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

Good afternoon, everyone. I'm Matt Sykes, Senior Research Analyst for Life Science Tools & Diagnostics at Goldman. And I have the pleasure of welcoming the 10x Genomics management team to present to us today. We have Serge Saxonov, the Chief Executive Officer; and Justin McAnear, the Chief Financial Officer. Serge, Justin, thanks so much for being here. We really appreciate it.

Thanks for having us. Thank you.

Maybe I'll turn it over to your first, Serge, to kind of set the stage a little bit, talk about maybe the most recent quarter, expectations for the year, but just also some of the key drivers and things that you want to -- can be top of mind for investors for 10x?

Yes. Maybe I'll start, Justin could add any additional color. But -- so first of all, just on the most recent quarter, I think the top line and the first order message is that we had really rapid growth relative to the previous year. If you go back to 2020, the Q1 there, which was only impacted by COVID back then in a minor way, we grew close to 50% from 2020. So that's the first order impact. Now of course, there's still -- the point we made is, there's still some amount of COVID headwinds. We would -- we see this as kind of a second order effect, but it's still there, it's still with us. We bounced back really strong in 2020 in kind of the third and the fourth quarter as people started coming back to labs. But then from that point on, there's sort of like once people reach the sort of roughly 90% efficiency, operating efficiency being in the labs, which we talked about in Q4, it's been sort of a nice improving plateau, like going from that 90% to 100% just takes much longer. And is mainly a function of all the restrictions that exist at the actual institutions. People are back, but they're not operating the way they were operating before. They can't be in the same labs they were before, they can't be with the same people that were there before. And so there's just sort of that kind of, again, the second order effect of COVID attacks on top of how much people can work. And we do expect that this -- as we look to the year, Q2, what we said, was not going to be really -- from that perspective, materially different from Q1. And as the year progresses, we do expect that things opening up especially as vaccine rollout has been happening as we look to Q3 and Q4.

Yes. And to add to that, it was a solid first quarter. As Serge mentioned, we grew revenue nearly 50% from a pretty good comp the prior year. But what I think is remarkable is that we increased our instrument installed base by over 40%, while slightly increasing the pull-through at the same time. And it was solid performance down the P&L as well from margins, spending, profitability. As far as expectations for this year, we laid those out earlier in the year. But on the Q1 earnings call, we said that we expected Q2 sales would be slightly up sequentially. And that's based on the environment really being the same from the end of Q4 into Q1 and into Q2 as we had expected. And so naturally, this increase from 90% operating efficiency to 100% is really going to be less of a step-up than we've seen previously. But as we contemplate the rest of this year, moving forward, our view on that hasn't changed and we would reaffirm what we said in the first quarter call that we expect to see some turnaround in Q3, but not really see the full impact of that until Q4. And revenues are seasonally stronger in the back half of the year, but this is going to be magnified somewhat just due to the dynamics around COVID. But the main driver of our growth is going to be the ramp in our newly placed instruments, we placed a lot over the last year, and just continued general growth in the installed base and existing customer usage.

Got it. That was a really helpful way to kick this off. I think if I start really high level with you, Serge -- and you've often talked about the Century of Biology. And as I think about the sort of the significant amount of innovation just in the life sciences industry over the past few years and how you guys have contributed a large part of that, could you just maybe reflect a bit back on what your original vision was for 10x? How you sought to differentiate your technology, bringing analysis to single cell level, and then maybe what lessons you've learned along the way? Or I guess, maybe a better way to say, like what do you know now that you would have loved to know back then when you actually founded the company?

Yes. Well, so maybe starting at the highest level. It's kind of astute to reflect back. As far as the conception of the company and the strategy and even a lot of the details that we have there envisioned from the very beginning, but it has played out in many ways as we hoped or planned for. We set out the company, the highest level of the conception of 10x was that we wanted -- we're seeing this revolution happening in biology. This exponential increase in our knowledge and ability to impact biology and health. And we also saw that this -- the driver of this is going to be new technologies to measure and manipulate biology. I want it to become incredibly good at building new technologies to drive this revolution forward. That was the -- like the underlying vision behind really forming 10x and how we thought about building it. We also recognized that the crux of what makes biology so challenging is it's inherent complexity. These are really, really the most complex things in existence of biological systems. And really, the way to address the complexity is by creating technologies that can measure biology at scale because, again, these are the complexity, you have lots and lots of things that are like acting and attracting with each other. And in particular, it's very -- it was kind of very clear to us based on first principles that single cell analysis was going to become very important. And so we've built out the set of technologies to be able to measure individual cells at very large scale. And yes, there's some amount of -- going back to 2012, 2013 when we got going, certainly, a lot of skepticism of just how useful single cell analysis was going to become, it has proven now to be incredibly fundamentally useful, of course. And so a lot of those things have played out kind of the way that we envisioned and wanted them to play out. To your question around what things would you tell yourself I wish I knew back then. Well, so one sort of obvious one that comes to mind is that our very first product was actually around -- not around single cells, but around what we called, Linked-Reads genomics. So being able to measure long-range information, getting a complete long-range sequencing information from genomes. And it was based around similar technology stock. Again, you kind of leverage this ability to measure -- to deliver scale, but aimed at a different application. And it was one of those things where I think we saw there was a huge potential in this technology and this application, lots of people we talked to also saw a great potential. But in the end, the market turned out to be significantly more circumscribed than the single cell and the subsequent set of products that we released. And so you can never -- you never really should judge a decision by the outcome, but had we known this approach, certainly, we would have made prioritized decisions differently. But at the same time, I do -- one of the premise -- fundamental premises of how we develop products is we want to have -- we want to go for home runs, right, products, concepts that have potential for exponential impact. And that means that you have to be willing to take chances and gain conviction based on first principles, and it's not always going to work out because market dynamics change and things kind of evolve. And this is one of those examples where the products were certainly great and had -- lots of customers loved it, but not the same kind of potential as some of the other ones.

Got it. I appreciate that. But I think it's always interesting to know. If we just kind of stay high level but move to the end markets, I mean you're following the path of many life science tools companies where you start in academic, move to biopharma and ultimately get to clinical. You're currently in the process of building out your customer base in biopharma. But as you move along this process, how do you make sure you keep the specific interest of each customer base in mind when designing products and providing services? Meaning, I think companies sometimes can get caught up with the potential growth of a new end market but maybe at the same time, ignore their core customer base. So how do you manage this transition dealing with different types of customers?

Yes. I mean, so one thing is that we see it as maybe less of a transition, but more of an expansion, right? So I mean, I think that's really kind of an important precept to start with. I think there's a tendency in our industry to -- both from companies and investors to underrate the potential of academic markets. I think partially it's because they're more challenging to quantify and understand kind of by definition because this is -- these are researchers who are always looking for new things relative to biopharma and clinical end markets where you can quantify your TAMs much more readily. You look at the number of patients for a particular disease, figure out the price and you kind of -- you get your numbers. So there's sort of that maybe disconcerting uncertainty around the academic markets, which I think tends to make -- guide people away from them. And we have conviction that there's a huge, huge potential. Certainly, we've made -- we've kind of grown up in academic market and I think we've just barely scratched the surface there. So it is important for us to continuously kind of reflect on that fact and make sure that we keep investing in that core because tons and tons of runway. If we never do anything in biopharma and clinical, we still have decades worth of growth within academia. Having said that, our ambition -- ultimate ambition as a company is absolutely to impact human health and to kind of move downstream and to have a more direct impact, which means that, certainly, impact on drug development and also on clinical diagnostics, ultimately. So that is definitely within our sites. And we have been selling into biopharma just about from the beginning. But initially, just as it always happens in these kinds of -- with these kinds of products in kind of more tech development groups and now have been progressing downstream from there into drug discovery, kind of lead optimization, and there's actually some work now happening in terms -- in clinical trials. These are more like secondary exploratory endpoints. But we see that we're going down that route and we're definitely investing internally kind of on the commercial side, also on the product side more and more to release new products and new features that are aimed at those customers. But we always -- we're certainly closely tied with our academic customers. And I guess one more on that side, I would also emphasize a lot of our -- the people who work within the company are themselves in some sense are or used to be key opinion leaders within academia. And so that helps us also keep sufficient focus on that market as we grow. I mean as part of the philosophy as well as we expand into new markets, part of it is also bringing the right people inside the company to push forward on that strategy.

Got it. Got it. That's really helpful way of explaining it. When I think about the cadence of product development that 10x has done, it's been really impressive. And obviously, the Xperience event earlier this year was a great example of what you guys can do. And I often think about how you're able to do this and it seems to me that you're guided in large part by customer feedback, ideas and issues in development of these products, solving problems, really. Do you think that it helps increase the chance of success of a product if you actually start with the customer in terms of solving their problems? Is that how you think about it when you come out with these products? I'm just trying to marry the number of products that you come out with and how much of that is just responsible from customers coming to you saying, it would be great if you did this or it would be great if you did this and then developing a product from it. Could you just talk about your product development strategy?

Yes, right. So I mean it is crucial, right, and something that is becoming more and more of an increasing advantage by virtue of our commercial success, now having that customer input. I would say a couple of things. First of all, like conceptually the company for us, what we care about is solving biology and kind of starting with those biological questions and biological problems in contrast to having a particular technology and then looking to see where that technology has applications. Much more where -- what motivates us are discoveries that our customers make and ultimately, patients that -- people that will be impacted through those discoveries. And so we do tend to work backwards from starting with that kind of problem-solving statement and trying not to get attached to any kind of technology when we develop products, right? And so that is really important for us. In the early days, in some sense, we had to have like our own sort of first order conviction before we had customers. And part of it comes from having kind of the right people in the company, right, with our employees who are, a, like motivated to make an impact and move biology forward; and b, a lot of them having come from the backgrounds where they would have been customers of these products themselves. And so that helps us to have some amount of internal conviction. And then absolutely, like as we get to the market -- as we've gone to the market, we certainly have made it a priority for us to form partnerships with our customers, see our customers as partners on the commercial side and engage with them kind of on a deep intellectual level. We look for what they're happy with, specifically what they are not happy with and what things are on their minds that they would love to see. And both on sort of mundane kinds of things, like what existing products were -- what is bugging them and what can we like streamline and you see a lot of examples of products that we released, whether it's Chromium Connect or CytAssist or a lot of other sort of packages to specifically kind of -- to address bottlenecks in workflows. Also looking what are like the next set of capabilities that would naturally come along with the products that are on our customers' minds. And then also kind of what are they looking multiple years down in the future, like what are the emerging sort of needs that they see. And again, different kinds of customers have different horizons. And you kind of -- you take -- and we take all of that input and kind of -- as inputs into our product development strategy and then kind of marry it with our, again, our internal conviction. And the nice thing too is like over the last several years, there has been a virtuous cycle because when the customers see that the things they tell us actually manifest themselves in products, sometimes layers that come out and then they can use, that motivates them that much more to tell us what they're thinking and binds them closer, kind of -- again, kind of engages them on a deeper level. And it becomes a source of this kind of reinforcing advantage -- soft reinforcing advantage as we move forward. And ultimately, right, that's the sort of the greatest motivator.

Yes. Totally agree. That's well said. I think just focusing on academic labs. And you made some comments at the outset about reopenings, but more importantly, the efficiency of those labs and there still needs to be some ways to go there. But as you know, particularly in the U.S., as the vaccinations continue to kind of move throughout the country, like where do you expect this operating efficiency of labs to be over the rest of the year? And do you feel like -- and a lot of questions that we get is, is there a lot of pent-up work that was either put aside because of COVID or unable to do because the lab was closed or you weren't able to get in? That level of pent-up demand in terms of work will actually continue for some time. And labs will theoretically have to operate at 120% capacity over the next 6 to 7 months just to catch up, like when you talk to your academic customers, like do you get the feeling that, that is the case? And where do you see us kind of getting to full efficiency where we were pre-pandemic?

Yes. So I'll take that one. We saw a strong recovery at the end of last year. And right now, we're progressing asymptotically towards full back to normal or full 100% efficiency. And I really think that COVID is probably more of a second order effect, given where we are today. We said that the environment that we saw in Q4 -- at the end of Q4 and into Q1 will continue into Q2. We still think that, that's the case. And even with wider vaccinations, we still have headwinds to efficiency and utilization. Sales and support staff are only now being let back into customer labs and this personal interaction with customers is really important. And operating protocols are varying widely with restrictions still in place in many cases. And so we're generally working with our customers to -- as they become more comfortable getting fully back to normal in the labs. And so we do expect to see additional improvements when we get into Q3. We expect to see the full impact of that in Q4 and hope that in Q4, this will largely be in the past. And to the second part of your question around just this bolus of demand, while customers are eager to get back in the labs and get fully back to doing their experiments as they were accustomed to prior to COVID, we don't think that there's going to be this bolus of demand with them coming back. It's less of a binary event like we saw at the end of 2020, less of a material increase in utilization and more just, like we mentioned, asymptotically approaching that 100% efficiency.

Got it. Got it. And maybe just staying with you, Justin for a minute. Just if I think about sort of the back half of the year for you guys, I think about the number of products that you're rolling out, and I know some will be in '22, but you're rolling out some this year as well. You're increasing head count amongst your commercial team that you guys outlined. Government funding, which there'll be a lag to it, but clearly, that seems to be going up. And I think about the guidance you guys gave, and I'm just thinking about, is there an element of conservatism? Or is there just still continued uncertainty and it's just difficult to kind of see -- to see where we might be at the end of the year?

Yes. So overall, I think it helps talk about just our philosophy in general with the information that we share and how we think about guidance. But we aim to be direct with investors and talking about what we're seeing in the business and what we're expecting throughout the year. And this was evidenced in how we navigated through 2020, where we shared the percent of customer labs that were open to the best that we could estimate. We gave mid-quarter updates on how orders were progressing compared to the year before. And when we laid out our guidance for this year, we contemplated all the factors that you listed, new products in the roadmap, headcount that we're adding and then how we assume the COVID recovery would go. And so new products, new headcount on the commercial side and the R&D side, those are all going to help increase revenue, but they do take some time to have an impact. And so the heads that we're hiring right now are really more long term focused, thinking about 2022 and beyond when we have increasing the complexity of our customers and the products that we offer. And so as far as the funding side, we are encouraged by the recent developments that we see there, but we think that, that's more of a 2022, 2023 impact. And then overall, just looking at the back half of this year, ongoing instrument placements, continued increases in utilization will be the key drivers of our revenue. But we think the guidance that we gave represents a fair assessment of our expectations. Upsides would be faster reopenings, product -- new product ramps accelerating faster than we expected and downsides would be the inverse of that.

Got it. Justin, I appreciate that clarity. And maybe Serge I would turn back to you, just -- you obviously introduced a number of products. We attended the Xperience a few months ago. Maybe talk about, we're a few months on, any early feedback on particular products where you feel customer demand for it. It could be a differentiator in terms of growth this year. Or maybe put another way, like what are you most excited about in terms of the products that you announced? And where do you see the most traction?

Yes. So I was kind of thinking that I'll get that question, and we certainly announced quite a few, and it's very hard to choose. It's like picking which one of your kids here. You like more -- I mean, look, by the time our products come to the point where I would talk about them publicly, they will have jumped through a whole number of groups internally to qualify for being -- strategic importance of being -- resonating with customers having huge potential. So they all kind of in one way or another have that going for them. I would hesitate just like Justin pointed out, like it's not -- they are not going to be necessarily -- they're not being launched with the mine towards this year. All of them are meant to build up the business for the long term. And I'm excited about each one of them for different reasons. And I think customers have certainly picked up. I can't think of a single one where there wasn't really -- there wasn't the customer segment that did not -- wasn't really excited by them. I think there are some of them that people weren't necessarily expecting. I think the -- for example, on the Visium side, we talked about Visium HD which was -- like I think customers who kind of looked at this thought about those deeply, definitely resonated with them and kind of appreciated the technology that went into making this work. And definitely excitement around that. The ones who we've been thinking about adopting Visium for their like kind of biobank samples appreciated CytAssist coming. I think that was definitely -- you can see, I think even on Twitter, there's excitement around that, for example. And on the Chromium side, we talked about Chromium X. And that's aimed at the core part -- it's kind of our core customer base, maybe the top tier of our customers are looking to push the boundaries of kind of single cell genomics. And that's where I think some of the most exciting experiments at least are going to take place. And definitely, a lot of kind of resonance for some really cool applications coming from that side.

Got it. That's a helpful overview. And maybe if we just focus on Visium for a moment. I mean you have or will have FFPE compatibility, which expands the market, HD launch next year. Maybe an update on what you're seeing with Visium in the market today?

Yes. So as we've -- now we've been sort of previewing FFPE launch for some amount of time. We've actually started taking preorders, and it's about to ship imminently. Very like robust amount -- demand coming in from just like we've expected. It opens up the translational market for us. Really, we have customers using Visium before, but that was almost -- I mean, it was very much despite themselves almost because you kind of -- you need FFPE compatibility for any scale of experiments. And so definitely, people are now kind of going in and jumping in. So we'll see how that evolves. Any new product launch always takes some amount of time and sort of like of feedback, a little back and forth between people kind of adopting it to their samples, looking at what the data looks like and sort of progressing through the market. And so we'll see how the next several quarters evolve, but it's looking quite exciting and encouraging at this stage. And of course, on -- kind of on the heels of that, we have multiple launches coming next year as well to build on this momentum.

Got it. And then just maybe shifting to in situ. I know this is early stage. You made some acquisitions to help build that business. Any details on the progress there? Or just anything you can share with -- on the in situ strategy?

Yes. So our view is that this is really important. We kind of -- we view the fact -- the world is going in a single cell direction and ultimately, all of biology that starts with tissues or cells is going to be measured with single cell context. And we see that there's really only 3 ways to do that at a very high level, whether it's associated with Chromium -- with the Chromium approach or NGS-based barcoding approach like with Visium or ultimately in situ, which is why we believe in this technology and that's why we invested in it. I think it's important to recognize that we view it as a platform with multiple products coming down the line for multiple different applications. We made investments internally before making acquisitions last year with an eye toward acquiring the right kinds of technologies, the right intellectual property to enable this sort of products and they have their older kind of the right levers at our disposal to build products. We aren't ready to talk about time lines or specs at this stage. Clearly, this is a very busy, very exciting field right now. Lots of companies, lots of researchers are kind of jumping in. I think it is still very early. And we recognize that this kind of technology takes -- it is a challenge to build. And so we're investing aggressively internally and building the right technologies with -- to deliver products of the kind of user experience that our customers have now come to expect from us, right? And that takes time and takes resources.

Yes. You set the bar high too. So yes, take your time. One product that I spent a lot of time thinking about, and maybe I shouldn't, but I just think it's really interesting is actually the 10x Cloud. And the reason why I think it is, is I just think about your business, I think about the size of your installed base and where it's gotten to. And I think about customer retention, just in general, and the stickiness that the 10x cloud can help with your business because you're, again, solving a problem for the customers. Could you just talk about the thought process behind the 10x Cloud strategy and how the take-up has been so far? And I know you're just U.S. now, and I think eventually international, but any update there?

Yes. So yes, totally, this is actually a very exciting sort of area for us internally. We haven't talked too much about it because we do see this as just the beginning of our long-term strategy. We do think -- going back to the very kind of beginning of the company when we first started building on the products, we kind of appreciated that software is going to be a key kind of pillar of our offerings. I mean, in fact, you can't really do much with physical products without having awesome software. And so we invested very intentionally from the beginning. We also kind of recognize that even though our initial offerings are going to be kind of on-prem distributors offer, installed locally, ultimately, the right place for this kind of software is in the cloud because these are large data sets and science is based around collaboration. And so that's where it will have to end up. Back in 2013, the world wasn't quite ready for this. The world is ready now. But again, this was in our sights from the very beginning. And as we develop our internal software, we very much developed it with that in mind and developed a lot of pretty hard-core technologies, first, for internal use to help us scale our computation and now we're releasing them for external use. Now this is early days, so this is just like kind of foundational elements where you can -- you get to process your data in the cloud in the most efficient, effective way for customers. And we -- and our primary imperative is to streamline that process of analysis for our customers to help them, right? We're not trying to build a business right now out of the software, out of the cloud, it is really to streamline and help with the experiment. But as we mentioned, as this kind of grows, for sure, it creates an additional element of stickiness and network effects as well. And just on top of that, this kind of technology is actually quite challenging to develop and took us quite a number of years, incredibly talented people and huge investments in resources. And I think we can now leverage that baseline of investment for like really awesome experience for our customers going forward.

Got it. That's really helpful. And I think maybe sort of a related topic, a question that I've gotten a lot lately and you probably have too, is just the competitive environment for single cell analysis. And it seems like we talk to new companies all the time with different technologies. Sometimes it's hard to envision whether they might have their own lane or whatever. But when I think about 10x, I think about the fact that while it hasn't snuck up on people, you have a very large installed base now, and it's been growing really fast. And that is a huge lever that you can use in a more competitive environment, if that's where we go. But I would just love to get your thoughts on how you think about the competitive landscape today and then maybe in the future, as we start getting new entrants, the funding environment remains pretty robust, so we probably continue to see them. How are you thinking about it?

Yes. So I mean, this is always a big focus of ours. We never want to kind of rest on our laurels and I generally tend to have a pretty -- kind of in my mind, it's a stronger word, but kind of a view of the industry that people are always naturally going to come at us largely because we've validated the market and has shown how big this market can be. The fact is we have competition from the very beginning. When we first launched our single cell products back in 2016, there's lots crude methods that we had to contend with and also kind of some of the biggest generation technologies. Then later in 2017, probably had the biggest sort of competitive dynamics happening around on Bio-Rad and Illumina introduced their product and then Becton Dickinson introduced their product. And back then, we were a tiny company with a very small commercial force with no established brand, and we managed to prove well in those competitive dynamics by virtue of better execution on superior products, I would say. Since then, of course, the dynamic has shifted much more. We do have -- we now have a very large commercial force, probably as big as any in the industry when it comes to these kinds of products. We have a very well-established brand. And we have also continuously invested in product development, both in terms of just improving the core specs of the products, but also adding more applications and adding more sort of components to the ecosystem. Like we talked about the software side of it and the cloud. We're also making investments in sample prep. And so just the bar to have a competitive product with us has a reason, right? Compared to 2017, it's a different world. And of course, some -- anyone who would try to get in to compete in this marketplace now has to contend with the market leader as well, an established brand. So that gives us a lot of these nice advantages. But again, we can't sort of rest on our laurels. There has been a continuous stream of new companies emerging over the past several years, and we kind of always have to be on a lookout. And I think, ultimately, it's going to be a function of us continuing to execute and like focusing on the customer going back to your previous question, making sure we listen to their problems and deliver -- keep delivering the solutions to them.

Got it. That's very helpful. And then maybe, Justin, moving, just little bit more on the financial side. You've talked about instrument placement growth sort of being the primary objective and that you're going to place more this year versus last year. You obviously have some new instruments coming on in the second half of the year. How should we think about the placement growth? And then on pull-through, you've talked about $150,000, how optimized is that? And how should we think about the math on pull-through as this installed base grows and we add new instruments?

Yes. So we placed 746 instruments last year, 645 the year before that and 530 the year before that. And we remain on a rapid clip and expect to place more instruments this year than we did last year. And this includes the impact of the Chromium X launch in the back half of the year. I think it's important to take a look at the context as well and that there's 100,000 biology labs out there on a conservative estimate, and we've talked about overall potential of 50,000 to 100,000 placements of Chromium. So even with the installed base that we have at the end of last year, over 2,400, we are still really early on and there is a tremendous opportunity out there. And so we aim to continue to accelerate our instrument placements in the years ahead. Regarding pull-through, $150,000 on average per instrument, that's an average across all instruments. And while that's a convenient metric to describe the business, there is lots of variability there beneath the surface. You've got these 2 opposing forces of utilization for existing customers continuing to increase while we're adding an ever-increasing number of new customers. And we want to maximize both of those. We're not optimizing for pull-through, we're optimizing for instrument placements and overall consumable spending in aggregate. And so moving forward, we think that $150,000, maybe slightly more than that, is a good number to use because really it includes the impact of this increasing consumables utilization of existing customers but takes into account the time that it takes new customers to ramp up.

Got it. And then just on the gross margin side, what are the various levers and key drivers we should be thinking about over time for the gross margin evolution for 10x?

Yes. So the gross margins that we have, that's a strategic strength of ours. It allows us to make the investments in the business that we're making today. We target around 80% for new products. It can vary around that by product, but that's generally the goal that we have in mind, at least on the financial side during the development process. When we look from Q4 to Q1, we did have a slight increase quarter-over-quarter, mainly due to some legacy GEM shipments that shipped at the beginning of last Q4. But as we've said, as new products continue to ramp up, which when you look at the Connect, that has a lower gross margin than the existing products. As those ramp up, those will drag the margin down a little bit. As we ramp up the Singapore plant and make some of the infrastructure investments that we're making, that's going to be a slight drag on margin as well. But we think a target around 80% is a good one to keep in mind throughout the -- as we get towards the end of the year.

Got it. And I'm sure there's some scale efficiencies that you're achieving as you're opening -- as you're increasing capacity and instruments too. And so that's probably some -- one of the factors that weighs in there as well, right?

Yes. But during the initial launch phase of a new plant, you aren't 100% utilized. And so there are going to be period costs just due to excess capacity as you ramp up those new plants.

Got it. And then just lastly, on the capital allocation side. Obviously, we talked about some of the acquisitions that you've made and you continue to invest organically. But just how are you thinking today on the build versus buy, balance sheet is strong, and so that's not really a constraint. How are you thinking about build versus buy strategy going forward?

And maybe I'll start with that and then Serge can add in. But we generally don't talk too much publicly about what we will be building versus what we will be buying. But in terms of our philosophy more generally, we don't seek to acquire revenue streams, we seek to acquire early stage R&D assets that can accelerate our own efforts. And so we look at investments, both organically and inorganically as part of our overall strategy.

Yes. I mean, I don't think we have like black and white rules around what kinds of acquisitions we might or might not make, Justin, is sort of right that we -- our M&A strategy is kind of part of our overall strategic product development strategy. We start with the question, right, like what -- where is the world going? What are the customer needs in the future? What is it that we can enable the kinds of things that have -- that exponential nonincremental kind of impact? And we work backwards, like what technologies would be necessary to achieve that. And we work really -- we invest internally. And then we also kind of realize that -- I appreciate that we don't have monopoly on smart people out there. So we have a function internally that's always kind of scouting what exists out there in the world. And this is where we also leverage our customer relationship, so where that becomes a huge advantage, where we can see like what new developments get made around the world, what people are excited by. And kind of if we see something outside that we gain conviction, makes sense technologically and could give us that -- a technology that would allow us to make that exponential impact in the future, then we acquire it. The other thing too that we think is really important to appreciate is that we make it a point to -- when we do acquire technologies, we make great products out of them, right? And that's something that we can tell unambiguously to founders of companies that this is -- they can see that we have done that before and that is absolutely our intention. We have a great product development engine and a great commercialization engine. And so for a lot of these people, what really motivates them, a lot of the founders, is to see their technology gain widespread adoption and impact, and we can give them that.

Perfect. Well, Serge, Justin, we're out of time. Thank you so much for joining us. That was really a great presentation, very helpful, and we appreciate the time.

Thank you.

Thank you, Matt.

Bye. Take care.