10X Genomics - Q1 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to the 10x Genomics Q1 2024 earnings call. Today's call is being recorded, and I would like to turn the call over to Cassie Corneau, Director, Head of Investor Relations and Strategic Finance. Please go ahead.

Cassie Corneau (Head of Investor Relations)

Thank you, and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the Q1 ended March 31, 2024. 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 [email protected]. 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 Saxonov, our CEO and Co-founder, and Justin McAnear, 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.

Serge Saxonov (CEO)

Thanks, Cassie, and good afternoon, everyone. During today's call, I'll start with an overview of our Q1 progress and performance, highlighted by the launch of four major new products that we believe set a new standard for single-cell and spatial biology. Next, I will discuss the exciting opportunities we have ahead across our three platforms and the steps we're taking to deliver on this future. Then, I'll turn the call over to Justin for a more detailed look at our financials, business trends, and outlook for the rest of the year. For the Q1, total revenue grew 5% to $141 million. We continued to drive strong growth in spatial, led by our Visium franchise and the highly anticipated launch of Visium HD. We also saw strong interest in our new Chromium GEM-X technology, which delivers substantially higher performance at a lower price.

A significant number of customers trialed the new architecture, contributing to lower than expected quarter-end orders for Chromium overall. Despite the near-term sales impact, we believe GEM-X will invigorate Chromium growth over the long term and ultimately enable wider single-cell adoption. And while we're working to deliver on the vast opportunity ahead in Chromium, our strategy has always been focused on the strength of the entire portfolio and on providing the full breadth of our capabilities to customers. With our three complementary platforms in single-cell and spatial, we're committed to innovation that enables the scale and resolution necessary for researchers to better understand biology and disease. We believe that we're still early in this opportunity and in adoption of these tools. This year, we're introducing franchise-defining products in each platform to enhance our performance, leadership, and accelerate long-term growth.

These products are a testament to the enduring strength and velocity of our innovation engine and its value for customers around the world. These launches also reflect how we listen closely to customer feedback and build products that are most responsive to their needs. Let me highlight a few of our latest advances and how we expect them to extend our technology leadership. First, we were thrilled to officially start shipping Visium HD at the end of March. For our team, there's really no better feeling than seeing new products in the hands of researchers. That's especially true here. Visium HD has not only been the most requested product in our history, but also one of the most ambitious development projects we've ever taken on. It is precisely the kind of challenge 10x was built for.

It is yet another example of our ability to tackle hard problems and arrive at the best solution possible for our customers and their research. Visium HD enables whole transcriptome spatial analysis at single-cell scale resolution. It runs on existing CytAssist instruments, leverages the same robust and easy-to-use workflow as standard Visium, and brings the field of spatial discovery to a whole new level. While it's still very early, we're really pleased with the strong initial demand and tremendous enthusiasm we're seeing from our customers. The positive momentum further fuels our ambition to establish Visium HD as the platform for translational discovery. This quarter, we also continued to deliver on our robust Xenium R&D pipeline. We began shipping both our multimodal cell segmentation product and our new immuno-oncology gene panel in March. Cell segmentation includes an add-on kit compatible with existing Xenium assays.

It leverages advances in assay chemistry and sophisticated machine learning algorithms to significantly improve the determination of cell boundaries using multiple morphological features and modalities... While Xenium launched with a robust nuclear-based segmentation approach, many researchers have been waiting for this new solution to enable the most accurate biological interpretation for their Xenium runs. Xenium is already well recognized as being in situ performance leader, and there is still much more to come. We're planning to launch our 5,000 plex capability mid-year, scaling up plex by an order of magnitude, while still delivering high quality, sensitivity, specificity, and throughput. We're also developing panels of 1,000-2,000 genes to give customers even more options and flexibility. We're moving forward with integrated protein profiling, which will significantly expand Xenium's existing protein capabilities.

Longer term, we have architected Xenium to allow for tremendous technological headroom and enable more applications, higher throughput, and lower cost. With the long-awaited launch of Visium HD, the performance of Visium in the field, and the interest and buzz around the Xenium pipeline, it's clear we're in the forefront of the spatial biology revolution. We're seeing some cutting-edge researchers and technologists start to reprioritize their team's resources and mindshare from single-cell approaches to explore how spatial methods can push their research forward. We're also seeing spatial resonate with new researchers who have never done single-cell or other genomics work before. Take this year's annual meeting of the American Association for Cancer Research, or AACR, for example. There was resounding energy and conviction on spatial, which emerged as a huge theme of the conference. In fact, the majority of the plenary sessions featured or referenced 10x spatial data.

This burgeoning interest in spatial is drawing the attention of both new and existing customers, and we have work to do to ensure we can satisfy that interest and drive growth across the portfolio. Turning to single-cell and the launch of our new GEM-X technology, the first major overhaul to our Chromium architecture since 2019. With its completely reengineered microfluidic chip design, GEM-X delivers superior performance at larger scale and lower cost. In March, we began shipping the first two products on GEM-X, our highest volume Chromium assays, 3' Gene Expression and 5' Immune Psingle-cellrofiling. These assays take single-cell analysis to the next level, giving researchers meaningful performance advantages across the board, from increased sensitivity and capture efficiency to improved robustness and scalability, all at a lower cost. In fact, the new technology provides researchers a more than twofold reduction in cost per cell.

We believe GEM-X raises the bar for the field and sets a new standard for single-cell analysis. Our customers have been eager to see and validate this for themselves. In Q1, more customers than expected trial GEM-X to see firsthand the power of this technology on their own samples. And more recently, customers, including the Fred Hutch Innovation Lab, have started to share their own independent comparisons of GEM-X and their Next GEM technology, verifying our performance claims. We're encouraged by the early enthusiasm, adoption, and feedback on GEM-X, despite the near-term headwinds as we help customers navigate this product transition. GEM-X delivers great value to customers now and opens up meaningful possibilities to expand the field long term. As we have said before, we believe there is significant price elasticity in single-cell, which presents a significant long-term opportunity for broader adoption.

GEM-X is one of several steps we have planned to take advantage of the elasticity. By delivering superior performance of superior economics, we believe GEM-X will help us enable larger projects, reach new customers, and encourage more routine use among existing researchers. We fully intend to expand the single-cell opportunity through a robust Chromium roadmap and other efforts to drive better awareness and broader adoption at large scale. Put simply, our goal is to make single-cell analysis the standard for most biological research. While we believe there's huge untapped potential for single cell, our conviction is not just in Chromium. It's in the combined performance, leadership, and differentiation of all three platforms together. Our strategy has always been about the power of the full portfolio and the choice it enables for customers.

Our goal is to ensure that researchers, and ultimately clinicians, have access to a comprehensive suite of the best-performing products to resolve biology in the way that's best for their work. We intentionally designed distinct yet complementary platforms to support a broad spectrum of customers' use cases and how their research and research questions may evolve over time. The strength of our execution in R&D and operations has enabled us to deliver a full portfolio of groundbreaking products. As we continue to evolve our commercial execution, it will better position us to maximize and deliver on the incredible potential ahead. We believe there are clear opportunities to drive growth, utilization, and scale with existing customers, to bring new researchers into the 10x ecosystem, and to accelerate translational and biopharma opportunities.

Alkermes MOSAIC study, which we first announced in November, is a powerful example of the progress we're making in translational applications... This large-scale project is on track to complete spatial profiles on thousands of tumor samples across seven different cancer indications by the end of the year. The team is looking to discover biomarkers and to build predictive models that could transform how we diagnose, treat, and ultimately cure cancer. In addition, we firmly believe there's a long runway ahead for single-cell methods in biopharma. Importantly, we're not the only ones who share this conviction. Some of our pharma customers recently published on the value and impact of our products in therapeutic development. Sanofi reported that 90% of the company's disease targets are credentialed using single-cell genomics. A recent preprint in medRxiv helps shed light on why.

The study analyzed single-cell data across 30 diseases and 13 tissues to examine associations between genes, cell types, and diseases. They found that support from single-cell analysis significantly increased the odds of clinical success for a given gene to be a viable drug target. In fact, the authors estimate that their approach could approximately triple the chances of a drug target reaching a phase III clinical trial. While we have established strong beachheads in translational and biopharma, it's still very early relative to the expected large potential. With all of the advances in our portfolio, we're in a better position than we've ever been to deliver. As one customer at AACR told me, "FFPE changes everything." Our FFPE capabilities, available on all 3 platforms, open up vast archives of biobank samples, along with exciting possibilities for new biological discoveries.

These capabilities reflect, yet again, how we listen to our customers, think deeply about their research, and build innovative products to accelerate and advance their work. We believe the long-term potential for single cell and spatial is boundless. While we're focused on delivering in 2024, we will remain steadfast in maintaining the long-term orientation that has always guided us. I have every confidence when I say we're still just getting started. With that, let me turn it over to Justin.

Justin McAnear (CFO)

Thank you, Serge. I'll start by reviewing our financial results for the three months ended March 31, 2024, and will then provide an update on our outlook for 2024. All growth rates provided will be on a year-over-year basis, unless otherwise noted. Total revenue for the quarter was $141 million, up 5%. At a high level, the quarter played out largely in line with total revenue expectations, with stronger contributions from spatial, partially offsetting lower Chromium contributions. Looking at our revenue breakout, total consumables revenue was $110.3 million, down 2%. Spatial consumables revenue was $26.4 million, up 134%. This growth was driven primarily by our Xenium platform, along with strong adoption of Visium HD, which started shipping at the end of Q1.

Chromium consumables revenue was $83.9 million, down 17%. Some of this year-over-year decline was expected. As discussed on our year-end earnings call in mid-February, we anticipated headwinds for Chromium revenue in the Q1 while customers began their transition to the new GEM-X products. As part of this transition, we anticipated that customers would trial GEM-X and would not stock up on either the legacy or newly introduced products at quarter end. While we believe this increased trialing created stronger headwinds for Chromium consumables in Q1, we are nonetheless encouraged by the initial adoption and enthusiastic feedback from customers thus far. The lower price of GEM-X will continue to drive some near-term revenue pressure, but over time, we believe there is elasticity that will more than offset the lower price.

We also believe that the stronger than anticipated spatial demand took some customer mind and wallet share away from Chromium this quarter. As Serge shared, we are seeing both new and existing customers prioritize spatial studies given the burgeoning interest in the space. How this plays out over time remains to be seen, but we continue to believe in the power of our full portfolio and offering customers a comprehensive suite of products to fit various needs. Moving on to instruments. Total instrument revenue increased 33% to $25.5 million. Spatial instrument revenue was up 133% to $17.6 million, primarily driven by Xenium instrument placements. We also saw a sustained demand for our CytAssist instruments as customers purchased the instrument along with Visium HD consumables. Chromium instrument revenue was $7.9 million, down 32%, driven by fewer units sold.

Services revenue was $5.2 million, up 91%, driven by increased service contracts revenue and increased Xenium instrument training and installation revenue. Looking at our revenue by geography, Americas revenue grew 1% to $79.6 million, EMEA revenue grew 22% to $34.7 million, and revenue in APAC decreased 2% to $26.7 million. Turning to the rest of the income statement. Gross profit for the Q1 was $92.9 million, compared to $98.4 million for the prior year period. Gross margin declined to 66% compared to 73% in the Q1 of 2023, primarily due to a change in product mix driven by Xenium instruments.

Total operating expenses for the Q1 increased to $154.4 million, compared to $150.4 million for the prior year period, driven by higher legal expenses and costs for facilities and IT, partially offset by lower personnel expenses. R&D expenses increased slightly to $68.6 million, compared to $67.1 million for the prior year period, primarily driven by higher facilities and IT costs and increased personnel-related expenses. SG&A expenses increased to $85.8 million, compared to $83.3 million for the prior year period, primarily driven by increased outside legal expenses and higher facilities and IT costs, offset by a decrease in personnel-related expenses. Operating loss for the Q1 was $61.5 million, compared to a loss of $52 million in the Q1 last year.

This includes $36.1 million of stock-based compensation, compared to $42.1 million of stock-based compensation for the corresponding prior year period. Net loss for the period was $59.9 million, compared to a net loss of $50.7 million for the Q1 of 2023. We ended the quarter with $371.8 million in cash and cash equivalents in marketable securities. We burned $17 million of cash over the course of Q1, while making a $20 million dollar payment in January related to the asset acquisition that we recognized in Q4 2023.

Turning to our outlook for 2024, we continue to expect full-year revenue to be in the range of $670 million-$690 million, representing growth of 8%-12% over full year 2023. We believe this range represents a balanced view for the year. It incorporates both the upside we've seen in spatial and the headwinds we are experiencing now in Chromium, which we expect to continue into Q2 as additional customers trial and transition to GEM-X. When looking out over the next 12 months, we are anticipating about $15 million-$20 million of total capital expenditures. We are maintaining cash discipline in 2024. Overall, we believe we have a great setup to drive positive cash flow for the year while making targeted investments to continue driving growth.

Ultimately, our goal is to self-fund our innovation and scale by investing cash generated back into our business. At 10x, we continue to be laser-focused on execution to drive growth and impact. We are excited about the strong enthusiasm for the products we launched in Q1 and look forward to providing more updates on our progress throughout the year. With that, we will now open it up for questions. Operator?

Operator (participant)

Thank you. If you would like to ask a question, simply press star one on your telephone keypad. If you find your question has been answered or you would like to withdraw your question, you can press star one again. As a reminder, we do ask that you please limit yourself to one question. With that, we'll take our first question from Mason Carrico with Stephens.

Mason Carrico (Research Analyst)

Hey, guys. Congrats on the quarter, particularly in the tough macro backdrop. If you could, could you give us some, a bit - maybe just a bit more insight into the adoption trends and early feedback on HD and GEM-X? How many of your CytAssist customers have purchased HD at this point, and how do you think about that driving sustained demand for CytAssist this year? And then similarly, adoption rates among existing customers on GEM-X, and has initial interest made you maybe more bullish on the opportunity for Chromium in the back half of this year and into next year?

Justin McAnear (CFO)

Hey, Mason, this is Justin. I'll take the first part of that, and then, Serge can add some more color. So as far as Visium goes, in looking at the SD versus HD split, I'd say roughly half and half. And when we're looking on the Chromium side around the GEM-X adoption, if you're looking over the last month, as in, Q2 to date, seeing roughly about a third of the Chromium consumables, on GEM-X. And back to the Visium side, you know, with the launch of HD, we have seen that driving sustained demand for the CytAssist. We do think that anticipation of the Visium HD launch, helped us place CytAssist, in particular, in the back half of last year.

And we are expecting that to be a catalyst for CytAssist placements going forward in 2024. Same thing with GemX. That is a product that you need a Chromium iX in order to run, and we do think that that's also going to be driving Chromium iX placements throughout 2024 as well.

Serge Saxonov (CEO)

Yeah, Mason, as far as the feedback on product is concerned, it has been very positive. So HD obviously has been perhaps our most anticipated product to date. Lots of customers were excited, and lots of customers were excited to get their hands on the product. And the early sentiment coming back from seeing the data, seeing the data coming from their samples is very, very positive. You know, so all the investments we made along the way, in terms of improving the chemistries, the workflows, importantly, CytAssist, and now putting HD on top of it, has really seemed to be bearing fruit, and resulting in great feedback from customers. On the GEM-X side, the sentiment is also very, very positive.

We're just now kind of going through the cycle where the initial customers who ordered and got their GEM-X reagents are actually getting the data back, and now talking about their results. I mentioned in my prepared remarks this, a testimonial from Fred Hutch. We're hearing from other customers, very pleased with the fact that there is a substantial boost in performance, great improvements along a number of axes, and also lower price. So, the feedback has been really positive. People were really excited when we first revealed GEM-X in the middle of February. And, a lot of a lot of customers have been ordering it now to trial it, to test it against the the Next GEM products that are out there.

The feedback that's coming back has been very positive.

Operator (participant)

We'll take our next question from Patrick Donnelly with Citi.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. I want to focus on single-cell, just given the results that are a little light in terms of what we're looking for. Justin, I know you talked about, you know, maybe that this weakness or softness lingers into Q2 as people kick the tires on some of the new products and trial some things. Can you just give us some sense of visibility into, you know, what that growth trajectory looks like? How are you thinking about that piece, let's call it single-cell chromium, for the year? I just wanted to try to think about, again, the cadence this year and the overall expectations for this year on single cell. It'd be appreciated.

Justin McAnear (CFO)

Yeah, Patrick, thanks for the question. When we're thinking about single cell for the year, I'd go back to the three factors that we're seeing impact single cell right now. And so the first is the GEM-X transition. We're talking about a limited timeframe in Q1 that launched in the last month of the quarter. And so, you know, there's a limited amount of data that we're going off of for that. But, you know, we did see a higher adoption rate than we were originally planning. And then looking at the customer ordering patterns, you know, we were able to see impacts with customers that you know, ordered GEM-X, ordering smaller kit sizes, smaller number of reactions, and just smaller number of orders overall.

Patrick Donnelly (Managing Director)

And as we can tell, too, some customers are still waiting to get their results from that, and so this, this trial is something that doesn't happen, you know, right away. It's, you know, over a somewhat extended, period of time. And so, as I just said earlier, for Q2, roughly to date, about one-third has been on GEM-X, and so, you know, a higher uptick than we initially expected. But then, you know, we would expect a more linear transition for the rest of the year with the, you know, to be substantially cut over, by the end of the year. And the other impact that we're seeing is that of, that of spatial. And that's a product, you know, it's drawing more mind and wallet share, on the customer side, towards spatial, from single cell.

Justin McAnear (CFO)

And so we'll see how those both play out throughout the rest of the year. As far as the GEM-X transition, that could be more transitory. You know, we do expect an impact in Q2, I think, similar to what we've seen in Q1. You know, just looking overall, you know, and this is more broadly than just single cell. If we're talking about Q2, I would expect at the top line, you know, somewhere mid-single to high single digits sequential increase over Q1, so maybe 7%-8% revenue increase Q2 over Q1. And then the last part is just, you know, the macro impact overall for single cell. You know, I think this is impacting things on the instrument side, probably seeing more of an impact on the instrument side.

We are hearing of CapEx budget pressures, elongated purchase cycles. I think specifically when you're looking at Chromium, when you have a number of spatial instruments out there as well, customers are having to make hard choices, and I think that's having a bigger impact on the Chromium side than it is on the spatial side.

Operator (participant)

We'll take our next question from Dan Arias with Stifel.

Dan Arias (Managing Director)

Good afternoon, guys. Thanks for the question. Serge, just sticking with the transition and the validation for GEM-X, you know, where is the confidence in understanding the timelines associated with that process? How would you compare it to other processes for your other single-cell kits? And Justin, if I could, just to kind of finish off Patrick's question there. Last quarter, you said you expected Chromium revenues to grow this year. Does that view still hold, just given the way that the start of the year has played out? Thanks.

Serge Saxonov (CEO)

Yeah, Dan, thanks for the question. So as far as the transition to GEM-X, if I were to put it in a historical context, maybe, things to keep in mind is that it is a straight-up replacement over the existing products. It's literally a product that's better on multiple dimensions with very little trade-offs that people have to make, and it's at a lower price. So we do expect that once people go through their initial validation to confirm our claims to make sure they replicate in their own hands, in their own samples, the transition should happen relatively quickly. So kind of a different kind of thing than what we had seen previously with Flex, for example, which is a very different kind of workflow for different kinds of applications over different kinds of customers.

And also likely faster than what we had seen previously, for example, with the Next GEM transition, which did entail some trade-offs and not necessarily huge performance advantages. So the question is, what is the feedback that people are going to be—the customers are going to be giving us, what are they going to be actually seeing in their own hands? And so far, it has been, you know, it's been very positive. And so we're feeling optimistic that as they go through this transition, that that'll be happening on a pretty rapid pace relative to our previous product introductions.

Justin McAnear (CFO)

And Dan, as far as the second part of your question, given the results that we've had in Q1, it's certainly going to be more challenging to achieve, to achieve growth year-over-year in Chromium. So at the midpoint of our guidance range, we are modeling more spatial upside, and we're also modeling more Chromium downside. And so with some of the headwinds that we're seeing related to the GEM-X transition, you know, we do think by the end of the year, those will smooth out. We definitely saw an impact in Q1, and we're expecting to see an impact for that in Q2 as well.

As far as the offset coming from spatial, to the extent that Chromium growth is being impacted by spatial, you know, we would expect to see an offsetting upside in spatial. And that's what gives us the confidence to keep our guidance range the same, $670 million-$690 million, that we had on the last call.

Operator (participant)

We'll take our next question from Doug Schenkel with Wolfe Research.

Doug Schenkel (Leading Analyst)

Good afternoon. So, I'm gonna try to package in two different things here. First, just as a follow-up to Dan's last question, you know, keeping in mind you launched GEM-X, you know, with a week or two left in Q1. You know, that obviously stalled the market a bit, but it, it doesn't sound like I'm hearing anything to suggest that, you know, there was momentum or there is momentum coming off of that launch over the last five or six weeks that makes you feel like you can get close to target on single cell. So this is not just a timing issue, there are other dynamics that are, you know, basically hitting performance here on the single-cell side. I just wanna make sure the answer to that is yes.

And then my second, you know, unrelated thing I want to talk about is Bruker's purchase of NanoString. That brings to market a high quality company with a much more formidable commercial and innovation infrastructure, a much bigger balance sheet. Obviously, they're poised to invest here. How is the emergence of Bruker as a direct competitor changing how you budget and tactically plan? Thank you.

Serge Saxonov (CEO)

Thanks, Doug. So let me take that first question. So on Chromium, so, I mean, first of all, just stepping back at a high level, Chromium, fundamentally, the franchise is not where we want it to be, where we think it should be. You know, we've been talking about for several quarters, and that there's been a lot of focus on Spatial among our commercial team, and actually more generally for the company in the last few years. And we've been making efforts to shift more of a balance and more focus, more resources onto Chromium. And we still have a lot of work to do on that front, and a lot of work continues.

For this particular quarter, like you mentioned, there is the GEM-X transition, and I would just say that we actually announced GEM-X in mid-February, so it's not just the last few weeks, the last couple of weeks of the quarter. It's kind of a longer stalling period, and it had a substantial impact on the quarter. We're also seeing, like I said, in my prepared remarks, more attention from customers on spatial. So, kind of as we're making internal efforts to bring more research to bear on the Chromium, we're also fighting a little bit of that headwind from the market.

And then, of course, there's sort of macro factors in play as well in terms of pressure on budgets and this elongated sales cycles. Again, I would say stepping back, like I said before, for our first principles and based on our customer feedback, we see a tremendous long-term opportunity here. We're still very early in that opportunity, and we're taking many steps to realize that opportunity. On the question about Bruker, so look, the spatial field, like we've said before, is very attractive. We've seen that, you know, for several years going back. We've made a lot of investments in innovation and product development because of that conviction.

It's not surprising that new companies are going to be entering this space. Again, very attractive, attractive field, very attractive applications. We've done a great job of developing products that customers-- that really resonate with customers. We've been getting great feedback, and that's really our North Star, and we continue to make investments and rolling out new products. That's how we established our leadership now in spatial. And we anticipate, as we progress through the coming quarters and, and, coming years, that that's going to keep propelling us to, to greater and greater success in the market.

Operator (participant)

We'll take our next question from Dan Brennan with TD Cowen.

Daniel Brennan (Senior Equity Research Analyst and Managing Director)

Great, thank you. Thanks for the questions. Maybe just a follow-up and then a couple other parts on single-cell and spatial. So, I know part of the push coming into this year was the reorientation of sales incentives to get them to focus more on single-cell sales. I think you just mentioned there's still a lot more work to do, so maybe if you can just clarify that. Secondly, I'm just wondering, obviously, Serge, you sound extremely bullish on the untapped opportunity and the demand elasticity. So obviously, we're working through this GEM-X transition right now, but could you speak to as we're through this transition, it sounds like by year-end, kind of, you know, how we would think about what a steady state single-cell kind of growth could look like?

And then C, you know, you've talked more about cannibalization on this call than in the past, but, you know, arguably, that also drives more spatial growth. So I'm just wondering, as we think about the cannibalization, like, is, is your, is your outlook for single-cell growth lower today than it would have been given this cannibalization? And is there an offset on higher spatial growth? Thank you.

Serge Saxonov (CEO)

Thanks, Dan. So a number of questions in here, so let me kind of go through them in sequence. So first of all, in terms of the efforts that we're making on Chromium. Yes, you're right. So we identify that as a priority, and we've been making progress. It does take time. I would say, you know, one of the, like, the foundational elements here is it starts with leadership. And we have great new leadership in place across all our three regions now, this quarter, AMR, EMEA, and APAC. We also have a great interim CCO leader in place, Mina Moustafa, who's been doing an amazing job in the transition.

We have been implementing a number of initiatives within the commercial organization to bring more focus on Chromium. So I've talked about in the past about setting up explicit quota targets around Chromium, the Chromium business. We had not had that in the past. We're creating a great amount of specialization within the commercial team to provide more headroom, more bandwidth for salespeople to be able to spend more time and more focus on Chromium. We also have implemented direct KPIs and management expectations around driving Chromium. We're also putting to bear more marketing resources and campaigns specifically for Chromium as well. We do expect that that's going to bear fruit in the coming quarters for sure.

And of course, this is being done on the background of a really exciting product launches as well. Kind of your second question on elasticity. Yes, yeah, I've commented a lot in the past around the fact that, yes, we do believe there is a tremendous elasticity of demand in the single-cell market. And one way you can look at it is from first principles. Biology, like I've said before, really should be studied in single-cell context, and the vast majority of it currently is not studied that... Well, most people who should be using single cell are currently not using it.

And we know that price is a major obstacle to them using it, and we hear it, and that's the second sort of chain of evidence. We hear it a lot from our customers. Consistently, the price is a major obstacle, both in terms of new customers who are interested in single cell, when they see price, that tends to turn them away or at least slow them down in adoption. We hear it from existing customers who are interested in making single cell becoming a more routine part of their research, as opposed to a method of exception, when you need to get really, really deep insight into a particular sample. And then we hear it from customers who want to scale to really large projects. The main obstacle consistently is price.

So we do see a lot of opportunities, both for first principles and based on the feedback we've been hearing from customers. We've been making efforts. GEM-X is a strong example of that, to kind of walk down the price curve and to generate increasing demand. We have strong conviction that over time this will lead to the expansion of the total market. And then kind of the third point you mentioned was around the sort of trade-offs with spatial. And it is definitely the case that there's been a lot of excitement around spatial recently. Certainly, especially with the launch of Visium HD, with the progress we've been making on Xenium.

It's certainly the case that we're seeing customers making those trade-offs, thinking about their budgets, their mind share, where they're going to be kind of spending their time. This was true, we talked about in the past certainly for early technologists, people who are specifically focused on what is the latest and the greatest innovation. They are looking at spatial, where in the past they might have been looking at single cell, and other customers too. And also, this interest from customers is drawing attention of our sales team as well, naturally, and as one might expect. Now, it is not the case that people are just switching over from single cell into spatial.

The insights that you get, the kinds of research questions you can ask, you can ask and answer are complementary. They're different. And we're also seeing a lot of customers that are new to this whole ecosystem coming in through spatial, people who've not done single cell before, people who've not even done genomics before. And so there is going to be ebb and flow as customers kind of figure out specific use cases, as new technologies come to prominence, to figure out the precise, appropriate use of them. Ultimately we see huge potential for all three of our franchises. We expect them to coexist and complement and supplement each other.

We expect that there's great, great future ahead for Chromium and really for the whole portfolio.

Operator (participant)

We'll take our next question from Matt Larew with William Blair.

Matt Larew (Partner)

Good afternoon. Maybe just picking up on that last point, Serge. Obviously, for a long time, you've been talking about the value of the ecosystem and building a portfolio of like platform assets within the ecosystem. Could you maybe update us with sort of the proof points you track internally that validate that thesis, be it adoption of your newer spatial technologies by perhaps legacy single-cell customers, or retention of single-cell customers in labs where they might have other 10x products that they've committed to? Is there anything that speaks sort of strategically to the value you're seeing of having, you know, different modalities in-house?

Serge Saxonov (CEO)

Yeah. So I would say there's a, there's good, kind of example data. And, you know, a substantial number of, anecdotes and examples of customers, purchasing, platforms together when they're kind of looking at, kind of setting up their genomics infrastructure, where they buy, they buy a Visium, they buy Chromium, they buy Xenium, and they contemplate, kind of use cases, that combine all three platforms. We're also seeing, kind of results getting published in, in papers and datasets that get released. And the consistent kind of feedback when we talk to customers, that oftentimes people do use, these platforms together. It's rare that you have a Xenium run, for example, without that doesn't make use of some single-cell information.

And, to some extent, same for Visium. And we see kind of the interest going back and forth, where people might run a Xenium experiment and then go kind of look at the Visium or Chromium to put those results in context. Or going the other way, you run your Chromium experiments, you generate data, and then you want to follow up and validate it using Xenium, with you know, for your specific biological system. So we see plenty of examples in there, a lot more of them getting published along those lines.

I do want to emphasize, it's kind of early in this whole process in terms of collecting kind of reliable statistics, because all these products are coming at customers pretty fast at this stage, and it is a pretty dynamic field. But when we look at again, the use cases and the applications, we see plenty of evidence of customers being excited about using multiple platforms. Yeah.

Operator (participant)

We'll take our next question from Matt Sykes with Goldman Sachs.

Matt Sykes (Vice President and Senior Equity Analyst)

Good afternoon, thanks for taking my questions. Maybe this is a bit premature, but, and I know you've addressed the cannibalization comments, but I just wanted to take a little different take on it. And just given your comments on spatial taking time and wallet share from single-cell, is there a way to maybe effectively manage the potential cannibalization if you believe this focus stays in spatial? Meaning, would you want to use this transition to spatial to your advantage, and just try a much more proactive approach to cannibalization, either encouraging existing Chromium customers where spatial makes sense, you know, towards spatial, which I'm sure you're doing, commercial standpoint.

But I just think that given sort of your earlier comments about the ecosystem, keeping the customer within the 10x platform is probably the first priority, and therefore, maybe actively managing that cannibalization could help sort of ease that transition into it. Or is that just too early at this stage to really go forward with those efforts? Thanks.

Serge Saxonov (CEO)

Yeah. So, one thing I would say, you have to be careful using the word cannibalization, because it's not so much a substitution where people kind of are getting results they could have gotten with Chromium using these spatial technologies and approaches. You can't. They're complementary. They extend, they complement, and they supplement. So, it's important to keep that in mind. I think for us, our North Star is really kind of customer success and delivering the value for their particular applications and their questions. And so we want to present the full solution to our customers. And the way that our, you know, sales team kind of interacts with our customers is to really try to understand deeply what are they looking...

What are the questions they're asking, what are their research goals, and then making sure they understand the capability of the products to give them the most efficient way to get to those goals. So I think I would frame it as less about what we are driving for ourselves, but making sure that we've got the full set of solutions that our customers can take advantage of.

Operator (participant)

We'll take our next question from Subbu Nambi with Guggenheim Securities.

Subbu Nambi (Managing Director)

Hey, guys. Thank you for taking my question. Regarding performance in China, revenue was down 16% in the quarter. Could you provide any initial color on the status of the strategy here, given that inventories piling up created some obstacles in last year? How did 1Q fare, and are there any material updates regarding your priority to continue building up backup sales force in China?

Justin McAnear (CFO)

Hey, Subbu, thanks for the question. You know, as we talked about on our previous calls, over the last year, we've worked actively to bring down inventory levels at the distributors and service providers. And just, you know, for the context here, you know, we sell to distributors who sell, you know, primarily to service providers who actually perform the service for the end customer. And so then, when there's any kind of

fluctuation in the demand at the end, you can have inventory stack up at either one of those levels of the chain. And so we saw that throughout last year. And, you know, each quarter, we worked to bring those inventory levels down. We developed closer, closer relationships with the service providers and shared more information with them, and they were able to share more information with us. We've also made some progress on adding distributors in the region to reduce the burden on any given one and also allow us to get closer to the customers as well. And so going back to the last part of 2023, you know, Q3 and Q4 played out roughly like we expected them to.

I would say the same with Q1. And at least right now at this level of demand, you know, we do think that we have, you know—we don't think that we'll see the same issues that we saw last year with inventory, but, you know, that could change if demand changes like it did at the beginning of last year.

Operator (participant)

We'll take our next question from Michael Ryskin with Bank of America.

Michael Ryskin (Managing Director)

Great. Thanks for taking the question. I hate to belabor the Chromium consumables point, but I just want to ask sort of a big picture, theoretical question, not just focusing on the Q1. If you take a look at Chromium consumables over the last couple of years now, going back to 2021, 2022, I think it's safe to say that that's been somewhat disappointing over the last two years. Plus, there's been a number of different issues, commercial missteps. Justin, you were just talking about China headwinds, now you got the GEM-X transition, you know, the broader macro. You're having some of the shift into other spend, into spatial, you know, I won't call it cannibalization, but call it what you will.

Given that performance over the last two years, I mean, and your comments on what feels like a revised Chromium consumables outlook for this year, it sounds like, you know, you're not expecting to hit the levels you were talking about before. Is there some deeper issue at play here? You know, where it's not just any one of these, whether it is competition and, you know, someone brought up NanoString, but there are a number of smaller vendors coming into the single-cell market that are, you know, making inroads in the market. Whether it is just budget constraints from customers, whether it is price elasticity. Just, I mean, is there a way we can revisit sort of the single-cell opportunity in the near term, and maybe take a look at it from that perspective?

Serge Saxonov (CEO)

Yeah, Michael. Yeah, let me kind of take that. So, I mean, a fair point. There has been, I mean, a number of legitimate reasons why Chromium has been particularly buffeted over the past couple of years. The fact is our, you know, our business in China went down a lot over this current period, so that certainly put a lot of pressure. We are this quarter, like I said, going into a particular product transition. So those factors are all at play for sure. But, you know, ultimately, the question of the underlying potential of Chromium there is still there for the same reasons we've always articulated.

Like I said earlier, you know, most from first principles, most researchers should really be using Single-cell analysis to understand their tissues. That's where the biology is, and that certainly is not the case now. And like we said before, the main obstacles to that are, you know, workflow ease, which you know, we're in the process of addressing through various means, and price, which we're also addressing through a number of steps. And then also driving greater awareness through commercial execution and, in general, market development. We do believe there's lots of robust growth ahead, but those obstacles do need to get addressed, and we are in the process of addressing them. The question of competition is, yeah, certainly it's a relevant one.

There's always been some competition in single cell, sometimes more, sometimes less. Over the last, you know, year, a couple of years, there's been a few more players that have come into into this space. We've talked about this before. There's, you know, compared to a year ago, there's somewhat more awareness and somewhat more prevalence of them out there. I would still say that the story is largely the same. Customers do trial them, which does create introduce some friction to the sales process.

It does put pressure on prices, but by and large, customers come back to us due to all the various advantages our products have, like much better performance, much better data quality, much better workflow, much better breadth of applications, customer support, and all the other things that people love about 10X. So it's still largely the same story. And there, you know, we the reason we've been successful up to now is because of the product innovation and the product quality, and that is our North Star. The goal is to keep delivering value to customers. We're continuing to invest in that, both in terms of product development and in terms of customer focus.

We believe the much, much larger opportunity is to drive the overall growth of the market, relative to, you know, the effects of any particular type of competition.

Operator (participant)

We'll take our next question from Tejas Savant with Morgan Stanley.

Tejas Savant (VP)

Hey, guys. Good evening, and appreciate the time here. So I have one on single-cell and then one on Visium HD. Starting with single-cell, you know, you mentioned in an earlier answer that the main obstacle to larger projects was price, and you've talked about the commercial refocusing as well. But I just want to get a sense of how open you are to deeper and more accelerated price cuts on Chromium versus the 10% that you got for the GEM-X launch.

I understand that that could mean, you know, incremental downside to the near-term guide, and, and perhaps it then puts, you know, your commercial folks on more even footing versus, you know, some of the incumbents or the new entrants you were talking about, and helps to reignite customer interest to pull the trigger on larger projects. And then my unrelated sort of second part of the question is on Visium HD. Really good to see the strong start there, and I know there's an interplay of different dynamics here, but to what extent did initial stocking from new users play a role in the upside?

Is there a possibility of a natural sort of sequential breather, maybe a couple of quarters out, before we see the big inflection that you've talked about, given the strong customer interest and how they were clamoring for this product to come through?

Serge Saxonov (CEO)

Hey, Tejas, thanks for the questions. So let me talk to the first one. So you're right. So with GEM-X, we showed a, you know, a 10% drop in per sample price. Now, I do have to say that's a substantially larger drop in the per sale price because you get a lot more throughput with GEM-X, and something that, you know, a number of customers appreciate. Your larger point as to whether, you know, we intend to drive further into the price, yes, over time, for sure. We talked about the fact that ultimately we want to reach the price point of $100 a sample. We're excited by that. We will drive the technology and the products in that direction.

We just want to be careful in how we do that and kind of stepping into that, kind of commensurate it with our other efforts in terms of driving demand and in terms of driving sample volume. So certainly, customers should expect to see more along this trajectory, and, you know, those are the considerations that we're going to keep balancing as we proceed through the upcoming quarters and upcoming years. Maybe on the second question, I can start. So certainly, there's been a lot of pent-up interest in Visium HD, and we do anticipate there are a lot of customers that came into sort of this quarter with pent-up demand. And we'll kind of have to see.

It's early to make a determination around how much of demand we're seeing right now is from the initial bolus versus what the sustained trajectory looks like. Again, there's good indications based on the feedback we're getting from customers once they actually see the data, but it's still very early days on that front.

Operator (participant)

We'll take our next question from Luke Sergott with Barclays.

Luke Sergott (Director)

All right, thanks for the question. So can you guys help us get, give a sense of, like, how many Xeniums you placed? And then, any type of directional commentary on... I know you don't typically break it out, but, you know, the contribution of, of Visium versus Xenium in that revenue base on spatial and how that trended, and then really just kind of figuring out the momentum within those two businesses to offset the single-cell decline for you guys to be able to hit that full year guide, because the back half step up is now outsized of what you've done in the past.

Justin McAnear (CFO)

Yeah, Luke, this is Justin. I'll, I'll take that. In looking at Xenium instruments on our last call, we talked about, you know, a quarterly range of, you know, roughly 50-75 per quarter. For Q1, it was about 50. We would expect that to continue to ramp throughout the year, from the lower end to the high end. With what we've seen so far, last quarter and this quarter, with pressures on CapEx budget, elongated purchase cycles, I would expect that it would be closer to closer to 50 again. And that's for Q2.

And then when we're looking at Visium versus Xenium, overall, you know, looking back at Q1, you know, roughly, roughly half and half between each of those on the spatial side. When looking on the consumable side, when you're looking from Q4 into Q1, you know, most of the growth that we saw sequentially from Q4 into Q1 was driven by Visium HD. And so there is, there has been, you know, a lot of excitement around Visium HD, like Serge said. You know, we've got to see what the sustained level is, but, you know, I would say that the initial level that we've been seeing, you know, has been, has been exciting. And then there's the, the potential for the Xenium consumables to ramp up throughout the year.

You know, we haven't released too many details on that. I would say that we're still looking at a wide variety of usage across the customer base, but we are seeing good trends as far as increasing use over time when we're looking back at the older cohorts versus the new cohorts. And this is also allowing, you know, a couple of quarters to ramp up as well. So I do think that there's upside on both the Visium side and the Xenium side within spatial when we're looking at offsets between Chromium and spatial and our outlook for the rest of the year.

Operator (participant)

We'll take our next question, or I do apologize. We'll take our last question from Kyle Mikson with Canaccord Genuity.

Kyle Mikson (Managing Director)

Great. Hey, guys, thanks for the questions. Quick follow-up on the single cell questions, I think for Serge. You reinvested a lot in that business this year, GEM-X, upstream fixation, other things. That includes additional resources this year that replaced those that were kind of taken out, shifted to spatial last year. Wanted to ask what the company's ROI is in single cell today, given that it's decelerating and kind of decreasing, even negative growth in some cases. And does that kind of make sense to keep investing at this pace if the returns become less attractive and kind of make the argument that, you know, maybe like shift those—that focus to spatial, possibly, I guess, just in line with some of the cannibalization questions earlier? Thanks.

Serge Saxonov (CEO)

Thanks, Kyle. So, look, we see a huge, like I said earlier, potential, large market potential in all three platforms. We are gonna keep investing in all three platforms. Over the past several years, we made very, very large investments on the spatial front. We talked about in the past, how much we shifted resources onto Xenium. Bringing up HD was also a pretty massive undertaking. At this stage, we don't see any reason to let go of Chromium. We're anywhere near it. In fact, the investments we're making right now, we feel like, have potential to open up a lot of new use cases and much broader use cases with much broader categories of customers.

So, we are certainly managing the spend and investment across our three platforms very carefully and continuously, and feel good about the balance and the amount.

Operator (participant)

Thank you. With that, we do conclude today's presentation. Thank you for your participation today, and you may now disconnect.