10X Genomics - Q2 2024

Transcript

Operator (participant)

I'd like to welcome everyone to the 10x Genomics Second Quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star and one. I would now like to turn the call over to Cassie Corneau, Director of Investor Relations and Strategic Finance. You may begin.

Cassie Corneau (Head of Investor Relations)

Thank you, and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the second quarter, ended June 30, 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 investors at 10xgenomics.com. An archive 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 second quarter performance across our portfolio of single-cell and spatial technologies. 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 second quarter, total revenue grew 4% year-over-year and 9% quarter-over-quarter to $153 million, and we were free cash flow positive in the quarter. We saw strong demand for spatial consumables this quarter and a solid sequential increase in single-cell consumables. We continue to hear overwhelmingly positive feedback on GEM-X and its performance, and our customers are further along in the transition from our Next GEM assays than we expected.

Within spatial, we saw continued consumable growth, driven by Visium HD and strong early demand for our Xenium Prime 5K product, which we launched in June. Despite the strong demand for consumables, we're increasingly experiencing headwinds from the challenging macro environment, similar to many of our peers. Our customers are under budget pressure, which has most acutely resulted in cuts to CapEx budgets and elongated purchase cycles, impacting our instrument revenue this quarter. We believe these macro factors and cautious customer spending patterns are likely to persist, putting particular pressure on instrument sales, especially Xenium. As we look to the rest of 2024, we're lowering our revenue guidance, which we now expect to be in the range of $640 million-$660 million. Justin will discuss this in greater detail.

Despite these near-term headwinds, we remain confident in our strengths, differentiation, and long-term potential. Biology needs to be analyzed at the single-cell level in a spatial context. We have built leading platforms for both single-cell and spatial biology. These are still nascent fields, which are drawing growing interest from competitors. As we have always said, we operate in attractive spaces. There has always been competition, and there has been more recently. We planned our strategy anticipating this increase with intent to both grow the field and stay ahead of new entrants. We firmly believe we're well positioned for the opportunity ahead. We believe that 10x is differentiated by significant technology leadership, built over many years of multidisciplinary advances across microfluidics, chemistry, molecular biology, hardware, and software. We believe our solutions are several years ahead of our competitors, and our innovation engine is poised to ensure it stays that way.

We have also built an extensive commercial and sales channel, highly skilled at tailoring solutions specific to customer needs. We're proud of our talented and passionate customer support teams, who provide researchers with the bespoke assistance often required to run complex experiments. Our product roadmap has been intentionally designed to drive costs lower for researchers, especially those who are targeting large-scale projects or those new to 10x. We expect our product roadmap will remain a meaningful competitive advantage as we continue to execute against our plans to remove cost barriers and greatly lower cost per sample and cost per cell. Now, let me share some more detail on recent developments across each of our platforms, beginning with Xenium, which is well recognized as the in situ performance leader....

This quarter, we launched Xenium Prime 5K, increasing plex capability by an order of magnitude, while continuing to deliver our industry-leading performance. This new product, which measures 5,000 genes, features an enhanced chemistry to deliver excellent per-gene sensitivity, improved specificity and spatial fidelity, and integrated multimodal cell segmentation. We're highly encouraged by the initial order rate and early customer feedback. As I mentioned earlier, macroeconomic pressures are having a meaningful impact on Xenium instrument sales. Despite the near-term headwinds, our view of the huge expected long-term potential for the Xenium platform is unchanged. We continue to receive outstanding feedback from customers. We're seeing encouraging trends in utilization across the instrument fleet. We receive a lot of interest from potential new customers, many of them are new to 10x. We're excited to see the emergence of numerous large-scale cohort studies that are aligning around Xenium.

We also believe there is more we can do to deliver on this opportunity and to drive near-term performance, which is why we're expanding our dedicated Xenium instrument sales team as part of our broader commercial strategy. With the extensive range of offerings on both Xenium and Visium, we have multiple ways to support customers in their spatial biology research. Our complementary, yet distinct platforms, support a broad spectrum of customers' use cases and accommodate the ways their research and research questions may evolve over time. Turning to Visium, the leading platform for unbiased spatial analysis. Building on last quarter's Visium HD launch, Visium consumables exceeded our expectations in Q2. As a reminder, Visium HD enables whole transcriptome spatial analysis at single-cell scale resolution, and has continued to drive momentum for the platform.

We're pleased with the positive feedback that we're receiving for Visium HD based on its performance in the field. It is attracting both new and existing customers to spatial analysis. High customer interest for HD also contributed to the sustained demand for CytAssist placements during the second quarter, despite CapEx pressures on instruments. Our experience over the years has made it clear that an instrument like CytAssist is key to delivering a complete solution for customers. CytAssist is critical for enabling a robust and straightforward workflow, one that allows customers to use standard histology slides. Additionally, by ensuring consistency, precision, and preservation of spatiality, CytAssist is integral to high-quality data and more accurate scientific results for our customers' experiments. Customers continue to discover the power of Visium, and we're enthusiastic about its trajectory and its ability to broaden exploratory capabilities within spatial biology. Now, turning to single-cell.

During the quarter, we saw solid sequential growth in consumables revenue. We also delivered year-over-year growth in reactions sold. While there's still work to do to return Chromium to robust growth over the long term, this quarter's results reflect the underlying progress we're making in single-cell and the good momentum we have with the GemX transition. More customers are now aware of and are impressed with GemX and its superior sensitivity, throughput, data quality, and cell recovery, all delivered at a lower cost per sample and per cell compared to our NextGEM architecture. In the first two quarters since launch, the GemX transition has progressed faster than we initially anticipated, with more early adopters seeking out GemX for its performance and cost advantages. Our FLEX assay also continues to gain traction with customers.

In a recent independent benchmarking study from Genentech, that compared 10 commercially available single-cell technologies, FLEX exhibited the highest ranked performance. Researchers also called out FLEX for its unique ability to process FFPE tissues, which they wrote, "Greatly expands the reach of single-cell RNA seq to access the vast catalogs of preserved clinical specimens." The opportunity in translational is one of many reasons why we believe there is still a long runway ahead for single-cell. Large-scale projects also hold tremendous potential. As we remove cost barriers, we expect to open up more possibilities for large-scale studies with more samples and more cells. A great example of this is the Garvan Institute's new TenK10K project, which we announced earlier this week.

TenK10K intends to use GEM-X to map 50 million human cells from 10,000 people to identify unique genomic fingerprints of autoimmune diseases, heart diseases, and cancer. In addition, we see the emergence of powerful new applications based on high-throughput single-cell approaches, from analyzing organoids, scaling CRISPR screens, to building out foundation models that enable AI-based modeling of biology. As we've said all along, there's a large opportunity to democratize single-cell analysis by making it more accessible for new customers and more routine for existing customers. We know price is an important consideration, both for new researchers taking on their first single-cell experiment and current customers looking to scale towards larger and larger projects. As we've said before, our goal is to drive broader adoption and enable routine use by reducing customer costs and making our technologies more accessible....

As part of our strategy, we have been working to drive down costs along multiple vectors, per cell, per sample, per experiment, per project. We strongly believe in the elasticity of demand for our products, and we will continue to execute on our product roadmap to take advantage of this elasticity. To truly deliver on the next phase of 10x growth and impact, we need to evolve our commercial organization. We're taking steps to improve our commercial execution, address recent challenges brought on by the increasing breadth and complexity of our business, and set us up to scale into the future. That starts with the leadership. Earlier today, we officially announced Mennah Moustafa as our new Chief Commercial Officer following an extensive search. Mennah joined 10x in 2022 to lead commercial operations, and has done an exceptional job as our interim CCO.

She has a clear vision for our commercial strategy and has been rapidly implementing foundational processes to better enable the success of our customers and our company. Under Mennah's leadership, we rigorously validated our sales structure to assess what's working well and what's needed for the future. We are now implementing a new organizational structure, which we architected from the ground up to drive our next phase of growth and scale. Our new structure reengineers how we go to market, with distinct teams explicitly focused on driving Xenium instrument placements, expanding consumables utilization with existing customers, and accelerating adoption with biopharma and new and emerging academic researchers. This specialization also helps us to focus and deploy the right resources across our platforms.

I'm confident these commercial changes will, over time, help us drive growth across the portfolio, open up opportunities with new customers and segments, and maximize our scale and impact. I couldn't be more excited to have Mina at the helm as we continue our work to build a premier commercial organization that delivers superior execution and superior results. Now, before I turn the call over to Justin, I want to take a moment to acknowledge the CFO transition we announced earlier this afternoon. After nearly 6 years with 10x, Justin is moving on to another opportunity. Justin has been an incredible leader during his tenure at 10x. He took us public, helped to scale the company, and build a strong financial profile that has generated tremendous revenue growth and positive cash flow. He's assembled a talented team, and he has contributed greatly to the fantastic culture we have today.

On behalf of the board and everyone at 10x, I want to thank Justin for his immeasurable contributions and wish him the best of luck in his new role. Adam Taich will be joining 10x as our new Chief Financial Officer. Adam is a seasoned executive and strategic finance leader with more than two decades of experience in the life sciences tools industry. Most recently, he served as the Interim Chief Executive Officer at SomaLogic, and has also held a number of senior roles at Thermo Fisher, including Vice President and General Manager of the Molecular Biology Business. He brings a unique skill set across finance, strategy, business development, and general management, which will be immensely valuable to take 10x to the next scale. I'm very excited to welcome him to 10x. With that, let me turn it over to Justin.

Justin McAnear (CFO)

Thank you, Serge. It's been an honor to be part of the 10x team over the past six years. I'm extremely proud of how much we've accomplished and how much we have grown. From a single product company to a scaled organization with three leading platforms across single-cell and spatial biology. This was not an easy decision to make. I continue to have deep conviction in Serge, the team, and the opportunity to accelerate the mastery of biology and advance human health. I firmly believe 10x will continue to lead and has a very bright future ahead. I'll now turn to the quarterly results. I'll start by reviewing our financial results for the three months ended June 30, 2024, and will then provide further details on our updated outlook for 2024. All growth rates provided will be on a year-over-year basis, unless otherwise noted.

Total revenue for the quarter was $153.1 million, up 4%, driven by stronger contributions from consumables, partially offset by lower instrument contributions. Looking at our revenue breakout, total consumables revenue was $123.4 million, up 10%. Spatial consumables revenue was $29.3 million, up 150%. This growth was driven primarily by continued enthusiasm for Visium HD, as well as contributions from Xenium Prime 5K, which we started shipping at the end of Q2. Chromium consumables revenue was $94.1 million, down 7% year-over-year, driven by continued customer transition to our new GEM-X products and prioritization of spatial experiments. We saw positive momentum in our Chromium consumables results this quarter. Sequentially, revenue was up 12% as customers worked through the stalling and trialing due to the GEM-X introduction in Q1.

This transition is ongoing. In near term, we still expect the lower price of GEM-X to continue to drive some revenue pressure, but over time, we believe there is elasticity that will more than offset the lower price.... Moving on to instruments. Total instrument revenue decreased 23% to $23.9 million. Chromium instrument revenue was $8.8 million, down 32% year over year, driven by fewer units sold, but up 12% sequentially. Spatial instrument revenue was down 17% to $15.1 million, primarily driven by lower number of Xenium instruments sold. Services revenue was $5.9 million, up 74%, primarily due to increased Chromium service plan contracts. Looking at our revenue by geography, Americas revenue grew 2% to $93.1 million.

EMEA revenue grew 20% to $37.4 million, and revenue in APAC decreased 6% to $22.7 million. Turning to the rest of the income statement, gross profit for the second quarter was $104.2 million, compared to $99.6 million for the prior year period. Gross margin remained flat at 68% compared to the second quarter of 2023. Total operating expenses for the second quarter decreased to $146 million, compared to $163 million for the prior year period. This decrease was primarily driven by lower personnel expenses, including stock-based compensation expense and a decrease in laboratory materials and supplies.

R&D expenses decreased to $62.9 million, compared to $71.5 million for the prior year period, primarily driven by lower laboratory materials and supplies. SG&A expenses decreased to $83 million, compared to $91.5 million for the prior year period, primarily driven by lower personnel expenses, including stock-based compensation. Operating loss for the second quarter was $41.7 million, compared to a loss of $63.4 million in the second quarter last year. This includes $38.5 million of stock-based compensation, as compared to $45.7 million of stock-based compensation for the corresponding prior year period. Net loss for the period was $37.9 million, compared to a net loss of $62.4 million for the second quarter of 2023.

We ended the quarter with $380.1 million in cash and cash equivalents and marketable securities, generating $8.3 million of cash in the quarter. Turning to our outlook for the rest of the year, as Serge mentioned at the beginning of the call, we now expect full year revenue to be in the range of $640 million-$660 million, representing 5% growth over full year 2023 at the midpoint. Our updated guidance reflects impacts from macro level factors and the commercial restructuring. I'll start with the macro level factors. In this environment, we've seen many customers experience budgetary pressures and uncertainties. This has mostly been on the CapEx side, with spending constraints and elongated sales cycles. We expect these headwinds to continue for the remainder of the year.

Additionally, under Mennah's leadership, we are executing on a new sales model that improves how we support our customers. We believe these new functions, roles, and territories may cause some near-term disruption while laying the foundation for long-term growth. While these factors may have near-term impacts on revenue, we continue to have full confidence in the strength of our platforms to deliver strong long-term growth. When looking out over the next 12 months, we continue to anticipate about $15 million-$20 million of total capital expenditures. We also continue to maintain cash discipline in 2024 and in our 2025 planning. Our goal is to self-fund our innovation and scale by investing cash generated back into our business. We still believe we have a great setup to drive positive cash flow for the year and into next year as well.

At this point, I'll turn it back to Serge.

Serge Saxonov (CEO)

Thanks, Justin. I'd like to wrap up by reaffirming my conviction in the strength of 10x and our leadership in single-cell and spatial biology. As we navigate near-term macro pressures, deliver on our strategy and product roadmap, and optimize our commercial structure, we're steadfast in our goal of driving more balanced, focused execution and growth across all three platforms. Of course, none of this would be possible without our amazing team at 10x. Thank you for your commitment to drive, especially in times of change. I truly appreciate how you all rally together and stay focused on delivering for our customers and advancing our mission. With that, we will now open it up for questions. Operator?

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, press the star and the number one on your telephone keypad. Your first question comes from the line of Dan Arias with Stifel. Your line is open.

Speaker 16

Good afternoon, guys. Thanks for the questions. Serge or Justin, can you maybe just add some color to the forecast on the second half of the year? I don't think people are surprised by the guide coming in, but you beat our number on Chromium. So is the new range entirely due to Xenium and Chromium instrumentation? And then what's the new outlook for single-cell and spatial that's implied here? And if I could sneak a second one in. I... Serge, where do you think the breakdown is coming in the forecasting? I know you don't have all the full answers here, but-

Doug Schenkel (Managing Director)

You've made changes internally when it comes to leadership. You've given the sales force better tools to work with. Where do you think you're getting tripped up by what's taking place when it comes to projecting what customers are gonna do here?

Justin McAnear (CFO)

Hey, Dan. Thanks for the question. I'll start with your first part around the range. So when looking at our updated guidance range, 650 at the midpoint, as we mentioned on the call, the update's coming from two buckets, so macroeconomic factors and the commercial restructuring. And when you're looking at macroeconomic factors, the majority of that impact is on capital expenditures, instruments, and in this case, most of it on Xenium, with a smaller impact on Chromium. And so that's the majority of the update. The remainder of that update is due to less consumables, and so with a lower amount of instruments sold, there's gonna be a smaller amount of consumables that go out with those initial orders.

And then also, we're giving ourselves some room for the commercial restructuring as the team settles into their new roles and responsibilities.

Serge Saxonov (CEO)

Yeah, let me—and maybe to touch on your second question, Dan, just, like Justin said, the changes in guide is mostly attributed to the changes in the macro environment, especially, specifically, focused on the instruments. And then, in addition to that, are the changes that we're making on the commercial side, which are going to create some temporary potential for disruption.

Justin McAnear (CFO)

Yeah, and just one thing that I'll add before we go to the next question is just, when we look back at how we said Q2 would end up on the last earnings call, we expected sequentially to grow mid- to high-single digits, you know, which we grew high single digits. We expected most of that growth to be due to Chromium. Chromium grew 12% sequentially. When we look at the second half of this year, the split between first half and second half at the midpoint of our range, it's about 45% of revenue in the first half, about 55%, in the second half.

Just to your question around what's embedded in that guidance, when we look at how much of that to allocate to Q3 versus Q4, we're expecting the same seasonality that we saw last year in 2023, and we're expecting Q3 and Q4 each to have roughly the same growth rate over their corresponding period in the prior year at the top level.

Operator (participant)

And your next question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Tejas Savant (VP and Investor Relations)

Hey, guys, good evening, and thanks for the question here. One on the, on the Xenium side of things, and then one on the leadership changes, guys. So first on Xenium, can you share some color on just, ASP trends in the quarter? Any sense that you need to do deeper discounting in light of, you know, the customer CapEx sensitivities you flagged here? Or has there been any change in competitor pricing models? And then, in terms of the leadership changes here, Justin, it's been good working with you over the years, but Serge, the question for you really is: do you see any evolution in your guidance philosophy under Adam? Share some color on the degree of input he's had, if any, in terms of the new guide.

I guess where I'm coming from is, you know, a new CFO always likes to preserve the right to impair the guide he or she inherits. So just any color around that would be great. Thank you.

Justin McAnear (CFO)

Yeah. Hey, Tejas. I'll start with the first part of your question on the ASP trends on instruments. I know you asked about the Xenium, in particular. You know, over time, from the very beginning, we saw, the ASP and, you know, the, the mid- to low $200s, and we hit the low $200s in, mid part of last year, and that has been, steadily coming up, into the, first part of this year. And so it has been, it has been relatively stable, as of the last couple of quarters, and, no major changes in the ASP.

When you're looking at Chromium, you know, no, no major changes in the ASP between, you know, at the X level or the iX level, but we have seen a shift where there's more weighting towards the iX, where, as before, it was roughly 50/50. But in this CapEx constrained environment, more customers are opting for the, for the iX. And so that does, impact basically the weighted ASP between those two instruments.

Serge Saxonov (CEO)

And maybe to touch on your question around Xenium, the sort of competitive environment around Xenium, there's not really been, I would say, a material change relative to the previous quarter on that front. The big change is really around the budgetary constraints of our customers and their decision-making there, and certainly something that we're looking at to make sure we're able to work with them on in this sort of new environment. As far as the guide is concerned, look, our philosophy is largely the same. You know, we look at sort of the balance of different factors, the upsides and the downsides, and give the best view we currently have on the rest of the year.

Operator (participant)

Your next question comes from the line of Doug Schenkel with Wolfe Research. Your line is open.

Doug Schenkel (Managing Director)

Hi, this is Madeline Mollman on for Doug. I just wanted to ask if you could sort of quantify the impact of the GEM-X transition in the quarter. I think you mentioned Chromium consumables were pretty strong. And then, what are you thinking about GEM-X for the rest of the year and into 2025? How should we be thinking about sort of the continued impact there?

Justin McAnear (CFO)

Yeah, thanks for the question. As far as the GEM-X impact in Q2, I would say that Q2 played out relatively like we had laid out on our last call. When we talked about how we thought Q2 would end up, we included the impacts of the trialing and installing due to the GEM-X transition. Now, a few things: we are a little bit further ahead on the GEM-X transition than we expected to be at this point, and we're also appreciating that there is a little bit of a longer tail towards this transition as well. And so one thing that we're contemplating is those customers who plan to continue using Next GEM, how we can help them transition to GEM-X sooner.

Operator (participant)

Your next question comes from the line of Rachel Vatnsdal with J.P. Morgan. Your line is open.

Rachel Vatnsdal (Executive Director of Equity Research)

Hello, this is Marta Zaremba on for Rachel. Thank you for taking the question. I just wanted to go, double-click on the Xenium placements expectations for the rest of the year. You mentioned that's part of the reason for the guide cut. So how should we think about the Xenium placements for the rest of the year? And then, how are you thinking in terms of whether or not the impact is mostly due to macro or perhaps more on the competition? Thank you.

Justin McAnear (CFO)

Yeah. So Xenium instrument placements are being impacted by macro right now. We're seeing customers, CapEx budgets getting cut, and we're seeing more scrutiny on CapEx purchases. And this is resulting in, like I said, opportunities moving out, due to elongated sales cycles, or some opportunities dropping out with, with budget cuts. I'd say it's more of a elongated sales cycle. You know, one thing when we look at the funnel for Q3 and Q4, you know, we are still seeing a large amount of opportunities, in the funnel for the second part of the year. On our last call, when we talked about the range that we would expect for each quarter this year, we expected it to be between 50-75. Right now, when we look at...

You know, and Q2 came up, you know, a little bit short of that. And when we talk about how we're thinking about Q3 and Q4, assumed at the midpoint of our guidance range, is an average of about 50 instruments a quarter between those two quarters, with a little bit less in Q3, and more in Q4.

Serge Saxonov (CEO)

Maybe just to comment again on the Xenium competition, part of the question. No, we're not seeing a change in the dynamic. The reduction in the Xenium number should be purely ascribed to the changing macroeconomic environment. We track opportunities in the funnel pretty closely.

Operator (participant)

Your next question comes from the line of Dan Brennan with TD Cowen. Your line is open.

Daniel Brennan (Senior Equity Research Analyst)

Hey, good afternoon, guys. This is Kyle on for Dan. Had a quick one on Visium HD. You know, you talked about Visium HD being pretty strong and the uptake from customers being strong. Can you speak to any impact Visium HD has had on customer usage of Visium or even Xenium? Thank you.

Serge Saxonov (CEO)

Yeah, good question. In terms of the impact on standard Visium, the impact has actually been somewhat less than we expected. The standard Visium is still continuing to garner demand from customers. I mean, both for existing projects, for ongoing projects and to some extent, new projects as well. We're pleased with that dynamic. HD has been, to a larger extent, incremental. And then, yeah, I mean, we also have the great performance in Xenium consumables and 5K, especially, despite the fact that there's definitely some dynamic where customers are trying to choose between those products and evaluating kind of which way to go.

Overall, it has been a good quarter for spatial consumables, kind of across the board, I would say.

Operator (participant)

Your next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Patrick Donnelly (Managing Director)

Hi, this is Brendan on for Patrick. I was wondering if you can give an update on, like, the path towards profitability and cash flow positivity, especially with this new commercial restructuring?

Justin McAnear (CFO)

Yeah, great question. So when we look back at Q2, we were cash flow positive this quarter. We were free cash flow positive this quarter. Going back to Q1, if you exclude the one-time, or the payment that we made for the technology acquisition related to Visium HD, would've been both cash flow and, or would've been free cash flow positive as well, and then we hit that in Q4. So there's been a great trend here over the last few quarters. When we talk about the rest of the year, we say that we've got a great setup to drive cash flow positivity for the rest of the year. And so what that implies is that there's some optionality in there.

I know we do reserve the right to make the, you know, targeted investments that we need to do, that we think that's best for the longer term health of the business. And just understand, too, that at this stage, our goal is not to accumulate cash, but it's to reinvest the cash that we generate back into the business. So there could be swings from quarter to quarter, as you're really trying to stay, you know, roughly even to slightly positive and invest all that you can back in. But the most important thing to realize is that, you know, we do have full optionality for how we control this, and how we think about this longer term.

Serge Saxonov (CEO)

Yeah, and on the point around commercial resources restructuring, so to a large extent, this restructuring constitutes a redeployment of resources, where in many cases before, we had kind of overlay functions, and now we're redeploying those functions to have explicit ownership of accounts and customers. We are setting it up so that we're going to be making modest incremental investments in our commercial organization, but it's to a large extent, again, it's more about the redeployment rather than increase. But it does... The new structure does set us up to scale really efficiently going forward and drive growth while maintaining a good cost structure.

Operator (participant)

Your next question comes from the line of Kyle Mikson with Canaccord Genuity. Your line is open.

Kyle Mikson (Managing Director)

Yeah. Hey, guys. Thanks for the questions. I'll just start by saying, like, you know, good luck, Justin, working with you these past few years, and good to see Adam come on board. We know him well. It's a good, good addition to the team. Two questions. First is on Xenium. Why is that one being impacted so much by the macro environment in relative, you know, just compared to Chromium? I guess, is that just due to the higher price point? And last quarter, you guys mentioned single-cell market share being taken over by spatial. Is that still happening? Second question is on commercial organization. Why such a dramatic change here, I guess?

Does that mean you weren't able to correct the factors that were hindering growth in recent years, and then after a few changes, like since 2022, you know, why are you confident that this change is now gonna make you ready to finally kind of re-accelerate the company? Thanks.

Justin McAnear (CFO)

Hey, Kyle, this is Justin. I'll start. So first off, thank you. It's been great working with you as well. As far as your question around Xenium, yes, it's the highest priced instrument. It's quite a bit more than the other instruments that we sell, and it's a big investment for customers, and so that has been the one that has been most impacted. But Visium and Chromium, on the CytAssist and the Chromium X and iX, you know, some impact there, but not to the degree that we're seeing with Xenium.

Serge Saxonov (CEO)

Yeah, and on the question, Kyle, of the commercial restructuring and why now? What's important to appreciate is that we have gained a lot of learnings over the past two-plus years in terms of trying different approaches and kind of adjusting our incentive structure, creating some amount of specialization. And one of the things became clear to us is that without a holistic restructuring, you're always going to be dealing with trade-offs and with compromises as you're trying to optimize for one thing or another.

So, we stepped back, kind of re-evaluating from both in light of all those learnings and from first principles, given where our portfolio is, given where our imperatives are for strategic growth going forward, and rearchitected kind of this the sales organization with those principles and those learnings in mind. We feel really good about where things are landing and kind of a much cleaner now sort of roles and responsibilities that we'll have in our sales team. Also much more manageable territories and much more clear sort of specialization and expertise that we can now deploy and sets us up really well for scale and growth forward.

Operator (participant)

The next question comes from the line of Dan Leonard with UBS. Your line is open.

Dan Leonard (Managing Director)

Great. Thank you for taking the question. This is Luan from Dan. I think we want to touch a little bit on the instrument business that you mentioned. Can you describe the trends within the academic markets and then a pharma market? Do you see any differences? And then also, with all the commercial changes right now, any specific strategies that can help to convert the funnel opportunities to orders? Thank you.

Serge Saxonov (CEO)

Yeah. So I mean, as far as sort of the end markets, academia versus biopharma, we have actually seen sort of challenges in both, especially when you look within Americas, but really widely across the globe as well. Different dynamics, for sure, but both happen to be challenged right now. There is definitely a lot of sort of news and pressure on academic budgets with NIH and so on. So we're following that. But yes, across kind of across the board.

As far as the question around sort of conversion of opportunities and kind of moving those through the funnel, yeah, I mean, that's part of a big part of what we're doing here is creating a specialized sales force, specifically for Xenium Instruments, with its own management structure and specialized CapEx sales executives. And we do think that that's going to help both in terms of opportunity creation and converting opportunities into sales.

Operator (participant)

Your next question comes from the line of Michael Ryskin with Bank of America. Your line is open.

Michael Ryskin (Managing Director)

Great. Thanks for taking the question, guys. Just one for me. About a month ago, there was a deal announced in the space of a small, private, single-cell vendor by, you know, a major global sequencing company. A lot of speculation, debate on where that's gonna go over time, but there's some expectation of possibly some sort of, you know, combination offering or maybe just some-

A more streamlined go-to-market strategy. Realize it's still early, but just curious if you're hearing anything from your customers, about, you know, what that could do for the competitive landscape and, you know, how you think Chromium is positioned if that was to happen, any response you might take? Thanks.

Serge Saxonov (CEO)

Yeah. So look, like we always known, we got strong conviction. We operate in very attractive spaces, very attractive markets. And, to some extent, the entry by, you know, a large sequencing company into the space, you know, demonstrates and validates that conviction. Our strategy has always contemplated, so the entry of new companies into this space. And, what we have, you know, put together as far as product development strategy, as far as commercialization strategy, is meant to both drive growth in these markets and also prevent, or counter the entry, by new companies. Fundamentally, I think it's well acknowledged that we have the best products, great performance, great workflows, the widest breadth of applications.

We also have a really strong roadmap going forward to both lower the cost and drive greater access, which again serves the dual purposes of driving increasing market adoption and also countering any potential new entrants. And it's also important to appreciate that we have a great commercial team on both in terms of customer support and sales that really understands these applications and customers. And you know, these are oftentimes fairly intricate experiments that our team helps our customers with. And so you know, you take all of these factors together, we feel good about our position.

And, again, I wanna reemphasize, we've always contemplated in our strategy, the entry of new players into the space, and we're fully prepared to answer as necessary, but ultimately drive market expansion and greater customer success.

Operator (participant)

Your next question comes from the line of Subbu Nambi with Guggenheim Securities. Your line is open.

Subbu Nambi (Managing Director)

Hi, this is Ricki on for Subbu at Guggenheim. Thanks for taking our questions. You reported China revenue that looks like it grew about 7.7% year-over-year, whereas a lot of peers have reported struggling in China this quarter. Could you provide some color on what you saw in China for the quarter and what drove the strength? Was it all consumables or was it some instruments? And then similarly, in EMEA, the revenue there also looks like it grew almost 20%. Could you speak to what drove the strength there as well, and if that's sustainable growth through the rest of the year? Thank you.

Serge Saxonov (CEO)

Yeah. I mean, so maybe to touch on China first. Certainly, China was a, was a big, big sort of problem for us in the past several years, due to a very challenging environment there. It was very hard to have any visibility, and certainly the market dynamics were very hard to understand and to address. We have been doing a lot of work since last year, really, to get closer to our customers, to restructure some of our distributor relationships, our service provider relationships, so getting much better visibility. And some of that is, you know, I think is improving performance.

Some of it is also just the underlying demand dynamics that have been going somewhat more in our favor recently.

Operator (participant)

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

Matt Sykes (Vice President and Senior Equity Analyst)

Good afternoon, thanks for taking my questions. Justin, congrats on the new opportunity. It's been great working with you. Just two quick ones for me. What is your level of confidence in sort of the rebasing of Chromium consumable growth, given the sequential improvement you saw this quarter? And how much of an offset will the GEM-X pricing, I think, Justin, you mentioned that, will be to this growth over the course of this year and into next? And then secondly, just the reduction in Xenium placement growth, how should we think about Xenium consumable growth as a result of that? And can increased utilization of the existing installed base offset the lower growth in the installed base over the course of this year? Thanks.

Justin McAnear (CFO)

Thanks, Matt. All great questions. I think when we're looking at Chromium, you know, when we went back to the dynamics in, basically going back to the end of the year when we initiated guidance and we talked about, how—what we expected for the impacts of the transition, I think those drivers largely played out like we had expected, although probably bigger in magnitude when we talked about Q2 on the last call as Q2 played out. I think it, again, it's those same drivers on the Chromium on the Chromium consumables. Like, we saw a great sequential rebound on Chromium both on instruments and consumables growing 12% sequentially from Q1 to Q2, and, you know, obviously 12% overall.

When you look on the year-over-year compares for Chromium, you know, we were down quite a bit in Q1, year-over-year, and Q2, that was halved. Embedded into our guidance range when we get into Q3, we expect to get pretty close to flat, year-over-year, if not roughly flat. And we do expect an increase for Chromium in Q4, year-over-year. And so obviously, when you put all that together and you look at the full year, year-over-year compare, just because of the downside that we had in the decreases that we had in Q1 and Q2, still gonna have a decrease for the year. But this is gonna hit instruments harder than consumables.

I do think that, you know, the instruments, there's other factors at play there in the macro environment as well. But I think what gives us confidence is, we're seeing the dynamics play out at the customer level like we had expected. And you know, that update is or that is incorporated into our guidance update. For Xenium, great question on the Xenium pull-through. You know, we have been seeing decent growth in spatial consumables with lower Xenium placements. You know, that would mean lower consumables in the future. But as we get past these transitory factors right now impacting us and start placing more instruments, you know, obviously, we would expect that to pick up.

When we look at our earliest cohorts, earliest purchasers of the Xenium instrument, they're still increasing their utilization. We are seeing overall that there's a decent ramping period for customers from when they buy the instrument, go through the installation training, and start using it more reliably. That's about probably a two-quarter ramp-up period. So we are seeing the difference between, you know, customers that have had the instrument for a quarter or two quarters versus those that have had it longer. But I think the important thing to take away is that there is this trend towards, you know, the increasing utilization over time. And then, you know, we just introduced Xenium Prime 5K, and there's a lot of excitement around that, and that can have some impact on the pull-through and how customers use the instrument.

And so, you know, it'll be interesting to see how that plays out as well, but there's been, there's been a ton of excitement, around that too. And I do think that, you know, overall, this is an instrument that, could, you know, have an overall high rate of pull-through. You know, for, for an instrument itself that is a, that is a low-margin, instrument, you know, we have to believe that longer term, that, that the, that customers that are investing in that, and we ourselves, investing in those placements, believe that there's gonna be, you know, decent pull-through, in the future. And so feel good about where things are trending, but not ready to share more detail than that at this point.

Operator (participant)

Your next question comes from the line of Matt Larew with William Blair. Your line is open.

Matt Larew (Analyst)

Yeah, good afternoon. Serge, you know, last quarter, you obviously was in the context of pricing for Chromium, talked about, you know, longer-term goal of $100 per sample. You've talked about GEM-X, you know, being one step on that journey and the belief that when you reached an appropriate pricing level, there would be significant elasticity and demand there. So just kinda curious where you view the progress that you've made over the last few months, how much of the continued journey is, one, reliant on additional technology advancements and product enhancements versus perhaps commercial or strategic decisions on your part?

Justin McAnear (CFO)

Yeah. So, we do believe strong, as I mentioned earlier in my prepared remarks, and I've been saying for a while, that there's strong elasticity of demand in the marketplace. With GemX, we actually reduced the price per sample, by about 10% relative to previous NextGem, architecture. And also it decreased the price per cell by a significant amount because it has twice as much throughput, so the price per cell went down by more than a factor of two. We are seeing customers appreciating that, for sure, and quite a few running kind of larger numbers of cells, to, as a result of that.

The first order effect on this tends to be more they either just spend the same budget as they would have otherwise, just kind of running more, or, to some extent, some of them also just taking the lower price and running the same number of those samples or cells. But in the long run, we do believe and we see some evidence of that from our Flex products that the lower prices will ultimately drive to much more demand and market expansion. Again, GEM-X and our Flex launches are sort of steps along that journey. Again, the initial science is still too early to be, you know, to be pointing to kind of massive changes, but we're feeling good about where things are headed.

Going forward, we do expect product configurations that will lean further into the elasticity of demand here. We have plans to address the different cost bottlenecks that our customers are facing, whether it's on a you know per experiment basis, per sample basis, per cell basis. And we'll be rolling those out in due time. And we also are cognizant of you know putting more commercial focus on these efforts, too, as we go forward. And part of the goal of our restructuring is to enable that as well.

Operator (participant)

Your next question comes from the line of Luke Sergott with Barclays. Your line is open.

Luke Sergott (Director)

Great. Thanks, guys. I just kinda wanna go back to the Xenium conversation about the consumables and pull-through. So, you know, talk about what happened in the quarter from a pull-through perspective. You know, are you seeing any air pocket there waiting for the 5K? You know, with the strength in the Visium in the quarter, does that mean that, you know, the Xenium pull-through has really stepped down? Just kinda as we're thinking about going forward here, what that progression will look like.

Serge Saxonov (CEO)

Well, so, yeah, Luke, as I mentioned before, I think we actually had strong demand from kind of both sides of the spatial business, both in Visium and Xenium. There was definitely anticipation of the 5K that, you know, that was causing some amount of pausing with customers earlier. But like we said, the actual ultimate orders were really healthy, like, once we started shipping the product in June. So, yeah, so I think the underlying dynamics are strong, sort of on both sides across both franchises.

Justin McAnear (CFO)

Yeah, Luke, and just to add to that, like, when you're talking instruments, looking at CytAssist versus Xenium, like, CytAssist, although there has been a slight impact to that, it's been pretty solid, quarter to quarter, and so, you know, bigger impact on Xenium instruments. But I do think in this environment with CapEx pressures, you know, some customers looks like are opting to try out CytAssist and Visium before jumping to Xenium because, you know, we are seeing less of an impact there, and then just hearing some of that anecdotally as well.