any color on how site assist placements have sort of trended relative to the last few quarters?
spk16: Hey Kyle, this is Justin. I can give you some broad strokes there. So, you know, Q3 and Q4 of last year, demand was really strong for site assist. We shipped a few, a small number at the end of Q2, but Q3 was really, you know, the launch quarter, the launch quarter for it.
spk00: We had a drop in Q1.
spk16: And right now, in Q2, we're up very close to where we were in Q3 and Q4 of last year, and incremental over Q1.
spk14: Got it. And so, with all these site-assist placements, how should we sort of think about Visium pull-through going forward? Has this driven a lot of demand for Visium projects?
spk08: Yeah, when we look at the numbers, we certainly see, like, a substantial bifurcation. The labs that have Cytosys run more Visium consumables than the ones that do not. Now, there's an open question still that we're looking at. There's a selection effect. Labs that are going to be running more consumables are more likely to buy the Cytosys instrument. So we're still watching how that's going to sort of play out numbers-wise, but qualitatively, It's unambiguous that SiteAssist makes it much easier, much more amenable for people to run Visium and generate great data. We're hearing great feedback and lots of interest. And it's a very fundamentally enabling instrument. So we feel optimistic about its potential to drive more.
spk14: Got it. Thank you.
spk04: Next up, we have Kyle Maxson from Canaccord. Go ahead, Kyle.
spk02: Yeah. Hey, guys. Hey, guys. Thanks for taking the questions. One on the chromium business, that grew 7% year over year on an easy comp in the first half. I know there was the China headwinds and the placement mix consisted of less connects in the quarter. But you originally guided to that low teens growth for the business. I know that's now updated. It sounds like what you just said, Justin. But I guess I'm just wondering, like, what factors are going to occur in the second half to get you to that low teens level or whatever it is now? And if there's any like non-macro related deterioration and demand for those to go sell products. And maybe if you just talk about it by region, it could be kind of helpful just to give our confidence in that area.
spk16: Yeah, sure, Kyle. So first off, overall, when we initiate our guidance at the beginning of the year, we talked about low to mid-teens chromium growth at the worldwide level. You know, we talked about the impacts that we're seeing in APAC, primarily driven by China. When we incorporate that along with AMR and EMEA, you know, being on track to what we expected they would be at the beginning of the year, you're right. We do end up year-to-date in the high single digits, but when we look at how we expect to end the year, we expect that AMR and EMEA both will be in the mid-teens plus, and that's what's being worked into our overall guidance range. You know, AMR and EMEA on track or a little more. And, you know, building in the weakness that we saw in APAC driven by China carried forward.
spk05: Okay. Next up we have Morgan Stanley.
spk04: Go ahead.
spk09: Hey, guys. Good evening. Thanks for the time. So juggling a few earnings calls here, so apologies if you touched on this search, but can you give us some color on what you're seeing in the in-situ market right now in terms of pricing? How aggressive are you prepared to be there to lock in customers into your ecosystem? And as you think about sort of consumable pull-through starting to ramp on some of those initial placements, any anecdotal evidence or bookends you can share?
spk08: Yeah, there's a lot going on in situ for sure. So our North Star, our focus is on the customer, right? And there's, you know, when it comes to pricing, certainly we're trying to accommodate people right now, and especially, you know, when it's in a competitive dynamic, make sure they, you know, they make the right choice. But the thing that I said earlier and the thing that we're coming back to is the fact that the system performs incredibly well, generates the best data in the market, consistently corroborated by other customers. It works really well. And kind of to your question, it works well in the field, and we're seeing that some of the early customers are able to run through quite a few samples very quickly. Now, those early customers will tend to be the ones that are most ready to adopt this technology, so we anticipate that later cohorts will take some more time to onboard and ramp up, but there's a lot of really positive early signs in terms of the potential and how many samples these systems will be pulling through.
spk09: Got it. Okay. That's helpful. And then quick follow-up for me on the Flex side of things, Serge. Where are customers today in the adoption phase for Flex? What percent of those early adopters have completed that initial pilot and evaluation trials and have now switched over? And then a broader sort of big picture question as well. As you think about sort of differentiated innovation and to the degree to which it sort of confers you macro insulation, how are you thinking about that in the context of your guide?
spk08: So in terms of – let me answer the Flex question, Tejas. So the way that – so Flex has been getting general adoption. It's been scaling up kind of across our customer base. And I wouldn't even say necessarily just sort of the early adopters or others that to some extent is bringing some translational customers. We certainly have some or like some of our core customers moving on to Flex. In a lot of cases, it's less about switching over people from certainly from their existing workflows or existing studies, but more in terms of sort of in terms of incremental. uh studies and incremental projects when they have a new project uh they they are now starting more and more conceptualized in terms of flex because flex is enabling them to you know it relieves a lot of the logistical challenges that people have faced and because of the multiplexing ability allows them to to reach a substantially lower price per sample and thus imagine larger uh larger studies And so it's been on a good trajectory. It's still a relatively small fraction of the overall Chromium franchise, but it's on a good trajectory, and especially as we look at the potential to expand the single-cell market over time, I think we're seeing good signs.
spk05: Got it. Justin, any perspectives on the guide?
spk16: Hey, Josh. So all of our products, our view of them are built into our guide. You know, we still have a decent range on our guidance heading into the back half of the year. And so, you know, those different scenarios are built in.
spk04: Fair enough. Thank you. Next up, we have Mike Reiskin from Bank of America.
spk13: Go ahead, Mike. Great. Thanks. Hey, guys. Thanks for taking the question. I got a couple quick ones here, hopefully. One was just starting on, you know, Xenium site assist, instruments versus consumables. You know, you talked through the pacing of site assist. That was really helpful. We can kind of back into the Xenium numbers then. But I want to focus on the consumables on spatial. You know, by our math, that's been kind of flattish, relatively flattish, four quarters in a row on a dollars basis. um, more or less. So, uh, question is, uh, when does that start to, to really accumulate? Um, and that kind of goes to the point of like, as the install base of ZDM goes, uh, higher and higher, at what point do you think that'll really kick in? And you'll start to see that, you know, razor razor blade model, um, on the spatial side really, uh, start to churn.
spk16: Yeah, Mike. So as far as your first question on, uh, spatial overall, and you're asking about Visium, uh, Visium first?
spk13: Both. Both visium and zinium consumable.
spk16: Yeah, I think the thing that's tough is when you're looking by product at the worldwide level right now with the China and APAC impact in there. You know, to interpret that as what it means for the platform, you might get the wrong conclusions. And so Spatial has been strong in AMR and EMEA. Everything has been impacted in APAC and China. And some additional information on SiteAssist and Visium. You know, we saw trends earlier on that SiteAssist customers were tending to order and use more Visium. And I think that's a great trend. It helps address some of the workflow issues that the users had early on. And so it's really showing that that is the future of the platform. And the visium or endocytosis consumables basically are now overtaking, you know, the legacy kinds of visium consumables.
spk13: Okay. All right. And on the – Justin, I want to switch real quick to the margin side of things. I think you flagged pretty extensively to us that gross margins are going to be negatively impacted by the ZNIMA ramp, just given, you know, the incrementally lower gross profit dollars on that instrument as you're ramping it. Is 2Q a bottom or sort of close to the bottom there? I guess it's hard for us to sort of back into these numbers, but is this a good place for gross margins to level out and then start to grind higher again? Or do you anticipate that going even lower, 3Q, 4Q, to your point, as zinium placements continue to ramp higher?
spk16: Yeah, so first I'll start with just looking at the year-over-year change in gross margin. And when you look at the change that we saw, I mean, when you net out smaller puts and takes, it's all primarily driven by the mix shift towards NC2. And so then when we look into the rest of the year, the gross margin could trend lower if we were to place more Xenium instruments each quarter. But as we continue to scale our manufacturing capacity to produce more units, the cost per instrument will decline. We should have improvements in the unit economics. But keep in mind, when we built the Xenium instrument, we sought to optimize performance and time to market, not cost. And so based upon the successes that we're seeing out in the field, that was the right call. And although we do have a near-term impact to company gross margin, The focus right now isn't the margin that we're making off of each instrument. It's the consumable revenue stream that that instrument is going to enable. So, you know, we thought to produce the best instrument in this space, and we succeeded in that endeavor. And then also keep in mind, talking about unit economics, that, you know, customers who purchase this instrument today, they're getting an incredible value compared to the competition. And as more customer data is generated and more feedback makes its way out into the public, this is going to help drive our long-term strategy. But right now, what we're starting to see is this instrument is not priced at the value that it brings, and I do think that we'll have opportunities in the future to adjust that as well.
spk04: Interesting.
spk05: Thanks, guys.
spk04: Next up, we have John Sauerbier from UBS. Go ahead, John.
spk06: Hi, hello, thanks for taking the question. This is Tianqi calling in for John. So just to kind of build on what Mike just asked, do you guys ever share a kind of like target margin profile, you know, for ZNM, let's say when the volume is high enough?
spk16: So this is Justin. When we look at ZNM, we don't necessarily separate the instrument from the consumable, we look at the Xenium business overall and what we expect that to ramp to. And so early on, when the mix shift is primarily more towards instruments and we're taking time to ramp up the consumable stream, you're going to see, I think, the greatest impact. And then over time, as those consumable streams ramp up, those are going to become a larger part of the revenue overall, and they'll bring the margin up in the longer term.
spk06: Got it. Thank you. Second question is regarding the, you know, chromium flax. You know, very exciting news about the feature barcode application. Just, you know, do you see, you know, flax and, you know, the kind of like the feature barcode applications accelerate the clinical adoption of the single cell in settings like diagnostics and like maybe precision medicine? How should we think about that? Thank you.
spk08: Yeah, it's a good question. I mean, and I would say ultimately the answer is yes, right? I think FLEX overall enables the work single cell for the first time to work with clinically relevant samples collected from tissues. First, it enables fixation at the point of sample collection. And more excitingly, it enables single cell analysis to be applied to FFPE samples, which is how most clinical samples, most tissues are stored. And at this stage, we're still very early in terms of the single cell adoption on its way toward, if you imagine the progression from basic research toward the clinic, but we're definitely seeing increasing adoption and certainly a lot of interest in translational studies. So kind of gathering up the cohorts of patients, phenotype samples, and running them on single cell to look for biomarkers. And that's kind of a prerequisite for them later thinking about clinical applications. And so it's definitely Flex is enabling that bridge along that trajectory.
spk06: Thank you. Congrats on the quarter.
spk04: Next up, we have Matthew Sykes from Goldman Sachs. Matthew, go ahead.
spk01: Hi, this is Evie Kozlowski on for Matt. You mentioned you were working with distributors in China on inventory levels. Can you talk through what that looks like? And then if you expect to see these issues continue into next year?
spk16: Hi, this is Justin. I'll take that. And so I think you've got to go back to the end of Q4 going into Q1 when we had our typical annual price increase. But this year the price increase was more than we've had in the past. And typically what we see with distributors is they will buy ahead inventory at the lower price before the price increase goes into effect, you know, to the limit that they can, you know, basically hold inventory. And I think what we saw at the beginning of this year is we started the year with higher inventory, started to have issues in China overall, and the inventory didn't come down as much as the distributors thought that it would. And we've just been trying to manage this since. And so the inventory levels are still high, and this is against the backdrop of the challenging macroeconomic factors that we talked about earlier and so it does take some time for things like this to unwind because we sell to a distributor distributor sells to service provider and then service provider sells to the end customer so given that dynamic we don't expect any improvement in you know q3 or q4 we expect the average of those quarters to be roughly the same as q2 you know we are seeing some talk of activity levels improving here or there, but mostly anecdotal. And so we've really got to forecast what we can see right now, and that's still higher inventory positions amidst the backdrop of lower demand.
spk01: Okay, great. That's helpful. And then have you seen any acceleration in chromium or maybe feedback from the market post the nanostring ruling in Germany?
spk05: I think the question is more around Xenium.
spk08: The momentum in this quarter on Xenium has been very strong. I think much of that is driven by the performance of the instrument and the data that comes out of it. I would point to that as the first order and the second order variable that I've been driving.
spk05: Great. Thank you.
spk04: Next participant is Mason Carrico from Stevens, Inc. Go ahead, Mason.
spk15: Hey, guys. Maybe two quick ones from me here. For cytosis placements during the quarter, did you guys share the percentage or mix of placements that are going to new 10X customers or new Visium customers versus customers who are already utilizing Visium? And how does that compare to what you've seen the last few quarters?
spk08: I don't think we share the specific details around that, but it's a reasonably balanced mix, I would say. There's a substantial number of cytoses that are going, as you would expect, to current Visium customers who have been using sort of the legacy manual assays. But also there's a material number of customers that are new to Visium. They're buying Cytosys to get into the Visium workflow because it now is kind of opening up possibilities that weren't really open before. And certainly, those substantial fractions have been previous 10x users of single cell, but there's also some new to 10x users entirely as well. And I think that the relative fractions have been fairly similar over the last couple of quarters.
spk15: Got it. Okay. And then for... Do you have any bundled orders with those placements, whether site-assist, chromium, and maybe any color you could give if you have seen those in terms of the mix of instruments or the customer types driving them?
spk08: Yeah, we've certainly seen customers kind of coming in into the full 10x ecosystem, and we are certainly not averse to encouraging that. In fact, you know, when people do want to go in and buy all three instruments. We give them, you know, we give them special deals, and especially those come with consumables. That happens, and we've talked about before just how much value there is to a customer being able to use all three platforms to interrogate their biology. And we're seeing that in workflows where very, very frequently people are using a chromium experiment to map out the cells and the genes that they then want to put on a custom panel for Xenium. And oftentimes when they're running Xenium experiments on a particular tissue, they then follow up on that same section, put it on Cytosys, and run a Visium experiment to get a more comprehensive view of the tissue. And we've talked about this before. There's a lot of science to be discovered by using all three platforms, and that's definitely resonating with a lot of our customers as well.
spk05: Understood. Thanks. Next up, we have Justin Bowers from Deutsche Bank.
spk04: Go ahead, Justin.
spk07: Hi. Good afternoon, everyone. In the prepared remarks, you talked about being able to ramp production faster than you had expected in the first half, and I was just hoping you could give us a little color on some of the bottlenecks you were able to work through, and, you know, are there any sort of any more of those in the ways you scale production in the back half of the year or are you through most of that? And then secondarily, just maybe give us talk a little bit about sort of the panels on GDM and the number of different panels and the development path and your ability to scale the custom panels after the initial request. So two parts.
spk16: Yeah, so I'll start with the operational capacity. I think you've got to go back to the beginning of the Xenium launch where we talked about overall our first priority is customer success and having a measured rollout initially to making sure that our earliest, that our early customers were successful, were able to generate their own data on their instruments and then have success overall in interpreting that. And we had success there pretty much pretty early. And so then the constraint shifted to the next thing, which was operational capacity. And so, you know, once we got through those early placements and then we then shifted to operational capacity, it was around making sure that we had enough components, making sure that the yields were high, making sure that we had the space to do this. Our new operations facility was a big part of that. all the QC that goes in the end, and then also installation and support resources. And so first off, you know, kudos to our operations team for scaling up like they did over the quarter. But there's risks they encounter every day and every week that they've been solving day to day and day to week. And so, you know, really our goal is to make sure that we're able to successfully and consistently maintain this level of production as we head into q3 and q4 but then as you think about scaling up to the next level as we get ready for next year you know we will need to build higher inventories with components there's going to be higher whip on the balance sheet we're going to need more support personnel and and installation and service personnel as well. And so, you know, over time, that bottleneck can shift from one point to the next.
spk08: Yeah, maybe on the topic of Genium panels. So we've been working hard and adding more and more panels pretty much continuously. We have a number of them, like human breast panel, lung, brain, There's a new panel we've come out with for multi-tissue analysis and for cancer. So kind of across applications, across tissues. And importantly, we also have a fully custom option that a lot of our customers are using, as well as customization on top of the standard panels as well. So lots of options, and we're adding more all the time. And that's why it's really important. It's not, you know, oftentimes it is, making sure that the customer is able to measure the precise genes they're interested in. And as we keep increasing our content, that just increases the power and the reach of the platform as well.
spk05: Next up, we have Matt LaRue from William Blair. Go ahead, Matt.
spk12: Hey, good afternoon. Just one, and this doesn't relate to the conversation around progress. towards cash flow positivity. So you kind of alluded to some of the things that you're working on. If I think about what you're undertaking from sort of a working capital perspective and how that might burden cash versus maybe more one-time costs related to capacity expansion and then resulting in perhaps initial underabsorption versus things that will be more sustainable like additional people, technology, et cetera. just as we're thinking about sort of building out the model and how we get towards that cash flow positive number, how should we be thinking about maybe those different buckets of investment areas?
spk16: Matt, that's a very insightful question. There are different flavors of the type of impacts that we're going to see as we go up the ramp. And so the ones that I just talked about around building up inventory and buying components in advance and stockpiling those because some of those supply chains are new and relationships are new and suppliers are new and things like that would be expected to smooth out over time as you're able to get further up the ramp and have those be more established. So I see those maybe as things that would spike during the ramp for a few quarters and then hopefully smooth out as they become more routine. When you think about the operational capacity. A lot of that is going to be fixed. But as you scale up the units, you're going to be able to better leverage that fixed cost. As you think about the installation and the support, those are things that are working well right now that can also become more efficient over time. So again, as the units increase and when you look at the unit economics there, I would expect leverage there as well. But you've got to build you've got to build capacity for these things in advance of when you're going to need them. And so then when you are going up a ramp, you are going to be underutilized for some period of time because of the nature of having to build something in advance. And so that's why I pointed that out as we head into the year for the free cash flow positive. Becoming free cash flow positive is really an important goal for us. And you know, we're continuing to work towards it. And there is still a path for us to hit that by the end of the year. We expect to be very close to free cash flow positive. But when you look at where we are in this ramp with it being steeper and us having the decision around accelerating the investments here in Spatial and Xenium or, you know, holding to the cost line absolutely to make sure that we hit the target at the end of the year, You know, I'm loosening the constraints in a targeted way to make sure that we do what's right to support and grow the spatial opportunity and realize the full potential that we have there.
spk05: So I hope that answers your question. Next up we have Rachel Van Staal from JP Morgan.
spk04: Go ahead, Rachel.
spk11: Hey. Hey, thanks for taking my question. It's now on for Rachel. You know, we've seen a lot of drugs come online in the commercial market, which has reignited interest in several disease areas, including Alzheimer's. Could you give us a sense if you're seeing any of these, you know, really large drug launches influence any, you know, earlier than clinical market-related work? You know, Alzheimer's, maybe some of the GLP-1 interest. We've typically seen that commercial markets will influence, you know, pre-commercial markets. So, have you started to see that flow through at all in some of the work for any of your instruments?
spk08: I think for us, you know, we've been, so far, products have been focused on the early discovery side of the world with the kind of expected progression further down the workflow at biopharmaceutical companies. So I think like when you took a very large view, there's certainly the incentive to invest more in foundational scientific research and subsequent R&D work is increasing as there are more and bigger launches of new drugs and new modalities that come online. And so I definitely think that there's going to be more investment for those reasons and investment in new technologies that drive the understanding of the fundamental science allow you to see things at a much deeper level. We are seeing, certainly, and I mentioned this in a call, the utility of our products specifically in the cell therapy space, which is a big emerging area, but we see that also expanding across other modalities.
spk05: And our last person up today is
spk04: Kyle Mikeson. Kyle, I believe I cut you off a little early on your question, so if you'd like to form your next question, please do so now.
spk02: Kyle Mikeson Yeah, no worries. Thanks, guys, for squeezing me back in. Just one for you, Serge, on the 5,000-plus panel for Xenium that's planned for mid-2024. At AGBT, that was just proof of concept, I believe. When would early access begin for that, and then would that come before Vizium HD? Thanks.
spk08: Serge Tchaikovsky Yeah, we haven't given an updated timeline on really either of those. It's a good question. I mean, both products are incredibly exciting, and we're seeing really great internal data, but we're not yet sharing the precise timelines.
spk05: Well, thank you, everybody. That concludes today's call. Thank you for joining. You may now disconnect.
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