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

Hey, everyone. Good morning. My name is Tejas Savant, I'm the life science tools and diagnostics analyst at Morgan Stanley. It's my pleasure to host 10x Genomics this morning. And with us, we have Serge Saxonov, CEO; and Justin McAnear, our CFO. Thanks gents, for being here. Before we get started, just need to rattle off the disclosure statement. Please see the Morgan Stanley research website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales rep.

So with that, Serge, before we begin, could you just take a couple of minutes to just talk us through where the business is today, some of the challenges you've encountered over the last few months? And what are you most excited about looking to 2023?

So in terms of -- so kind of stepping back maybe a little bit Obviously, over the last some number of years, we've grown really rapidly coming out with our first sort of slate of products back in 2016, we went public about 3 years ago now and reached $0.5 billion close to run rate at least pretty fast, right? And so the company has grown throughout the company, the revenue base, the complexity of the products, the sort of the complexity of the customer base has all grown really rapidly. The last -- certainly since the beginning of the pandemic, I would say, but the last several quarters have been less predictable, let's say, than we understand. So we certainly have challenges. I wouldn't say necessarily the last few months maybe, but the last couple of quarters or so have been challenging. A lot of this environment has been more challenging for us to predict. And some of it is also given our reliance or kind of -- given the concentration of academia and academia, especially our kind of research tends to be kind of more responsive or was more responsive to different sort of waves of the pandemic we've certainly had a share of challenges around that kind of globally, but also more geographically as well. So that has been a lot of the story over the last several quarters, I would say, for us and kind of looking at the -- as the world is sort of has now been coming out of the pandemic, like what does it look like going forward, sort of the big question for us. There is lots and lots of things for us to be super excited by. I mean, first of all, there's just the fundamental thesis that we've outlined over the years is still the same, still very, very strong. We do see that the world has to move to the world of biology has to move through measuring thanks of the single cell level. The biology is single cell biology ultimately and whether you're doing a spatial context or in a dissociated matter, like that's where the world is going. And if anything, we have more conviction now in that thesis given all this sort of scientific findings, all the research, all the feedback from customers over the last several years and quarters to -- so kind of at a very high level, the -- we're very, very optimistic about where the world is going and how our tools are going to enable the world to get there. As we look to 2023, in particular, obviously, this year, we have a number of launches that are going to sort of really set us up well for the following year. We have a number of enabling products on Chromium single cell side that's kind of really aiming to address some of the bottlenecks that existed and that -- and those workloads for us in sort of the beginning of our -- of the franchise. We've -- we're this year, especially this quarter, we're enabling some really crucial things on Visium and kind of addressing some of the key challenges that existed for that platform. And of course, we're very, very excited about Xenium, which is coming later this year to really set us up for sort of the new what we see is a revolution in spatial biology.

Got it. Got it. That's a great overview. Maybe just to start with some of the questions that we get on the TAM side of things, right? I think the -- and I asked this to one of your peers yesterday as well, you've got this sort of weird situation where customers are super excited about spatial biology. But that sort of -- the KOL check aspect hasn't translated into the numbers for the spatial biology players over the last like 6 to 12 months for different reasons. And so as you look at the opportunity today, what gives you the confidence that the long-term sort of TAM is still very much intact. It's not a question of the low-hanging fruit being gone and the market being saturated. And if you were to size the TAM in terms of the number of lab customers out there for single cell for spatial and then for NC2, how would you do that?

Okay. Well, so first of all, going back to sort of the -- the question of the overarching TAM, like where is this all going? Why are they confident? So kind of going back to what I said at the beginning, I'd like to think about things from first principles. And for first principles, there's no way that the world is not going in the direction of single cell or spatial and/or spatial biology. That's where the fundamental -- the biology is, if you want to understand the -- what makes -- what determine self, what determines disease, you wanted to develop diagnostics, therapeutics and just drive the fundamental understanding of biology, that's what you need to be measuring. And I think there's no -- I don't think there's any dissenting opinion on that. It's just a matter of, again, maybe how and when rather than whether. And we've always said that, that's like ultimately, the endpoint is not ambiguous. How you get there is going to be it's more of a question, right? And certainly, there's been a lot of macro factors, both just global economic factors over the last several years, several quarters? And also how those factors affect specifically kind of the research community and how the science is done and so on. So I think all of those have been sort of affecting things and potentially. And also, if you think about spatial biology in particular, there's all kinds of -- it's very, very early. The products -- all the products on the market currently have had significant limitations. And so it's very hard to read anything about the -- or I would say it would be inappropriate, we didn't think about the ultimate TAM based on the performance of sort of the existing products at this stage. In terms of sizing the TAM for us, and this is something I've sort of said before is that over time, it's easier for us to kind of have more confidence about the size of the [indiscernible] time across our product lines. So we need to look at Chromium and Xenium then necessarily having a precise delineation where those -- the different product lines from because some of there's a question of just fundamental question of science, question of markets, questions of technology, how customers will precisely sort of apportion of the different applications between those 3 different approaches. Where we do have fundamental confess that between the 3 of them, they do kind of -- they cover really the future of biology. We do think that spatial is going to be incredibly important. The number of labs, I mean there's different kind of ways to look at it. We certainly believe that the market is well into many billions of dollars. If you think about it in terms of installed base, over time, it comes down to sort of like who has the right CapEx. I would like to think in terms of dollars spent and in terms of applications that are there and those are massive. And so we've talked about before that sort of our market size roughly being in the order of $15 billion. So as you kind of look over the medium-term horizon, but that's focusing just on the sort of the research side of the world, and there's much more upside as you to start thinking about sort of translational clinical applications downstream as well. But that's a longer-term question.

Got it. Switching to the product side of things. On the Chromium, you've talked about that halo user dynamic being a little bit of an issue for you earlier in the year. Where is that today? And in terms of your focus on converting these halo users into instrument owners. Just can you give us a quick update on progress?

Yes. So that in itself -- that sort of the numbers around is around to get somewhat noisy and somewhat challenging to estimate, which is why we prefer to kind of update us more on a yearly basis as opposed to kind of focusing on a quarterly-by-quarterly fluctuation. So at this stage, I wouldn't say there's any sort of material difference from what we have stated before on that dynamic. In terms of our -- kind of the way we look at the conversion of failure users, many ways it's similar to what we've done before. But the -- I think the key here is -- or one of the keys is kind of recognizing what are the halo users, and they're sort of people that are sort of new tend to be kind of new to the ecosystem, less sophisticated, maybe less yet committed to single cell approaches. And so our job is to get them further into kind of become more intense users, get them further into their experiments. And so rolling out all the products that we have been rolling out to kind of simplify the workflow and simplify the kind of the performance of those experiments should help to kind of get them on board, get them to become more frequent orders and which ultimately listen to become instrument owners, which is of the dynamic we've seen. There's also kind of a separate question of structuring the commercial tactics, the commercial strategies around the conversion of them. And some -- and a lot of it comes down to -- we've sort of talked about it, figuring out -- so the most efficient way of using our sales force, removing kind of friction in their process and pointing them to the most efficient kind of who are the most likely [indiscernible] to convert, so they can go after them. There's a big ocean of right out there. And so that's how we're thinking about it. Got it.

On the fixed RNA profiling, it's clearly a needle-moving launch for you. How are you thinking about what fraction of the demand for Chromium X today is from customers who want access to fixed RNA profiling. And the kid's been on the market for about 5 months, any early feedback that you could share?

Yes. So at this stage, roughly, when you look at people who are getting the access is that probably about half of them are so coming from -- because of the fixed RNA profile and kit. There's a little bit of a chicken egg take here because obviously, in order to run the kit you need the X in order to get the X, you kind of need to be interested in the kit. -- in a lot of cases. And so people -- it's early. It's only been a few months. Where the people are right now is kind of in the benchmarking and pilot stage, where they're comparing the new kit against the flagships -- and it's a [ total ] order, right, like this -- so the 3 prime kits have been around the market. They're market-leading products. It's a [ total ] order to consider displacing them. But people are comparing -- kind of running these pilots to compare first how does it kind of in the basic sort of specs compared against and then kind of expanding this beyond you look at samples that couldn't run before with the previous flagships, -- how much -- how reliable is fixation then look at kind of the other capabilities of the kit like I can actually do less sequencing, so that kind of reduces the cost of experiments. And then kind of looking at the multiplexing. So there's a whole progression of kind of like as people are running through kind of realizing all the benefits of the kids. So right now, I would say it's still in the stages of where people are benchmarking and kind of running those pilots experiments. But certainly, the sort of the verbal feedback has been quite positive. And especially in some instances where when people have started applying them to samples that previously weren't accessible to single cell like FSP, which is something we just started talking about. So there's a lot of promise to it. I think it is -- it has, like we've said before, has tremendous enabling potential, but we do need to let people run through the paces...

Got it. How should investors think about the incremental revenue opportunity in '23 from fixed and profiling surge? I mean you've got sort of people doing the math and getting it $50 million, you've got people getting a lot higher than that. And you've clearly characterized it as you just said, is a very meaningful long-term opportunity for you. Any early color that you can share?

Yes, it's challenging because it's a new product, there's not a pretty existing trend line that we can sort of apply to it. And obviously, the question is here is the incremental kind of new use cases, new opportunities in the translational space kind of looking at areas samples, I think there's a lot of potential there. But I think it's too early to kind of speculate on what the impact will be, especially in kind of a 2023 time frame because we also have to take into account the sort of the time it takes for people to run the pilots as well.

Got it. And then switching to Visium. You have the V2 launch. I mean just any early customer feedback there? And how should we think about the incremental opportunity given that it's software exclusively on site assist?

Yes. So the initial feedback has been quite positive early. It's obviously just come out and Again, it's only available in cities. So it's a cytosis again, the check a little bit here with people. But the initial feedback has been quite positive. We've seen people who run the initial pilot experiments and started ordering more. It is driving more CytAssist placements. And so we see it as being -- and we've talked about before, FSP in general, that product has been growing faster than the fresh frozen version. And should -- sort of the capabilities brought together sites, I would expect to accelerate the dynamic. The only moderator is now there is a capital sort of period for people to overcome to get into the ecosystem. It's not huge. The loose price for the instrumental $75,000, but it's there as opposed to -- before there was as required. But we're -- I think it is -- it has CytAssist with the B2 has a lot of really enabling capabilities for customers. So there's a lot of kind of step-up excitement as people are realizing kind of how it works, what it enables, what it all...

Got it. One of the points that sometimes comes up is just Visium data on archived FFPE samples. Is there an upper limit? And other measures you're putting in place to improve this?

In terms of not being...

Age of the sample.

Age of the samples.

Older samples having worse quality data basically.

So there's a couple of things. First of all, I mean, there's always the case that some samples just can't be like rescued. Like once you get to the point where there's just no RNA there like you're not going to be able to measure the RNA right. The other point to sort of keep in mind is that there is not necessarily a perfect correlation where the quality of the sample versus the age aren't -- they're not -- and so sometimes, we do get fairly old samples that run well. V2 should and CytAssist specialists should improve that as well, there's a number of kind of subtle things that kind of issues that get resolved by the CytAssist approach that are actually can be fairly prevalent. And so we have to see how that kind of the V2 chemistry together with CytAssist, how that kind of shakes out in the market. But that's one of the main advantages that it's considerably more robust and it works across kind of a wider range of samples.

Got it. On the HD pushout search, do you think you'll be in a position at your sort of Investor Day coming up to give us a better sense of time lines?

So yes, we're at this stage, we're not giving a time line and we're not -- we're going to update the time line when we're ready.

Got it. And what about sort of what drives your confidence that you've talked previously about Visium purchases being a little bit sort of muted in anticipation of the HD launch. The question we tend to get though is, is it just the HD launch is actually the Xenium that's coming up that's driving this hold out, if you will.

I think at this stage, the Visium Yes, there is a sufficient sort of bifurcation of customer needs and demand that I'm not sure if that's the Xenium sort of launch that's gating Visium. I think people -- I mean Visium HD is something that people want for sure. And so it had been specialized before we kind of pulled the time I was definitely giving pause to people to order standard with HD. I think the dynamic has lessened somewhat, especially with CytAssist coming to market now kind of to or accelerate, but I'm sure it still exists out there as people are considering. So I would say it's more of an HD effect than Xenium effect.

Got it. Fair enough. On the Xenium, clearly a lot of excitement coming out of AGBT, a lot of excitement about in situ in general with 8 or 9 players that are showcasing their platforms. How has those competitor launches sort of factored into your customer conversations to date? And one of the things that folks ask us is one of your peers has talked about 120 units for their NC2 instrument. Where could 10x be in terms of the order backlog at time of launch?

Yes. So definitely, the space is quite [ buzzy ], right? Lots of companies talking about the customers are very excited. A number of companies are kind of trying to at least talking about providing solutions. And it's also a bit of a confusing space. When we talk to customers, they're also kind of trying to figure out like what is going to be important to them. And some of the more sophisticated customers are starting to kind of figure this out. And so we're getting feedback, which is very useful, especially as we're sharing kind of working with our -- sharing our data, kind of working with them on the product and the launch. The -- so lots of excitement. I think the spec that we've laid out have been resonating and the data that we have shared has been resonating quite well, especially with people who are particularly sophisticated in understanding what they want and understanding the data. I think the key things that we have emphasized, and I think sometimes have been reinforced by the conversations we've had is throughput being able to kind of use these systems in routinely and the ability to customize [indiscernible]. What we found probably even more so than we expected, it's hard to do, have one sort of size-fits-all panel. People do really care about their particular systems and in particular kind of applications. And that's part of the reason we also expanded sort of the amount of customer visibility, we're doing with these -- with our panels as well for our people. So I think -- those are like 2 particular learnings that we've had and lots of great positive feedback and lots of excitement. And certainly, we feel really good about where the platform is shaping up in terms of the capabilities now and the road map for the future as well. So very, very exciting. As far as sort of the bookings we never shared bookings before I note backlog, when we'll share revenue once you had one starts appearing...

Got it. Are you committing to breaking that...

What's that...

Revenue? Will you break it out?

Actually, we'll talk more at the Investor Day on our future plans are going to report revenue in different ways.

At launch, what does Flex look like search for Xenium, -- is it -- I think it said 400 flex, but what's the mix RNA versus protein? And over time, I mean, as you think about getting the flex higher, is that just a consumable/informatic sort of upgrade versus new hardware?

Yes. So a couple of things. The target is 400 at launch. That's RNA. -- only proteins will become available after at least high-plex protein panels. And with the 400 includes kind of standard panels and also custom like item custom ports as well, which I think is the key. The other thing that we've -- that we are also doing -- this is actually also an important kind of point the feedback that's been coming by being able to do kind of simultaneous proteomic and co-detection, especially like morphology being able to look at morphology location standing on the same slide as same section as the RNA panel is quite important. And so having that HME standing at launch is also something that we see is really important. As far as capabilities of the hardware, it's meant to be future proof. So we do expect future kits, future capabilities, whether it's software, whether it's chemistry to becoming at a pretty rapid cadence of the launch. But the hardware the instrument itself is built to be future-proof and to support all those locations, many ways analogous to what we do with Chromium...

Got it. And you just mentioned making sure that DM is the highest throughput relative to the competitors out there at launch. How are you thinking about sort of future throughput increases? And what does that mean for you in terms of range for booth, let's say?

Yes. I mean -- so I think there's a lot of benefits to throughput. Obviously, for customers to actually get to the point where they can run this product routinely is very, very beneficial, right, as opposed to doing one experiment every now and again kind of thing. So a lot of benefit to customers. It's also -- there's an effect it's like the more samples the customer runs. -- customers run the more they can publish, the more there's data that's out there. And so there's a kind of a positive fly-wheel that benefits the business. And then, of course, on the financial side, the more samples they run, the more pull-through. And so we do expect that to be a significant kind of financial engine. Ultimately, it's about the samples, right? That's what we -- it's about the pull-through for these platforms that we're excited by. I do also want to say that the sort of as we -- as we've been saying, we see this getting to launch is just the first step of future -- many future iterations as well, and we expect to keep pushing on that, along that [ access ] as well.

Any color you can share on the manufacturing scale-up and from a supply chain sort of perspective, do you feel things are relatively derisked or especially in the context of the HD issues you've had, we get the question around how much [ Aeromar ] are there around the timing of the launch?

Yes. I mean, so definitely something we're watching. I mean, I mean maybe the keywords are relatively there. Like it is -- we've been -- yes, on -- we've been very focused on the supply chain, and we certainly through the development process have had to kind of work on that and adjusting as we're proceeding because certainly, the world has been very, very challenging when it comes to complex instrumentation and putting that together. I think we feel quite good about it as we're heading towards the end of the year about launch. It's not without challenges for sure, but we -- from where we're sitting right now, we're feeling good.

Switching to some of the geographic trends. And then maybe, Justin, you can chime in here as well. Obviously, the continued lockdowns in China has been in focus outside of Shanghai, got Shenzhen, Chengdu, et cetera. Do you feel the guide is sort of adequately haircut at this point as far as China recovery assumptions are concerned?

Yes. So the China lockdowns were a big impact in Q2, and it was our most material impact for the quarter. And in our August call, when we talked about our updated guidance range and what that implied that included China not getting back to 100% that there being some level of disruption throughout there. And we've seen that. They're not back at 100% yet, but they are better than they were last quarter. And so basically, those are the statements that we made at the time of the earnings call. And we also said that barring any material change to the environment that that's what we had incorporated in our guidance range.

Got it. And what percent of your sales in China are through distributors? And is there anything to be thinking about in terms of inventory stocking, destocking dynamics...

Yes. So most of our sales to China through distributor model, they sell through and do service providers as well. And so there is a lag somewhat on shipments that come in through the distributors or through the service providers. So when there is a sudden impact like a lockdown, the service providers can be caught holding some inventory that they'll then work through when things open back up. But typically, we don't sell into a distributor until they have a purchase order from the service provider. So the service provider is the point whether this is the biggest impact. Coming into Q3, as things started to open back up. There was some supply that they've had to work through, both just a backup of demand from customers and then some supplies any of the service providers as well.

Got it. 3-parter in Europe. Cold chain, is that in the rearview mirror, FX has gotten worse. Is that beyond the translation impact? Is that sort of starting to weigh on demand trends? And the third bit is the government is sort of focused on subsidizing energy costs here heading into year-end. Does that crimp academic budgets?

Yes. So starting with the cold chain logistics issue. We believe that this is mostly behind us at this point. There's still a very small number of customers that we're working through some minor issues with we don't expect that to be a material impact. As far as FX, it's not just Europe that has the FX impact. Granted we sell in the euro and in the British pound. The customers in Europe, we also sell to distributors in U.S. dollars who could sell to customers in local currency. Same thing in APAC, we sell to distributors in U.S. dollars and they could sell in local currency. And so the dollar has strengthened against currencies worldwide. So the first impact with currency is just the translational impact for those sales that take place in the foreign currency. In 2021, that was about 17%. But when you look at APAC and EMEA together, that's just less than half of our overall revenue. And if you look at the depreciation of the dollar against the euro and the pound, you're talking the 10% to 15% range. It's also appreciated against the won and the yen as well. So definitely still a currency impact. We did talk about on the earnings call how when we contemplated the new guidance range, we expected things to stay in the neighborhood as far as where they were. And so basically, it was just above parity on the euro at that point, and we've seen it fluctuate up and down above parity right now with euro and the dollar. So if it dips anymore below, there could be additional impact there, both on the translation, but also on the demand side for the distributors who are either -- they might have a lower demand from the customers or they got their margins, they have their margins squeezed at the time. As far as the impact of uncertainty on macro factors policy that it's very hard to weigh in on that. There's a good number of macro factors that are putting pressure and driving uncertainty on budgeting. And you have seen government institutions, they can be sensitive to that with their budgets when there is additional risk -- but there's nothing additional that I would call out due to that right now.

Got it. I guess when you put all of that in a blender, do you still feel good about low teens growth sequentially in the third quarter and somewhere between 2% to 6% for the full year?

So I can definitely appreciate the question. We aren't going to provide an intra-quarter update on guidance at this time. But you're right, that was what we said on the Q2 earnings call. So just to reiterate, when we did see a lower-than-expected recovery from the pandemic in the first half of the year due to the macro factors driven multi by macro factors. And then those are lingering into the second part of the year. And so we adjusted our growth expectations in the second part of the year. We expected those macro factors to continue. But we still have great confidence in the underlying demand for our products and the opportunity ahead. So at the time, we said that we expected Q3 to be about low to mid-teens increase sequentially over Q2 and Q4 to exhibit the same kind of seasonality that we've seen in the past.

Got it. And then as you think about sort of 2023, I mean, essentially the base business, relatively easy comp here, even if you grow that at 20% to 25% and bake in a very modest Xenium contribution, you get to where street numbers sort of are shaking out at the moment. And that's before we talk about sort of Visium HD, CytAssist or fixed RNA. Can you just sort of walk us through the different moving pieces as you think about 2023?

Yes. For 2023, and we will talk more about just how we're thinking about 2023 later on in the year at Analyst Day, we'll give the actual annual guidance at the beginning part of the year. But I do think one of the biggest -- the biggest variable on 2023 is just going to be the Xenium ramp. That's going to be -- that I think the bars around what that could be based upon just the demand and how many we choose to place initially as we ramp that methodically, ensuring that the customers -- the early customers are successful. That's probably the biggest part there. But there's a lot of great pieces in place with the new products that we've launched with CytAssist coming out. It's going to be the first full year of fixed RNA and with CytAssist as well. And so like Serge mentioned, CytAssist its own at a $75,000 list, there's going to be some incremental contribution on the revenue side, but we are excited about what that could enable just from just the Visium business in total.

Got it. We're out of time. So thanks so much for doing this guys. I appreciate all the color, and thanks for joining us.

Yes. Thank you.

Thank you.