10x Genomics, Inc.

Ladies and gentlemen, thank you so much for standing by and welcome to 10X JNMX first quarter 2025 earnings conference call. Please note that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. Thank you. I'd now like to hand the call over to Cassie Corne, Senior Director, Investor Relations. You may now begin.

Thank you, and good afternoon, everyone. Earlier today, 10X Genomics released financial results for the first quarter ended March 31st, 2025. If you have not received this news release or 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 Saxinoff, our CEO and co-founder, and Adam Tate, 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 so that we may accommodate everyone in the queue. With that, I will now turn the call over to Serge.

Thanks, Cassie, and good afternoon, everyone. Today, I'll cover Q1 performance and share updates on how we're navigating the rapidly evolving macro environment. I'll also walk through recent business developments before handing it over to Adam for the financial review and outlook. Total revenue for the first quarter was $155 million. During the quarter, we settled our worldwide patent litigation with VizGen on various favorable terms. As one component of the settlement, we received an up of $26 million that we allocated in part to operating expenses related to gain on settlement and in part to license and royalty revenue. Excluding the portion allocated to license and royalty revenue, our first quarter revenue was $138 million, down 2% year over year, primarily driven by a significant decrease in instrument revenue offset by continued strength in consumables, a sign of solid core demand and growing usage across our platforms. Our Q1 results demonstrated clear signals that customer demand for our products is robust and reinforced our conviction in the long-term growth potential ahead, which I will discuss more later. But first, I'd like to take a moment to reflect on the significant changes in the macro environment since the beginning of the year. changes that went far beyond what any of us expected. Signs of risk and uncertainty across academic research funding and the macro landscape began with a cap on indirect funding from the NIH, and since then, the research funding environment has continued to deteriorate, particularly across U.S. academic and government labs. Within U.S. academic and government research funding, we're seeing two distinct but interconnected dynamics. First, there are real-time effects impacting our customers today, including delays, reductions, and outright cancellations of grants. Second, there is a growing threat of future changes, such as proposed budget cuts, implementation of indirect NIH funding gaps, and widespread concern over further grant review delays or project cancellations. Taken together, these pressures are creating a climate of deep uncertainty. We're increasingly hearing from customers that the combination of actual cuts and looming risks is making them hesitant to initiate new projects or invest in capital purchases. The uncertainty for our customers is driving increasingly unpredictable customer purchasing behavior and reduced visibility on our outlook for the year. Approximately 40 to 50% of our revenue is supported by U.S. academic and government research funding. As a result, we announced earlier today that we're withdrawing our full year revenue guidance and implementing quarterly guidance beginning with Q2. Adam will share additional context on our outlook. While the current environment is undeniably difficult and unpredictable, I am confident that we're well equipped to navigate through this period and emerge stronger. We're seeing increased usage of our products driven by price elasticity and the emergence of new applications, both of which support the long-term expansion of our opportunity. Our recent slate of product launches continues to resonate with customers and further extends our technology leadership that, together with our roadmap, positions us extremely well for the future. We have completed our sales reorganization, giving us the structure, coverage, and focus we need to take on today's challenges. And we have a strong cash position that we're actively protecting through this turbulence. We have implemented a reduction in both headcount and non-headcount related expenses across the company. This week, we reduced our global workforce by approximately 8%. While these changes are never easy, they will allow us to be a more efficient organization. better positioned to navigate today's environment while continuing to invest in our highest priorities. We recognize that the strength of our balance sheet is an asset. We have the resolve to protect it and the leverage to further adjust expenses if necessary. Importantly, our fundamentals remain strong and we continue to have full confidence in our ability to capture the large opportunities ahead. To that end, We saw multiple positive developments in Q1 that underscored the strength of our platforms and reinforced our conviction in our mission. First, we saw solid signs of single-cell elasticity, demonstrated by robust year-over-year growth in chromium reaction volumes. This growth was supported by strong adoption of Reflex and universal on-chip multiplexing products. both of which are specifically designed to boost volumes through lower cost per cell and per sample. Second, we're continuing to see increased Xenium usage, demonstrated by strong growth in Xenium consumable revenue and volume. Our Xenium platform keeps gaining traction among new customers, while our earliest and largest users continue to grow their utilization. Researchers are drawn to Xenium for its ability to elucidate biology that was previously inaccessible at the resolution and scale that were inconceivable until recently. And as researchers use the platform, they increasingly recognize Xenium's robustness, accuracy, superior data quality, and ease of use. Third, our recent and upcoming product launches are resonating with customers and continue to advance our leadership in single-cell and spatial biology. Our GemEx technology has been delivering great advances to single-cell analysis. VizimHD has become a leading approach for unbiased spatial discovery, and Xenium 5K assays have gained rapid adoption across our customer base. At the AGBT conference in late February, we unveiled innovations across all three platforms, including a new plate-based chromium flex product to massively expand scale and the number of samples per run. expanded cloud-based capabilities to support large project analysis, continued expansion of our Visium platform with Visium HD 3 Prime, Visium Cell Segmentation, and Visium HD XL, and Xenium RNA protein to enable multi-omic analysis on the same tissue section. Together, these launches strengthen our roadmap and deepen our ability to serve all of our customers, including biopharma and translational researchers, as well as those working on consortium-scale studies. Finally, we're seeing a trend of exciting new use cases driven by the imperative for larger-scale analysis and the promise of single-cell and spatial in opening up new clinical research applications. Let's talk about some of the notable examples from the last few months. A powerful and accelerating wave across research is the use of AI with massive single-cell data sets to uncover patterns, generate insights, and accelerate discovery in ways that simply weren't possible before. Building on the collaboration we announced in February with the Chan Zuckerberg Initiative to launch the Billion Cell Project, we have several other initiatives underway. We recently announced a partnership with ARC Institute to accelerate the development of the ARC Virtual Cell Atlas, an ongoing effort to create large-scale high-quality virtual cell models. Leveraging our Chromium Flex assays, ARC researchers will be able to generate perturbational data at unprecedented scale and quality. We're excited to enable the creation of increasingly powerful AI models in biology to support AI-driven insights into human health and disease and help accelerate drug discovery. In addition, Immune AI and the Park Institute for Cancer Immunotherapy are using our GEM-X technology to accelerate the creation of one of the largest single-cell immunooncology datasets. This effort aims to support the identification of immune response and resistance patterns, ultimately helping researchers uncover clinically relevant mechanisms that could inform the next generation of cancer therapy. With increasing recognition of the power of single-cell and spatial technologies in translational research, there have been more and more publications focused on uncovering spatial biomarkers of disease progression and drug response. For example, investigators from the Spanish National Cancer Research Center used Xenium and Visium to retrospectively analyze samples from the recent Dutrinum trial of patients with bladder cancer. The study uncovered spatial relationships and cell-to-cell interactions associated with treatment responses. Another study in cancer cells used Xenium to analyze samples from the FASCINATE-M Phase II trial of a novel antibody drug conjugate in HER2-positive breast cancer. The researchers characterized key immune cell subtypes, spatial niches, and specific interactions between immune cells and tumor cells. They identified spatial biomarker signatures that were predictive of treatment response highlighting the promise of spatial biology to help guide patient stratification strategies and therapy selection. Also, in a recent study in Nature, researchers used Bigeum and other tools to uncover spatial biomarkers associated with liver cancer recurrence. They used these biomarkers to construct a tumor-immune microenvironment spatial predictive score that performed substantially better than standard patient risk stratification methods. pointing the way to more personalized disease management of this and other cancers. We have deep conviction grounded in growing evidence that our tools represent the future of biological research, drug development, and diagnostics. We're committed to realizing that future despite the challenges in front of us, and we're focused on serving our customers through these tumultuous times. I'd like to thank our team for keeping that goal front and center, for their continued dedication, and for their resilience through this period. It is because of their efforts I feel so confident we're well positioned to execute and lead this next chapter. With that, I'll turn the call over to Adam.

Thank you, Serge. I'll start by reviewing our financial results for the three months ended March 31, 2025, and will then provide further details on our updated outlook for 2025. All growth rates provided will be on a year-over-year basis and less otherwise noted. Total revenue for the quarter was $154.9 million. Excluding the license and royalty revenue from the settlement, first quarter revenue was $138.1 million, down 2%. Total consumables revenue was $115.4 million, up 5%. Chromium consumables revenue was $84.1 million, approximately flat. Spatial consumables revenue was $31.2 million, up 18%, driven by Xenium consumables revenue. Moving on to instruments. Total instrument revenue was $14.8 million, down 42%. Chromium instrument revenue was $5.9 million, down 25%. driven primarily by lower average selling prices. Spatial instrument revenue was $8.9 million, down 49%, driven primarily by fewer instruments sold. Looking at our revenue by geography, Americas decreased 7% to $73.8 million. EMEA decreased 8% to $31.9 million. APAC increased 22% to $32.4 million. Instrument revenue was down across all geographies, though strong consumable sales offset the impact in APAC. Turning to the rest of the income statement, gross profit for the first quarter was $105.4 million compared to $92.9 million for the prior year period. Gross margins increased to 68%, from 66% the year prior, primarily driven by higher license and royalty revenue and lower manufacturing costs, partially offset by increased inventory reserves. Excluding the impact of license and royalty revenue, gross margin was 64%. Total operating expenses for the first quarter decreased to $144.8 million, compared to $154.4 million for the prior year period. This decrease was primarily driven by a gain on settlement. R&D expenses decreased to $64.2 million compared to $68.6 million for the prior year period, primarily driven by lower personnel expenses, including stock-based compensation expenses partially offset by higher lab materials and supplies. SG&A expenses increased to $89.7 million compared to $85.8 million for the prior year period, primarily driven by an increase in outside legal and personnel expenses, partially offset by a decrease in marketing expenses. Operating loss for the first quarter was $39.3 million compared to a loss of $61.5 million in the first quarter of last year. Net loss for the period was $34.4 million, compared to a net loss of $59.9 million for the first quarter of 2024. We ended the quarter with $427 million in cash, cash equivalents, and marketable securities. Turning to our outlook for the rest of the year, as Serge mentioned, we are withdrawing our previously issued annual revenue guidance, and in its place, we are providing guidance for the second quarter. The U.S. policy changes have introduced increased uncertainty into purchasing behavior for many of our customers. As a reminder, approximately 40 to 50 percent of our revenue is exposed to the U.S. academic and government research funding environment. We are highly exposed to ongoing uncertainty in the current environment. While the change to our guide reflects the current macro funding environment rather than company-specific performance, we believe it is prudent to take this step to ensure transparency and avoid setting expectations with the significantly limited visibility we have under these evolving conditions. We remain focused on assessing conditions in real time and we'll reinstate our annual guidance when our visibility on macro impacts to customer spending improves. For the second quarter, we expect revenue to be within a range of $138 million to $142 million, representing 1% growth sequentially at the midpoint, excluding the impact of the aforementioned license and royalty revenue. We anticipate that the funding and macro environment will remain challenged and that ordering patterns will continue to be impacted, particularly for instruments and larger consumable orders, as customers work through grant delays, program cancellations, and reprioritized budgets. At the same time, we're encouraged by the continued strength in core usage trends, including double-digit growth in chromium reactions and broader Xenium utilization. In regards to the evolving tariff landscape, tracking developments very closely. When it comes to components in our products, we have a limited reliance on China in our supply chain. In addition, we have a global manufacturing footprint with nearly all of our manufacturing occurring in the United States and in Singapore. Sales to China, which accounted for approximately 10% of our revenue in 2024, is where we see the largest potential risk. Given our ability to manufacture many of our products in Singapore and other mitigation strategies, we believe the impact from currently proposed tariffs is likely to be minimal. Stepping back from the near-term uncertainty, we remain confident in the underlying health of our business and our competitive positioning. Our teams are executing well. Customer engagement remains strong. and our recent product launches are driving meaningful uptake. As Serge mentioned, we have recently implemented several cost-saving measures in order to protect our balance sheet. Over the past few months, we undertook a full and detailed review of all of the costs in our business and took actions to reduce our ongoing operating costs. This included a reduction of 8% of our workforce as well as significant reductions in non-headcount spend. Together, we anticipate these measures to reduce operating expenses for 2025 by more than $50 million compared to 2024. As a result of these measures, we estimate we will incur between $5.5 million and $6.5 million of costs, consisting primarily of cash severance costs, which will be paid by the end of the third quarter. With our strong balance sheet, we have the ability to continue to execute on our strategy and fuel future innovation. We believe we are positioned well for long-term growth, and we are committed to staying agile as conditions continue to evolve. With that, I'll turn the call back to Serge.

Thanks, Adam. As we wrap up, I'd like to end on a personal note. I wasn't born in this country, but I love America. In fact, I love America, especially because I didn't grow up here. In no other country in the world could I have dreamed of the opportunities that came my way, of being given the chance to make a dent in the universe. There is no other place we could have started 10X. No other place has such a welcoming culture of boundless innovation and positive ambition. No other place has this concentration of insanely talented people, incredibly sophisticated capital markets, and the remarkable ecosystem across academia and industry supporting scientific innovation. We're living in a time of incredible progress in life sciences. The mysteries of biology are right in front of us, ready to be unlocked. Scientific progress in the coming years has the potential to bring cures to many, many diseases, and completely transformed the human condition. We are indeed on the threshold of a golden age, but we're shooting ourselves in the foot right when we should be pressing on the accelerator. Recent US federal actions are massively hampering the ability of our universities and our government agencies to pursue their goals of advancing science. I'd be the first to tell you that many of these institutions are in need of reform, but the current system often suffers from too much process, too much politicization, and too much bureaucracy. That younger scientists and unusual ideas face more challenges than they did in the past. But overall, these institutions are incredibly valuable and productive. Our university system is the global engine of scientific discovery and the envy of the world. The NIH is the foundational jewel of biomedical progress. We should certainly endeavor to reform and make these organizations ever more effective, but recent federal actions are not doing that. Instead, they're severely undermining these enterprises and run the risk of fundamentally dismantling their ability to support research, and that would be a tragedy. America is the greatest country in the history of the world, the beacon of hope for all of mankind. My exhortation to those who are listening Let's not squander our great inheritance. Let's work to defend and improve our greatest institutions. Overall, despite the current turbulence, I remain optimistic. The progress of science and technology just holds so much promise to improve the human condition and create massive value. As always, we're deeply committed to helping that progress and to always be great partners with our customers. We're focused on discipline and execution as we navigate the current environment while always keeping our eye on the long-term mission. With that, we will now open it up for questions. Operator?

Thank you. We are now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. Kindly limit your question to one question only. Your first question comes from the line of Patrick Donnelly of SETI. Your line is now open.

Hey, guys. Thank you for taking the questions. Serge, maybe just want to talk through the current backdrop. I mean, can you give us a sense as to what the recent conversations with customers have looked like, you know, let's say over the last couple months? Did the NIH and broader academic volatility, did that cause it to be freezing up by customers? That led to this level of uncertainty that drove you to kind of pull the guide. Now that we have the NIH proposal, to your point there, significant 40% type cut, has that changed any of the conversations? Or is it now we have to wait on the final budget numbers? I'm wondering, even if it's a double-digit cut, does just having that certainty lead to better visibility from your side and from customer's side? Patrick Corbett- Essentially, just wondering, I guess the path for you to have that visibility back in the business and seeing a pathway to growth, I mean does it come down to the budget, maybe just just pull the curtain back a little bit on that Thank you so much.

Patrick Corbett- yeah that's a great question key question for sure, so let me start with some background color about the conversations with customers and what we're hearing from the field. Patrick Corbett- And then i'll hand it over to Adam to talk about sort of implications how we're thinking. about the guide and as we progressed through the year, I was thinking about the numbers. So, yeah, as far as the conversations with customers are concerned, like as we said on the call, the environment kept getting worse as we proceeded through the quarter. In fact, the conversations with customers, what we've been hearing, have been getting in many places more and more, let's say, dire in terms of just the lack of clarity and uncertainty about where their funding was coming from. You know, the initial news around gaps around indirects, that created a lot of uncertainty around a lot of churn. But there was a lot of other activity. And I would say that compared to sort of the initial outlook that people had around this being just an NIH issue or like NIH budget issue, there is a more systemic set of issues now that you have to be looking at for when you're looking at academia and government funding in the U.S. You know, there's other agencies that are being affected. There's a ton of different procedural issues that are making it very challenging for people to actually get the funds, as well as having like a huge uncertainty around where the funds are going to be coming from in the future, or whether they're going to be coming. As well as, you know, multiple disputes with universities that are, you know, all of them are large customers of ours as well. So there's sort of a very large cloud of uncertainty that we are hearing from customers. And I think the big theme is just the uncertainty, right? And that has prompted, you know, the different organizations, different institutions to implement, you know, numbers of cost-cutting measures and, you know, reducing their spends in various ways. And so there is an impact that we are certainly seeing right now in terms of spending patterns. But there is also kind of an anticipatory impact that people are baking in into their sort of plans or lack of plans.

Maybe, Patrick, Adam here could just add to your question sort of around the suspension of guidance. And I think as you heard from Serge, we've been spending a lot of time with customers out there trying to do our best to support but also to learn. So it's a fair question when we've spent a lot of time weighing that carefully. Philosophically, we believe that forward guidance should enable the investment community to model our business with a reasonable degree of accuracy. I think as you just heard from Serge, the facts, given the uncertainty, they don't support that standard. As we just talked about kind of in our prepared remarks, we started the year with good momentum. Q1, really multiple positive developments, double-digit year-on-year growth in chromium reactions, strong Xenium consumables utilization, You know, it really confirms what we said when we set out the initial guide. It also confirms the fundamentals of our business are robust. But since that call, you know, Serge just mentioned funding backdrop, customer confidence, it's worsened materially. Academic and government research budgets tightening. NIH grants and the outlays, as you sort of track those, that remains in flux. And then there's a variety of procedural changes. that have been put in place that actually, you know, really disrupt our customers' ability to know their funding levels, and then it makes it difficult for them to commit to projects and programs, you know, for us in the second half of the year. Just as a reminder, you know, 40 to 50% of our revenue is exposed to those U.S. academic and government sources, half of that being the NIH, you know, the other sort of, you know, portion of that, you know, is the NIH federal. you know, state institutional sort of academic and government sources. So the range of possible full year outcomes become unusually wide due to the unpredictability of that external environment. Generally, we seek to provide as much transparency as possible. But given our line of sight into Q2, we provided guidance for this quarter today. However, in the second half, there are plausible scenarios where conditions improve. There's others where they deteriorate further. So giving a full year number at this juncture would create a false sense of precision. And withdrawing it is the most intellectually honest approach until external signals stabilize.

Your next question comes from the line of Kyle Mixon of Cataclyde Sanity. Your line is now open.

Hey, guys. Thanks for the questions. Adam, on your last point there, could you just maybe provide a little more detail on how you expect the year to kind of fly out going forward, whether it's like, you know, instrumentation versus consumables? You kind of commented on that. Or maybe chromium versus spatial could be helpful to understand that. And also, if there was an NIH pull forward in the first quarter, because you saw that from some other folks in the sector. And just a second question I want to ask maybe for Serge. Spatial insurance declines, you know, 50% year-over-year. Just comment on the current market dynamics, given, you know, brokers were pretty active, that HWTA, ACR, just would love your thoughts on that. Thanks.

We didn't see NIH pull forward, so I can start there. If we think about the balance of the year, let me start with Q2. We just withdrew guidance for the second half, so not really in a position to be providing specific outlook beyond Q2. That said, based on what we're seeing today, Q2 is shaping to look a lot like Q1, so consistent trends, similar dynamics. You know, we had, you know, as I think you can see from the numbers, you know, real pressure on the capex and the instrumentation side of our business. You know, and consumables held their own. You know, we were, you know, flat on chromium consumables and really nice growth on the spatial side, particularly in the zinium side. So when we think about the back half of the years, just a really wide range of possible outcomes. The current trends hold to be reasonable, expect sort of flat to low single digit sequential growth trajectory, which is what we sort of baked into our Q2 guide here versus Q1. So there's a world where things improve and we see trends even better than that. The budget, you know, could very well favor spatial and single cell research relative to other areas. The new head of the NIH has sensible ideas around reforms. And to the extent that money gets unstuck, it could create some upside for us. but also given what we're seeing in the environment there's a possibility for further deterioration so for now we've got the plans we've got the financial means uh to execute and respond across a wide range of scenarios and we're committed to providing an update when we have our q2 call in august yeah maybe uh carl on your second question on spatial uh spatial instruments and sort of the market dynamics there like fundamentally uh from the competitive perspective there hasn't i wouldn't say there was a

material change, similar dynamics that we've seen over the last several quarters. People really, really like our spatial products. They love Xenium. In fact, I was at AACR last week and got a lot of really gushing feedback from our customers, just real delight in the kind of data they're seeing in the kinds of insights they're drawing. And you could see that manifesting itself in various posters and presentations and papers. that are coming out. So we feel really, really good about Genium's position on the market. Again, the biggest thing, the biggest variable, the biggest reason for the decline is the macro environment. CapEx has been getting tighter across the world and particularly challenged within the US, especially within the academic and government markets.

Your next question comes from the line of Doug Shecknell. of Wolf Research Airline is now open.

Hi, this is Madeleine Millman on for Doug. I just wanted to touch on what you just said about sequential increases throughout the year. I think there's a slight step up from Q1 to Q2, the midpoint of the Q2 guide, including some of the litigation money. What gives you confidence in this, especially in light of your earlier comments that things got increasingly dire as the quarter went on?

Yeah, thanks, Madeleine. Yeah, and so first of all, you're correct. So essentially, the Q2 guide we've provided is $138 million to $142 million. That's the range, and it represents 1% growth sequentially at the midpoint. What gives us confidence around there? Well, thankfully, we're eight days here into May. We've got pretty good visibility into the order book and the order patterns between now and the end of the quarter. But I think that's an important distinction to make, which is it's not that we – have sort of lost visibility entirely. It's that we just don't have, given the dynamic environment and sort of the ever-changing procedures and other changes that are really impacting our customers' ability to have clarity around funding. That's really a second half dynamic for us in the Q2 here. We've got a pretty good sense of what's going on. And both from a customer segmentation standpoint, And really, even from a product and product mix standpoint, it's going to look a lot like Q1 did.

Your next question comes from the line of Mason Carrico of Stephens. Your line is now open.

Hi, guys. Thanks for taking the question. This is Ben on for Mason here. Just wanted to hit on the headcount reduction you spoke to and sort of your OPEX initiatives. How should we think about that in light of the recent restructuring that you've done? And really, how does that impact your ability to hire certain commercial teams and the ability to grow going forward? Thank you.

Yeah, so, yeah, good question. So, you know, the concept we implemented have been across the company, kind of touching on every department. Mathematically, R&D had more of an impact than other functions just because it's a large, particularly large organization. There was less of an impact on direct sales roles on that organization because we have just built out that team, that organization, and we do feel strongly that it is now a source of foundation for growth for us going forward. and we're quite happy and satisfied how that's going. Fundamentally, we really, really carefully considered all of our programs, all our initiatives across the company and focused the company in the most critical areas, the most critical initiatives with ideas that we will emerge kind of once we go through this turbulence in a very strong position. We feel good about our ability to, you know, to retain the talent, and this is something that is very, very important to us going forward.

And, Ben, let me just add, just from a P&L impact standpoint, the measures that we've undertaken and that we've announced will reduce operating expense for 2025 by more than $50 million compared to 2024, and also as part of that related to the reduction in force will incur between $5.5 and $6.5 million of costs. predominantly cash severance costs, which would be paid out by the end of the third quarter.

Your next question comes from the line of Dan Arias of Stifel. Your line is now open.

Hi, this is Paul on for Dan. Thanks for taking that question. Just wondering a little bit about sort of the regional view. EMEA sales declined as much as the US against a really tough comp, but the next two quarters have kind of similarly tough comps. Is that something that we would expect to see continue? And what are the factors that are kind of holding back customers in Europe and causing that single digit decline?

Yeah, Paul, thanks. Good question. Good catch. Like, I would say, first of all, to make sure not to overindex on any given quarter, because there are different dynamics around just the timing of different orders and shipments. The fundamental business in Europe is strong. So, yeah, there are some timing effects here. But, and I would also say there is no question on the CapEx environment, year over year, compared to the first quarter of last year, has gotten worse. So yeah, so the instrument environment continues to be challenging. And, you know, I mentioned on the last call, in the last quarter, that from the commercial reorg, our CapEx team was sort of still falling in place. In Europe in particular, it takes longer to hire people there, and this was the last sort of piece of the puzzle to fall in place. And over the course of this last quarter, we actually completed the full CapEx team in Europe, and it is now uh in in full force and uh going forward we feel optimistic about uh uh you know doing uh better uh with with instrumental genes in particular your next question comes from the line of taeha savant of morgan stanley your line is now open hey guys this is edmund on fatigious thank you for the time

Sticking on the regional view, you guys had really strong consumable sales in APAC. Are you seeing any pull forward of consumables in the region? And more broadly speaking, are you seeing any signs of customers stocking up ahead of potential price increases?

I would say that the first order sort of answer here is that there is great underlying demand in Asia, in China, and in Japan in particular. So the other elements to consider is that in Japan we went direct. Now we kind of changed our model of how we do business there, and that allowed us to capture additional revenue because of that. Also, Q1 is the fiscal year end there, and so that tends to drive an additional business. Yeah, so there's a number of structural improvements we made over the course of the past year, both Japan and China, and we're seeing robust demand in those regions, and it is manifesting itself in strong performance.

Your next question comes from the line of Matt Sykes of Goldman Sachs. Your line is now open.

Hi, good afternoon. Thanks for taking my questions. Maybe just focusing on the Xenium consumable pull-through, which was good to see, and you talked about increasing utilization, particularly amongst the larger customers. Just given the instrument placement has been weaker because of the CapEx environment, how much runway is there for you to continue to increase utilization with existing customers, particularly ones that are a little bit earlier in their cycle in terms of owning the instrument? And do you think that can continue to drive the spatial consumable growth over the course of at least next quarter and based on your visibility the rest of the year?

Yeah, Matt. Good question. And the answer is yes, absolutely. In fact, when we're looking at our utilization patterns, we're seeing an increase across the full range of customers. So I pointed out the heavily earliest users are still increasing their usage. I also mentioned new customers kind of ramping up. And it is actually the low users, the medium, and the high are still increasing. So we haven't really reached an asymptote in terms of the biggest users. They're still scaling up. And we have a very large bolus of customers that are still in early stages of that curve of adopting as well. That is, you know, that is certainly one of the reasons why we do feel very bullish about the Xenium potential. And I would say that it is, you know, it is playing out the way that we had talked about before, where this platform fundamentally is incredibly attractive to people, both for, you know, the kinds of insights you can get and just the practicalities of getting the data and making their discoveries. Uh, but, uh, it has, uh, it has this sort of element where it takes some other time for people to ramp up on it, right? Because you need to make, uh, typically, uh, select your genes. You have to make, do some amount of customization, what customers do. Uh, and that entails, uh, an initial sort of burning period as people got to go through that. But once they get over that, they start steadily, what we've been seeing increasing their utilization. So yes, there is a lot of runway, even independent of the instrument placements, to keep increasing utilization.

Your next question comes from the line of Dan Brennan of TD Cohen. Your line is now open.

Hey, good afternoon, guys. This is Kyle for Dan. Thanks for taking the questions. I wanted to go back to the P&L and the cost out this year. You guys are pretty meaningfully taking cost out this year, just given the current environment. But you mentioned in the prepared remarks, you know, there might be some other levers in the P&L you can pull, you know, if the current environment sort of continues. Can you go into more detail about, you know, what other areas you think you see the most potential for cuts, at least in the near term? Thank you.

Sure, Kyle. I can take a start on that and then turn it over to Serge for additional color if needed. So I think Yeah, I think as you noted, I mean, we're committed to, with the cost actions we've taken thus far, at least $50 million reduction over where we were in 2024. And the way that that breaks down is roughly half of that was coming from headcount, the 8% headcount reduction that we announced today after the market closed. The other half was discretionary spend. And so there is more to be done, you know, particularly in the discretionary spend area. And those are areas really as part of the holistic view that we took over the last couple of months. And with even more urgency and intensity as the macro situation began to deteriorate a bit more, became a bit more cloudy in March, we learned a lot. And there's more costs we can continue to take out as needed. So I think most importantly, We just want to remain nimble. We've got our fingers on the pulse of the situation as best as we possibly can. And we're committed to doing what we can to protect and preserve the strength of the balance sheet that we have.

Yeah, I'll just add, again, philosophically, we have strong conviction in our markets, in our development, in our team. We're focused on making sure that we capture the opportunities that we see kind of on the other side of the surveillance. But of course, we are agile and we'll be careful assessing kind of as we navigate this environment. And we have a strong balance sheet and we will absolutely keep it that way.

Your next question comes from the line of Luke Serko of Workplace. Your line is now open.

This is Seymour for Luke. Thanks for taking our questions. First of all, Serge, really appreciated that and to the prepared remarks. But anyways, getting into the question, I'm kind of left with a bit of a niche and long-term question here, but given the FDA's recent emphasis on moving away from animal testing in favor of the use of new alternative methodologies, including organoids, and kind of looking in the background of that technology, I noticed some use cases for single-cell sequencing when it comes to either researching new organoids or verifying the quality or reproducibility of those or even interrogating the cells after the study. So I'm wondering if you guys have put any thought into, you know, I'll be in a pretty niche area of single cell. I'm not sure if that's much of a needle mover, but I'm wondering if that is an upside driver in the long term for chromium.

No, I mean, actually, that's a really good question. It's actually a really perceptive question, and that's something that has been coming up very consistently as we talk to our biopharma customers. Because if you think about it, it's not just sort of the endpoint where the FDA is requiring the testing. It is a core sort of fundamental issue for biopharma for drug development is what systems do you actually test your drugs in? Cell cultures are just not... they don't represent human biology or they're not complex enough. And animal models are just like that, too different from humans, right? And for sure, a lot of our customers across the board have been investigating different models like organoids and different tissue models. And absolutely, single cell and spatial, in fact, are by far the best ways of working with them, both, as you say, in kind of uh of assessing them whether they do represent kind of the the biology you're trying to capture and then in that sort of in a production setting analyzing uh when you're applying a particular drug to to the system what it's doing what you expect it to do and whether it's having any effects that you don't want it to be having so we actually do see that as a very promising and pretty fundamental uh area of growth for us you know i talk uh quite a bit about the fact that our tools can be applied just across the full continuum of drug development. And that is definitely one of the kind of core elements of what we've been seeing, where we see the potential is, and still very early in this kind of, in this opportunity.

Your next question comes from the line of Michael Ricekin of Bank of America. Your line is now open.

I just want to go on for Mike he wanted to know outside of the US, how did ng hold up, and I know that pharma is like a pretty small part of the business so far, but you know how is that trended in one queue so far, thank you.

yeah. So, I mean, general academic government has held up pretty well outside of the U.S. Again, different countries face different pressures, and there's different budget considerations, for sure. And especially sort of with the geopolitics being fairly unstable or in flux right now, that creates some pressures. But overall, I think at a high level, the environment has been relatively healthy outside the U.S., and the business has been good.

Next question comes from the line of Matt LaRue of William, where your line is now open.

Hi, this is Jacob on for Matt. Thanks for taking the questions. I want to just ask quickly on tariffs, specifically related to China and just the overall demand in that region as well. I think you mentioned you see this as the largest potential risk related tariffs to the business. I mentioned there's ways to shift manufacturing to Singapore and other mitigating efforts. So just wondering, because this demand has held up in this region pretty well in previous quarters. I think it's up double digits now for three consecutive quarters and even at the highest level since the fourth quarter of 2022. So I guess just first, did you see any pull forward in this region during the quarter? And then second, is mitigating these potential China tariffs a near, medium, or long-term opportunity? And what would the cost look like to shifting the manufacturing to nearby regions? And then third, I guess, just what is your or the long-term growth opportunity you still see in that region. Thanks.

Sure. Thanks, Jake. Adam here. I can take that. So just on your question on pull-forward, no, I mean, it wasn't really a factor for us in Q1. You know, I should just take a step back and say, look, we're in a fortunate position of having manufacturing sites inside and outside the United States, and specifically we have the ability to manufacture most of our products in both locations here in the United States and in Singapore. Our team did a great job reacting to the news, you know, which has been quite dynamic and moving inventory, you know, as needed to get product, you know, sort of in region and try to do our best to anticipate, you know, tariffs and the changes there. Most of our single cell products are actually made in Singapore. And we're working on additional mitigation strategies, as you sort of noted and as we talked about, to have more products originate from Singapore as needed. So it's really kind of a two-fold dynamic. Think about the revenue side, which we talked about, and you just noted around China and cost impacts. For revenue, sales to China would be the biggest risk. It was roughly 10% of our business last year. And the impact there would be predominantly in our Xenium instruments, which are manufactured here in the United States. We've got proactive mitigation strategies, and we're actually working on some broader mitigation steps if the tariffs were to persist. On the cost of goods side, we've got minimal reliance on China and other sort of highly tariff countries in our supply chain. So we anticipate a real minimal impact to COGS given our ability to manufacture most of our products in Singapore. So it's a real low single-digit million supply chain COGS impact if the current tariffs remain.

Your next question comes from the line of Praneet Sudha of LRINC Partners. Your line is now open.

Hey, this is Philip on for Praneet. Thanks for the question. My question is just on new product launches. Can you just sort of give an update on sort of how the recent product launches have been contributing so far and what you're baking in for 2Q, specifically Gemex, Gemex Flex, and some of the other upgrades for us? and then maybe if you could give us a sense of the mix of GEMex kits now compared to prior kits.

Thanks. Yeah, so like on that last question, Philip, so the GEMex at this point is a large majority of what we sell on the Chromium product line. As far as just the contribution of the new products, well, look, last year we launched a lot of new products all across our platforms. So by and large, you know, like our business now is driven by those products, those launches, whether it's Vizium HD, Vizium 5K, all the different Gemex products on the Chromium side. In my remarks earlier, I mentioned that Gemex Flex and Onchip Multiplexing are doing particularly well. Now, those are the most recent product launches that we have. Yeah, no, I think they're driving demand. They're driving sort of the volume on the Chromium side. And on Spatial, people, like I said, have been really delighted in what they've been able to now discover with these new products. And they are driving our business by a large move forward now.

Your next question comes from the line of Rachel Ventsdahl of JP Morgan. Your line is now open.

Great. Thank you. This is Casey on for Rachel. Thanks for taking our questions. So first one, just on gross margins, looks like they were a bit light in the quarter versus where the street had been X the settlement. So just curious if you can elaborate on the current margin profile relative to your expectations and maybe what you're assuming for 2Q. And then, you know, as a follow up for 2Q, you said you have a bit more visibility there. You know, I guess at the midpoint, what are you assuming for placements between Visium, Xenium and Chromium in the quarter? Thank you.

Casey, I can answer your question as it relates to, you know, on the margin side of things. Yeah, I mean, so the margins excluding the vision settlement were 64%. So it's kind of in the zone of our sort of historical range. What I would note, and we put in the press release, we did have higher than normal levels of inventory reserves related to product transition that occurred there in Q1. As it relates to Q2 and sort of thinking about that going forward, typically the biggest driver of variability in our gross margins is Xenium instruments, sort of mix of instruments versus consumables. And given that we're anticipating Q2 really from a product mix standpoint to look more similar to Q1, I mean, we're not currently anticipating that same level of inventory reserves. We would expect gross margins to improve modestly from sequentially from Q1 into Q2.

Our last question for today comes from the line of Tycho Peterson of Jefferies. Your line is now open.

Hi, guys. This is Priya for Tycho. Thanks for taking our question. You mentioned facial cell opportunities regarding your biopharma customers. Can you talk more about any trends you see within your biopharma customers and what you've been hearing from them? I think you are also baking in for QQ and beyond.

Yeah, so as far as Biopharma, kind of if we zoom in on just sort of the first quarter, there's a number of moving pieces there. I would say that, you know, biotech has definitely been under pressure. I mean, the capital markets have been tough. There's a number of sort of competitive dynamics there that make the whole space very challenging. And that was under pressure. We saw that in our business. That said, there's a number of biotechs with a lot of funding who are big users of single-cell who believe, for example, in this kind of AI-based approaches to target and drug discovery and are leaning heavily into single-cell and spatial. On the larger pharma side of things, there's also some amount of kind of commotion as companies have been kind restructuring their investments and priorities, but the business overall has been doing well. Now, kind of zooming out a bit, pharma has been a priority for us, as I talked about it last year. That was one of the reasons for us to do our sales team restructuring. We're now in a great position given the capabilities of our products. you know, the ability to work with FFP clinically relevant samples, like the ability to scale now the pricing configurations that we're now delivering, the workflow investments, all of that. And together with now the fully formed sales team that's focused exclusively in biopharma, we feel really good about being able to make progress. In fact, we're starting to see some progress along these lines. And like I said earlier, I mean, the exciting thing for us is that we have As you look at the whole continuum of drug development, of the drug development process, there's applications, like critical applications, for single-cell and spatial, all through that continuum. And also, kind of as I referenced in my remarks earlier, there's now been also new publications that have been coming out at a pretty rapid clip, kind of showing the use of single-cell and spatial to understand clinical tissue samples and being able to predict drug response to that. And that is obviously of great value, especially as we think about kind of later stages of drug development. So, you know, our goal ultimately over time is to get to 50% or more of our business coming from biopharma. You know, we won't get there overnight, but kind of my expectation, step by step, we'll make our way there.

Thank you. We have reached the end of our Q&A session. Thank you so much for attending today's conference call. You may now disconnect.