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

I'm Brennan, obviously, day 1 of the TD Cowen Healthcare Conference, 43rd Annual. I'm pleased to be joined with me on stage, a senior management team of 10x Genomics. To my left, we have Serge Saxonov who is the CEO and to his left, we have Justin McAnear, who is the Chief Financial Officer. So first off, Serge and Justin welcome, and thank you for being here.

Thanks. Glad to be here.

Thanks Glad to be here.

Awesome. So kind of high-level kind of introductory question or 2 to kind of kick it off. 10x has grown revenues and an exceptional CAGR. If you go back over the last 5 years, north of 50%. Obviously, '22 was much lower year coming off a tough comp and you guide this year of 12% to 16% overall reflects low teens single cell with basal 40 plus. I think the slower growth in '22 has created just a lot of questions around end markets and competition and where are we with the evolution of these technologies and the market opportunities. Maybe from a high level, just as an introduction like Serge, where are we in the penetration, if you will, or the opportunity for single cell? And kind of how do we think about that kind of the trajectory of 10x as we look out?

All right. So yes, well, so maybe just to step back a little bit. We've built 10x [indiscernible]. And we're going after large markets, very important markets and we invest accordingly, invest in fundamental technological foundations. We have huge very differentiated products, huge comparable technology stack, infrastructure, commercial infrastructure, operational infrastructure taking advantage of these markets. And single cell back to the question, single cell [indiscernible] sense for first principles and from all of the feedback. You can get it from customers, especially people sort of have a forward taking view is that it's -- the potential is massive. We see that ultimately basically every measure that will -- whether for research or for ultimate translational applications or for appointment diagnostics ultimately will need to preserve single cell contact when researching tissues for our cells. And if you take that perspective, it's pretty clear we're very, very early in that projective. Now we kind of -- so we have a strong conviction around the endpoint. Now the partner is not always going to be the year in read it's going to be lumpy as we go to different market applications, a different macroeconomic sort of environmental factors. And last year was certainly had these challenges, but we're feeling quite optimistic as we look over the coming years. In terms of trajectory, what the new products are remaining for the interest of customers and just the opening up of markets.

Great. So we'll certainly get into some of the pharma opportunity on single cell. So basically, in the 30 minutes we'll spend, certainly a chunk on the core chromium and extensive new products there, and then we'll spend probably a little more than half on spatial and then kind of get to the balance sheet and the margin opportunity. But just on the core single cell market for academia, if you will. We did a survey recently that showed like low 20% growth outlook. We spoke to some customers that are well north of 30, a few that are already beginning to shift to spatial and they grow a lot less. So just trying to think through amongst that core academia customer base when we think about that single cell growth rate, like, again, on the guide this year of low teens, is that the right zip code for that customer base? Or how would you free an upside downside case as you look out for that customer?

Yes. So I mean one thing to appreciate is academic -- is that academic customer base is itself a fairly heterogeneous. As you mentioned, there's definitely people like the early technologies -- technology adopters early technologists specifically or if it could sort of result or purpose in life right as they evaluate technologies and adopting to other. So certainly, single-cell while was like the leading kind of new technology, some numbers a number of years ago, spatial is sort of best diagnostic so it makes sense that some of them will start out s[indiscernible]. But the vast majority of the single cell customer base is not that. I mean we kind of -- as you expand out on early technologies to sort of economic people, but there's like a much broader set of means and biologists. And yes, it's different people have different sort of [indiscernible] it's hard to say in pleasantly hotline. There's a lot of -- there's definitely a lot of interest that we have taking on new studies, taking new projects. So we do start to grow on average, probably that is pretty clear. So there's a number of moderating factors. Again, people -- sometimes we oversee can ramp our projects, both the students, increased elements there, the time frame is going to be maybe a little bit TBD. And then we also -- one of the things we're watching this year is the effect of flex this new capability that we launched and in particular, the nimble multiple examples, which over the long term is to be hugely enabling because it allow us to lower the price, for example, but doing more for samples of a single tenant plan. Now in the near term, it provides a bit of a headwind because if you detail constrained by a number of samples to a less per sample [indiscernible] I think that effect is going to be moderated in a in a bunch of different way, but it is something that we'll watch and so that's we think about it and so [indiscernible].

And we heard Kevin way this morning on the panel. He discussed this demand and elasticity equation and said kind of similar sequencing, cut the price, we'll just do more. Like what are you hearing as sequencing costs come down maybe from the field and from your customers kind of what did you -- did you assume anything in your guidance this year for the benefit from lower sequencing costs stimulating more spending on your products? Or just how do we think about that kind of dynamic?

So we always watch the sequencing prices. In fact, in some sense when we started the company, in fact, 10 years ago, a lot of our thinking was premised on sort of this NGS price growth, the product we just naturally become more and more and more prevalent and will benefit from lower sequencing prices. The last 10 years, that sort of pass out to some extent. I think that dynamic is accelerating now. [indiscernible]. illuminator competitors in the sequencing. I do think -- so that is definitely like a very central part of our thinking. The things that you want to also be cognizant of is like that ratio of our price to cost at [indiscernible]. It's -- when we started, we said about 50-50 with most of our customers actually see substantially more towards us. With some of the heaviest users, it tends to be more even because it multiplies ourselves a lot more. And so the sequencing price level have different effects on different customers. So it's [indiscernible] fair amount, so that will drive more tenet for us. The other note is kind of keep in mind, there's a lot of that to take some amount of time for the announcements from sequencing companies to actually propagate into actual experimental practice, they have to purchase the instruments. Those new sequences have become available, then they have to actually acquire those systems then they have to validate them, run them and so there's a [indiscernible]...

Okay. Maybe just on Flex. You brought it up in terms of the multiplex capability, but it is, I guess, a different chemistry to some degree it is, and it's also from some of your early papers, it looks like it's higher quality. Just kind of what are you hearing separate from the ability to fix and do FFPE, which we'll get to in a moment. But just what are you hearing early on from customers who are utilizing Flex in their initial feedback? Are there -- is it all positive there any drawbacks just how do we think about the early feedback there?

Yes. So initial feedback is overwhelmingly positive. People are excited. I mean, first of all, the conceptual, the ones we get like what it does, they realize all the powerful potential benefits in [indiscernible] and so far, they are the -- the feedback look has been quite positive. And we see that sort of trajectory or people's start small pits and then they subsequently were larger pit. So we definitely see the trajectory, which is always a sign of our product that's on a good ramp so definitely seeing that. In terms of -- so overwhelmingly positive. In terms of any negative impact, there's some questions around the fact that this is probably phased assay. So it works on human and mouse only, and then we have questions what about, but sort of genes of not on processes. And so there is some of the pro but we also released recently [indiscernible] structure to have some custom growth, and that's actually [indiscernible] but the skill and that we can actually customize it can actually go to teams that other approaches cannot do one. So in fact, in some sense, is positive. The work is somewhat different as well relative to our large project provinces it's a bit more. It's a good more complicated upfront, but it's a more simplified [indiscernible] so people have to be a little bit of adjustment for that -- that's another here in gleaned. I think those are the major but they're really minor relative to the positive.

And kind of on this multiplexing idea, whether it be on Flex or just even with Chromium Flex, is there some potential like near term, what you mentioned could be maybe a near-term gating factor some customers? Is it a function of sample availability? Is it something with the workflow like why would the initial flexing, if there is this -- if single cell still has so much upside opportunity in terms of expanding its use case, why wouldn't they just say, hey, we have a budget for extra single cell, we're flexing, we'll just get more samples and we'll do it. Like is there some factor that would prevent that from some customers?

Say it again.

Oh, really you're not hearing you.

Do you want to bring one up sir really quick? Yes. Sorry about that, guys. Yes. Thank you.

Yes. So the question just was like, why would there be potential near-term headwind if in fact, customers are -- have this insatiable demand of single cell and make just some more samples in the door? Is that -- is it some factor about the workflow or sample availability?

Yes. So I think to the first order, I think your sort of question is correct. All you need is more samples, right? And like Kevin mentioned this morning, if you like, for the most part, we do expect and people do expect to just run up to their budgets. They have a particular budget, they will spend the same amount of money now spend on more samples. But maybe not every customer necessarily has that the sample is readily available. They still have to kind of arrange them. The other thing is that it is -- it does require you to multiply a lot of samples. So it's a bit of a different kind of workflow so you do need to go and orient yourself to writing more samples. I think those are all solvable and fairly minor issues relative to the potential now to do a lot more, but it is a friction point...

Okay. Maybe just one here, 1122. So maybe one on pharma. Obviously, there's a lot of excitement in investors and sell centers alike all see this really big opportunity for pharma to adopt like what is -- is it publications? Is it just familiarity with like all the maybe nuances on which FFPE samples they work in or not? Just how do we think about the pathway forward if we were to look out 2 years in pharma, adoption is really accelerating. What are the steps to get there?

Right. So I mean -- so first of all, we have had a presence in pharma and it's been growing kind of in line with the rest of the business. It has been concentrated in early discovery, and we do think we agree there is a potential for it to expand much faster than the rest of the business, and that would entail kind of moving more downstream in development. And there, you kind of -- you basically need to be able to work with examples, whether it's retrospect to buy bank samples for FFPE or just like even sort of regular workloads, you need to be able to time shift the inflation. And so until the advent of fixation last year from us, it was really not possible to do, which is the big part of the reason why so much of our presence has been sort of in that discovery side. So I think now the product set has at least the major necessary components to be usable in pharma. There's definitely interest to move downstream. And we'll keep developing more capabilities, again, around some of these logistical and sample prep issues. And then -- but I think we're poised now in a good spot. The other element is you also need to evolve your commercial organization, right? We grew up very much in academia, selling them to academic customers, and that entails a certain sales process entail certain kind of reps certain type of marketing. And now we're putting kind of the next phase, we do need to add some more pharma-oriented people and tactics, right? And we brought in a new Chief Commercial Officer, Jim Wilber last year, who is actually his background, his previous company was kind of flipped that was mostly selling at the Pharma and Academia was a minor -- as a minority. And so that's kind of the next step for us is to expand the sort of the commercial capabilities and tactics to now go after this opportunity that's well set up for us from a product perspective.

Maybe just one more on pharma. Like is it a function -- if you went to the top 50 pharma customers, are they all doing single cell in some regard using 10x and it's just a function now of trying to expand that use and educate them on Flex and kind of go deeper or just -- I mean, [indiscernible] AD20 rule, but how do we think about what your current business is with customers? And how does that grow?

Yes. So for sure, like all of the top 50 or top part may use single cell, for sure, and some of them use it very, very heavily, but that's a very small minority, right, in the sense of them using across the board. So for the most part, they use it, but it's the departments that use them, right? And now we need to expand into other areas of those pharmas to educate them and to gain the right sort of champions yes and sell.

Okay. And maybe final one on single cell then. Like does your guidance for this year do reflect any kind of moderation in spend maybe it would have been above instead of low teens, maybe it would have been high teens and mid-teens? Are you reflecting any cannibalization at all from spatial yet? Like how do you think about that? And I know it's a fluid kind of dynamic, right? But just kind of wondering the feedback and as you build your forecast, do you see any cannibalization from spatial?

So I mean, we are aware of the fact that there's the whole application areas where our customers will choose -- they may choose one or the other. We do know this dynamic not talked about. The fact is we don't really -- I don't think anyone really in the world that really has a clear idea of like which way some of the applications will trend and which is why we invested so intentionally aggressively in all 3 platforms. So kind of regardless of how the world turns out, we will be the ones sort of making the revenue and the money. And so yes, there's some fundamental uncertainty around the sort of the degree of cannibalization between the platforms that we have, but we feel pretty confident that regardless of how it turns out, we will take that revenue. And so in some sense, the confidence intervals around the Santo are smaller than the comprehend intervals around the components.

That makes sense.

Okay. And just to add that potential impact of cannibalization. That is part of the reason why we guide at the company level for total revenue. This year, there is a lot going on, so we tried to give some additional information around how we saw single cell and how we saw spatial at this time, but that does point to guiding towards a total pumping revenue having one of those platforms [indiscernible].

Great. And then maybe like just one quick final one. And competitively, you've got a couple of these smaller players, these boxes companies that are seemingly adding a lot of customers, I don't know what the revenue base is, but just how do you think about -- we heard today in the podium, I think you guys are in a great spot, you're the dominant player by far. Would you be seeing some moderation in share over the next 5 years? Like how do you think about the competitive landscape in single cell?

We don't really anticipate it changing materially. I mean there's always been since the beginning of the Chromium days back in 2016. There's always been a fair like a flux of competitors and that people tend to forget that they're the early days, so we're actually really, really competitive, right? Lots of people and since then, it's kind of waxed and wane, like occasionally would see new companies come in and try the market. They're usually kind of trying to go after kind of either higher scale or lower cost. And we have the dynamic somewhat more last year with some of these new companies that [indiscernible] approaches trying to commercialize those approaches coming to the market stalled some kind of sales as customers were trialing them, and I think we're seeing them, but it's pretty marginal. And by and large, almost universally, we see customers on the trialing and then they come back to us ultimately for a variety of reasons, they've got much better data, easier workflows. And ultimately, there's no cost advantage to any of them.

Got it. Okay. So maybe on spatial your guidance this year calls for 40-plus percent type growth in spatial. Just wondering, any -- when we try to build that up, why 40 seems like the bottom, just given the new product contributions that you're expecting to get this year. So any color you could offer about the different components, whether it be on Visium and CytAssist and Xenium and how we think about the drivers of that 40% plus.

Yes. So a few things to keep in mind when looking at spatial increase year-over-year. So we launched CytAssist. The bulk of the launch was in Q3 of last year, and so it was a really strong launch quarter for CytAssist, so over 100 sold. We said that Q4 was very similar to Q3 so you can assume over 200 CytAssist. And whenever we launch a highly anticipated product like that, there is some pent-up demand. And so you can attribute at least $10 million of the 2022 spatial revenue to the CytAssist instrument. And so I think we need -- it's still pretty early. So we've got to see what the sustained level of demand for the CytAssist is throughout the course of 2023 and then because facial includes Xenium as well, it's really early days for Xenium. We just started shipping that last quarter. And we've talked about being deliberate with our initial placements, focusing on early customer success and then ramping it up from there. Everything that we're seeing so far, we're seeing good signs coming from the early customers and the data that they're able to generate off of the instruments. And so if that trend continues, I think we'll feel better about placing more. And then so we'll talk more about how we see 2023 shaping up when we get more inputs in from Xenium as well. But initially, we are more conservative on the Xenium side than on the Visium side. And I do think that if current trends continue, there could be room to go higher on.

Got it. Okay. So for Visium, we explored it on the panel this morning and even some of the experts there said it's unclear really how the multicellular single cell and ticket will really play out. And it depends on the use case, right? But as you look at the world, you have over 2,000 Visium customers and separate from Visium HD if you look at the world and you think about the utility of multicellular technology versus the single cell in situ. How does that multicellular profile look as we -- as it keep growing for a year or 2, flatline and then go down? Do you see like a long runway of growth, probably slower than single cell to do because given the base of revenues. But just how do we think about that product now is these new single-cell platforms roll out.

Yes. So I would -- we want to probably draw the distinction between Visium current configuration, which is largely multicellular with Visium HD which will be at the single cell scale -and the way that I see it is like the customers are -- the Visium HD should generally displace most of like the Visium -- standard Visium kind of use cases. I think there is still some place and obviously, it depends on how we price the 2 that there will be. But this Visium HD is likely to be kind of largely replaced. And then the question becomes like Visium HD versus Xenium versus CytAssist approach. And I think there's lots and lots to be said for Visium HD. And again, this is one of those empirical things that will have to be kind of burned out by virtue of technology and science questions that people are able to answer. But like if you think about it, if you start with the sale of samples and in some kind of a translational context, a cohort of samples, and you want to run a discovery to discover a biomarker signature or something like this. There's really no better solution than like in a Visium HD approach. And so as we think about all the translational applications that are kind of gearing up around spatial and around possible single cell as well, like Visium HD really, really has a huge potential to really kind of crack the large, meaningful studies and cohorts. And so we do expect it to grow quite rapidly different type of application [indiscernible] Visium type approaches, but it has a lot of potential.

So if we took Visium HD out because your competitor has a multicellular product that competes with Visium directly. Do you think like the traditional multicellular would still persistent grow given the single cell in situ approaches? I mean, obviously, different use cases and different customers, and we're just wondering for that particular product or is Visium HD necessary in order to kind of maintain the growth in that franchise?

I don't think it's strictly necessary. I think there's a lot of potential, but like once it comes out, I think it will take over a lot of the applications.

And the timing on that as well?

We haven't... A good question, I'll give you that. We haven't updated the timing on the launch.

Right, right? You just said the word you chose was not near term what are the words that you chose to define the -- when we know about that.

Nice try, Dan. But when the launch is in it I think you'll hear more but -- yes, but so it's not quite demand. Yes.

Not quite. Okay. That sounds fair. So CytAssist has been a nice [indiscernible] as you mentioned. It sounds like there was some pent-up demand that's great, but you have over 2,000 Visium customers, and a lot of those might be really small individual PI, so maybe they're not going to buy a CytAssist. But just you've been very positive about how material the benefits of CytAssist offers to customers. So it seems like there's going to be a pretty long runway of placement opportunity. So I don't know, while '23 might have some -- it sounds like incremental headwind from some of the pent-up demand like what's the runway for CytAssist.

No, I think it has tremendous potential. So yes, certainly, we have lots of customers. All the people who try to resume or potential opportunities here broad we anticipate a very large fraction of them will buy it. And I think well beyond the initial Visium customers, I think there's a lot more beyond that, too, because it's like a really, really big hurdle for Visium has been precise things that CytAssist is addressing. So I mean, we definitely see the placement opportunities in thousands, potentially many thousands as we go out there, get early, like the platform just launched. We need to get through them to sort of like a consistent sustainable trajectory past the initial pent-up demand kind of fire. But all the signs are pointing to a lot of optimism. Again, it's -- we've built it to address the key sort of logistical and workflow issues around the product. It also turns out to be very beneficial in terms of data quality and the kind of data you can get from your experimental runs and now the feedback from customers has been very, very positive. So at all pointing to becoming a major, major platform. And it is clear to us still clear to customers it is now a fundamental kind of necessity for running those kind of approach you really need that instrument.

So Xenium I can appreciate it's a very complex product and you want to ensure a life launch goes right. Just what -- maybe give a little bit more color about how you thought about -- you didn't break specific guidance out, but we have 50 placements you show in our numbers, which kind of gets us to that 40% plus. How you -- is it factors on just the learning for customers, it's really complex to learn? Is it not concerns in a bad way, but it's a complex products, you want to see how it performs in the field before you kind of push it, and maybe you have to be some tweaks, software issues, manufacturing issue, like how do we think about the factors that decade? Or is it really like we feel great on manufacturing, we feel great on the product working every time out of the box. It's just we want to ensure that the customers know how to use it first before we really push it.

So there's a lot of factors that go into it. So it's all those things. And so think about this, it's the most complicated product that we've ever produced. There's a lot of components that go into it. There's a lot of complexity in the supply chain. And when you pull a time line like that up like we did, and you're still developing it up pretty close to when you launch it, you've got supply chain lead times that's a consideration for operational capability. But initially, that's not so much we're worried about because we have the demand. We have the instruments to ship. And so it's making sure that those initial customer placements are good, making sure that you flesh out anything that you just don't know. So you can adapt quickly before you get too many places. And so I think we were cautious in that regard to make sure that there weren't any kind of issues that we need to address quickly before placing more. And from what we can see right now, those early customers are doing well, like we're seeing good data coming off of the instruments, some are posting that data publicly in the images. And so that's good. And so if those trends continue, then you start to feel better about placing more. Then you start to have the operational constraints really around manufacturing capability, supply chain lead times and just the service capability. We're doing all the service internally, and we're taking that over for the Connect instruments as well. And so that's the next constraint that you hit. But I think really, for this year, I do think that eventually, when it hits that operational cap, like that's going to be the key determinator in this year for Xenium placements. It's not going to be, I don't think, demand or customer training issues, it's really going to be the operational [indiscernible] get towards the back end of the year.

And maybe 2 quick final one. So Xenium versus Visium in terms of why customers like I think you and others have sized the market well into the billions. But how do we think about like the number of customers do you think that could be adopting, whether Xenium or broadly these single cell count do boxes over the next 5 years.

So I think, broadly, yes, the market potential is huge. It feels like at least as intense it's kind of the early days of NGS in terms of customer interest and the customer kind of understanding where this is all going. And it's almost pretty determined conclusion from everyone that this is the future. So I think that's kind of a reasonable proxy or knowledgy at least to kind of keep in mind the cause of the potential. I think you can get easily to sort of that NGS installed base potential and be on that trajectory. But in fact, I think there's a lot of upside beyond that. Again this morning, you heard Kevin mention the sort of like you're really kind of merging 3 worlds together here, microscopy, genomics and pathology. And I think that's why like when we look at this platform, it has that natural sort of attraction within the world of sort of the NGS genomics world, but it goes well beyond that into many other areas of biology and also then like in translational clinical market. So I think the potential here is like, yes, it's awesome. It is boneless. And it's going to be a question of like going through all those motions of like ramping things up, working with customers, making sure that the data gets validated appropriately and all the rest of that which is why we're investing very, very aggressively. And we do feel very strongly this is like we've got the best-in-class system now, and this is just the beginning of investing very aggressively to have more and more capabilities really rapidly, just like we've done before with Chromium and with Visium.

Justin, I'm going to seek one last one and since it's 11:40. So you're going to turn free cash flow positive in the fourth quarter, EBITDA positive and full year next year, we've got a 5% margin. How do we think about, you're investing aggressively, but yet you also want to be able to show this margin expansion. We look out a few years. What's -- how do investors think about this idea of where margins could go? Obviously, you control the first strings, what's realistic?

Well, starting with just gross margins. The biggest driver on gross margins this year is going to be the number of Xenium placements. And so as that flexes up, there will be an impact on the company margin overall. We make decisions like that strategically to drive what's best for the business overall. Thankfully, the consumables have a margin profile similar to what we're currently shipping. When you go down, you're talking about EBITDA beyond cash flow positive. We're going to have some increases in OpEx this year. But -- and mostly, it's going to be in noncash stock-based comp just on the nature of multiyear grants. But I do expect us to start getting leverage out of our operational spend and there's things that we're doing across the whole company to make ourselves more efficient to prepare ourselves for the next level of scale. And so that's been a primary focus as of late. And I don't think you have to sacrifice growth in the near term to do that.

Great. So I think with that, we're out of time. So Serge and Justin thanks for being here and thanks for being in the room with us..

Thank you.