10x Genomics, Inc. (TXG) Earnings Call Transcript & Summary

Okay. Good afternoon to the audience and thanks for joining us here on the second day of our 2nd Virtual Growth Stock Conference. We appreciate Serge Saxonov and Justin McAnear from 10x Genomics meeting with us today. As some of you may know, 10x is a leader in single cell space and really building a business to address a variety of technologies, spatial, in situ and some other, we will discuss today. So we appreciate you both being with us. Just quickly before we jump into the story here, we need to mention that for a complete list of disclosures, you can visit williamblair.com.

So to start, Serge, while you're not going to formally walk through a deck pres today, given that this is a generalist conference, I still think it would be helpful for you to provide a brief overview of 10x. So maybe you could spend 5 minutes just helping the audience understand brief history of the company, the markets that you target and how those markets and your participation in them has evolved over time.

Yes. So I'll start kind of a very highest level, about sort of the premise of the company and the premise of why we do what we do. So like one of the fundamental beliefs that we have when starting a company and why [ general in those spaces, ] we see this as the century of biology, where some of the greatest value creation opportunities in history are going to be unfolding over the coming decades, like cures for diseases, just fundamentally advancements in health care. And the big thing -- those kinds of possibilities are becoming tangible, possible things like curing cancer, addressing Alzheimer's and now infectious diseases. But the big challenge, the fundamental sort of vastly oftentimes underrated issues that we understand very little of the underlying biology. And like the amount that we don't understand, don't know as much greater than what we do know. At the same time, sort of our understanding of biology is sort of on this exponential curve, and a lot of it is driven by new technologies. Being able to measure and manipulate biology, and as the kind of -- the sort of the notions like the more biology you learn, the more -- the easier it gets to learn more. And so just like solving kind of a jigsaw puzzle, you're on an exponential curve. And our premise for starting 10x is that the world needs the best way to accelerate science and, ultimately, health care is to build new technologies and tools to measure biology. And especially, specifically what makes biology different from all the other sort of disciplines on what makes it challenging is its inherent complexity. It's a huge number of cells and molecules interacting with each other on huge number of ways. And to address that complexity, you need scale. You need to be able to measure lots of things at large -- at the right resolution, the right scale. And so we started the company back in 2012. I mean, literally, just me and my co-founder in a coffee shop in San Francisco, kind of looking at where the world was going, where the world needed and started sketching out some ideas around developing these technologies. We went through your national work based in the Bay Area. So you have sort of standard start-up iterations of raising seed rounds and Series A. And the rest of it and 1 commercial with products that combine hardware, chemistry and software. And we strive to provide complete solutions, basically, delivering products to help scientists understand measured biology and make new discoveries. So that's the fundamental premise of the company. Our goal is to be really, really good at building technologies. We built up deep expertise across multiple disciplines, again hardware chemistry, biology, software, data analysis. And we're bringing them together in a very multidisciplinary kind of approach to build these products that kind of are leading and will lead this revolution that we see happening in the life sciences. Now in terms of the markets that we play, so one of the fundamental kind of areas that we identified from the very beginning is this idea of single cell analysis. So all of us are made up of cells. The cell is the fundamental unit of biology. Each human has close to 40 trillion of them. And up until recently, really up until we came along, the way the biological analysis has been done is by whenever you take a sample, whether it's blood or piece of tissue from person, you take all the cells in there and you mix their contents together, and you measure if that's average. But as it turns out, there's so much like the fundamental biology actually happens at the level of the cell. And with our products, you can now -- for the last several years, you could take those samples and individually interrogate every cell across thousands to tens of thousands of cells and see the full complexity of the biology that's going on within this -- each individual cell. And so that has really kicked off what is now kind of recognized as the single cell revolution happening across biology and lots of discoveries. Just about every area of every disease, every area of life sciences. It's hard to think of an area -- the field of biology that has not been fundamentally transformed or touched by single cell analysis. And we've got -- we now have over 2,400 instruments installed around the world. Each of them is being used around the -- pulling in about $150,000 worth of consumable recurring revenue on average per year. And that's our basic business model. That's -- and the drivers are both in terms of increasing the usage and placing -- getting more customers and placing more instruments around the world. And we have one of the central premises of the company is innovation -- technological innovation. We keep investing. From the beginning, we've kind of set up really well to invent and develop new technologies but also to productize them and to commercialize them. And we keep investing very aggressively in terms of developing new products and new applications, has been kind of that cadence from the very beginning of -- since the founding.

That's great. And so part of those investments have led to acquisitions and improvements in areas like spatial and in situ. And so something that I think is really unique about your approach is developing, as you mentioned this [ couple of ] solutions and creating this ecosystem of solutions for customers to help solve complex problems. So maybe help us understand why spatial intervention and in situ are important to your customers and how collectively that set of solutions really will function and be differentiated for customers?

Right. So I think there's 2 threads to the question, these new platforms and then the completeness of our solutions, the way we -- our philosophy of product development. So one thing as I mentioned, kind of single cell -- distortion of single cell analysis that has become really central to biology. And that has become -- this is something that we expected to happen, but has not been proven out by a lot of discovery that has been done over the past several years, a lot of it driven by products. The fact that every human tissue, just about every biological system has this huge complexity, cellular kind of heterogeneity. There's lots of cells, all doing their own kinds of things with their own gene expression networks. So that has become clear to us. And that -- what that means is that in the future, if we kind of fast forward to some number of years down the line, basically, all analysis, whether for basic research or for clinical diagnostics, whenever you start with tissue or cells, it will have to be done with single cell context to like actually recognize cells. And then when you think about how people would do that kind of analysis, there's really 3 types of approaches. One is with our Chromium system, which has been in the market now for several years for what's called dissociated single cell analysis, where you interrogate each cells, kind of separate them and look at them individually. Another approach is the spatial analysis where you would take -- you would measure -- you would analyze actual tissues. So solid tissues at -- with single cell analysis where you see what is happening, but also where these -- the molecules are in the tissue. And that is actually being addressed kind of initially by our Visium platform, which we just launched. And then the third approach is what's called in situ where you're analyzing against the kind of tissue -- solid tissue and measuring the molecules of that tissue, but there, you're doing it right, kind of doing your analysis without taking those molecules, putting them on a separate analyzer. Kind of an integrated system. So those are 3 kind of complementary distinct technological approaches that both together essentially provide the entire -- the means of doing this kind of research in the future, where ultimately we think every tissue will go through 1 of these 3 approaches. And we chose to make sure we develop all of those solutions. Now the other thread that you pointed to is that we do philosophically, we strive to provide complete solutions for our customers, very much driven by the questions -- the biological questions. What is actually -- what discoveries need to get made, what our customers will be interested in, and then building full solutions to kind of going through the workflow, addressing data analysis and visualization. And so we see ourselves as much more of an applications company rather than a technology company.

Got it. And hand-in-hand with the expanding solution set is access to additional market opportunity. And so either Serge or Justin, I think it'd just be helpful from the current opportunity you've characterized of around $15 billion to the broader opportunity set of around $60 billion, how you see yourself accessing this additional market opportunity? Certainly, things like FFPE for Visium or a key component getting translational. But maybe just help us understand market opportunity today versus what it might look like in the future.

Yes. So one of the challenges to our business is that we are fundamentally creating new markets. Like the notion of single cell analysis was -- barely existed when we launched and it is a large and growing market now, and it's -- and that's -- that has been the trajectory that we expect to continue with drawing new customers and drawing new dollars from all across life sciences sort of tool spectrum. So we talked about kind of $15 billion as the initial set of customers [indiscernible] that should be available to us kind of in the near and medium term. These are the scientists that are already doing kind of high throughput research, where they're already looking to do large-scale experiments using other technologies that aren't directly, again, mappable to what we're doing, but we -- they're mentally kind of amenable to doing their -- many of them are ready to do the kind of experiments that we are suggesting and amenable. Over time, again, as our vision of microbiological research needs to transition to this high resolution, large scale, where you actually see the individual cells that resolve cell complex, we see more and more of life science tools market, which in total is about $60 billion, also becoming available to us over time. And so again, the notion is like we're not replacing any particular technology. We are not addressing any particular narrow, like a specific use case, it's really kind of converting much of research to this new way of doing science. And very early in that journey.

All right. Well, I think that's a great setup for folks now to dive and maybe a couple more specific set of questions here. And the first, I just want to ask around COVID in the recent quarter/ So just be curious for your thoughts on the quarter. We view it as a very strong quarter, of course, but I think it probably fell short of some investor expectations. So I do think it would be helpful, to be honest, to get your perspective on the quarter, but also maybe generally, given that you're still a relatively new public company, just how you think about setting and adjusting expectations and guidance throughout the course of the year?

Yes. So it was a solid quarter. We grew revenue 47% year-over-year. We grew the instrument installed base over 40% while increasing our average pull-through per instrument. And we beat across the board as far as the P&L goes with gross margin and profitability. As far as expectations go, as you mentioned, we are a relatively new public company. And I think that investors are still getting to know us and learn how we communicate. We aim to be direct as evidenced by how we navigated through 2020, sharing the percent of customer labs that we're open, giving mid-quarter updates on how orders were progressing compared to the year before, basically, sharing what we're seeing. And we aim to provide best estimates as far as our guidance goes.

Fair enough. And maybe on that point, your customer activity in the quarter perhaps didn't recover as quickly as others and you spoke on the quarter why that was. But you noted about 90% of customer labs were operating at varying degrees of capacity. I think it's back in the fourth quarter. And we're going to work their way back to normal in the fourth quarter. So just curious if the strong vaccination deployment progress and the recent changes in CDC guidance for vaccinated individuals has led to a shift in activity? Or what kind of external data points you monitor in terms of tracking improvement in market activity, maybe both through academic and biopharma customers?

Sure. So I think to answer this question, it is important to go back to Q3 and Q4 of last year when labs first started opening back up. So during the course of 2020, we went from 25% of customer labs closed at the beginning of Q2 to -- or 25% open to 60% open at the end of Q2, 80% at the end of Q3, 90% at the end of Q4. So we had a pretty -- we experienced a pretty quick start to the recovery in Q3 and Q4. And on that Q4 earnings call, we shared additional information as far as how we would see this year progress with roughly being around, even though 90% of labs were open, we still have these inefficiencies that customers are dealing with. Social distancing, decreased lab time, not having customer reps available on site. And really, Q1, we didn't see much improvement from Q4, and this has continued on into Q2. So as we track along in Q2, the metrics that we look at, customer reps are now being allowed on some customer sites for the first time in the last year. So that's good. We're looking at the overall request for quotes. And basically just tracking the customer activity. For some of these customers that are coming back into the lab, they need a little bit of time to get settled and get their experiments lined up and then go ahead and make their orders. So last time when we shared information here, we expected Q2 to be similar to Q1. We expected to see a turnaround in Q3, but really start to see the impact of that in Q4. So we are expecting a back-end loaded year. There is already the seasonality that makes Q4 an outsized quarter for the year. But we're expecting that to be magnified somewhat by the return to work COVID dynamics.

Okay. And then maybe a more qualitative question, Serge, around culture during COVID. So you've continued to rapidly hire and onboard people throughout the pandemic. And I know, again, as a company, your culture of innovation is a foundational part of the company. So I think just it might be interesting to hear you describe how you work to maintain that culture of innovation while working remotely and growing rapidly. And are there any metrics that you track quantitatively beyond sort of the feel the culture often is defined by?

Yes. And it's a great question, and I like, it's a key question because that is the source of the ultimate successes the people will have and the culture. And it's -- I wish there was like a clean set of metrics that you could measure culture-wide, but then that doesn't -- I think that would -- that doesn't exist, and I will get arbitration away pretty quickly, I would imagine. So there's a lot of qualitative feels. I mean we certainly did a lot during the pandemic and still are doing in terms of communication. I mean I think that's one of the biggest elements that was sort of top of the mind worry for me as people were sort of restricted, had to go back into their homes and they could no longer interact. We've got -- we hold all-hands meetings very regularly, very frequently, lots of communication as much as can be done through virtual kinds of meetings. There's some tangible measurements of how well we've been able to do this. So just looking at the pace of product development and the number of new products, many of which we've talked about, that are coming out, that gives, I would say, like a really good measure of the manifestation of the things that we've been doing internally. The fact that people who have been in the team has done an incredible job of keeping the product development going. At the same time, also, other areas of the company, whether it's manufacturing operations or the commercial folks keeping the sort of the engine revving. So all across -- I mean I would say sometimes diversity brings people together, and we certainly try to also leverage that for -- to build an even stronger culture many ways. At the same time, we have been growing rapidly. We have added quite a few new people through the pandemic and, yes, this is something that I always spend a great deal of time just thinking about and the rest of the executive team as well. And we put in a lot of effort, a lot of work, both tracking how things are going and also, again, being there, communicating with folks to help keep driving that connective tissue and that sense of urgency and innovation.