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

We'll kick things off. Thank you for joining us. My name is Michael Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team along with the other senior analyst, unseen, Derik De Bruin. Joining us for our next session is 10x Genomics, and we're excited to host Serge Saxonov, Co-Founder and CEO; and Justin McAnear, Chief Financial Officer. Serge, Justin, thanks for coming.

Glad to be here.

Thanks for having us.

Format will be the same, fireside chat. I'll poll for questions a couple of times. Don't be shy. Just raise your hand, and we'll get you in. Just to kick things off, guys, the usual opening question, you reported 1Q results recently, updated the guide. Could you give us some -- the puts and takes of the quarter, some key points? What did you see as the quarter unfolded?

Yes. So overall, we feel good with how the quarter ended. There were definitely some regional dynamics in play and some differences between product lines as well. Regionally, we saw some weakness in China. China was a little bit worse than we thought it would be, with higher inventory levels and us selling through basically 2 different levels with distributors to service providers, to the end customer on the heels of the biggest price increase that we've taken in history. But that was offset by -- more than offset by the strength that we saw in AMR and EMEA. And so if we think that the China weakness overall is relatively transitory as we get to the back end of the year, then I think that's good news overall. As far as Q2 goes, in China, we do expect, on a dollar basis sequentially Q1 to Q2, China to be roughly flat. On the product side, definitely saw some good strength on the spatial side, with CytAssist, solid demand continuing from Q3, Q4 into Q1, not quite at the same level as the 2 launch quarters, but solid demand for CytAssist nonetheless and also some good indications that it could be driving incremental Visium revenue. And then also Xenium continues to ramp steadily based upon the great initial feedback that we're getting and feeling more bullish on the Xenium trajectory, enough to increase the guidance.

Great. Maybe a couple of other points I want to touch on. One, I mean you discussed China weakness as transitory, but what about Americas and EMEA? Both of those were in the 30s, really strong growth. What really stood out for you there as to why you were able to sort of jump back up that quickly?

Well, I think it was a relatively easy compare year-over-year. So Q1 in last year was challenged as was Q2. I think there's a few different ways to think about it. One is that, this is a continuation of the ramp that we were seeing in Q3, Q4, continuing on into Q1, one that we expected to see a little bit earlier last year. And then as far as China, just to talk a little bit more about that, China is still murky with the different levels that we're selling through. The fact is, is that inventory levels are higher, and we'll be digging more into that in the coming months as well.

When you say inventory levels, are you referring to more on the consumables side?

Yes, it's the consumables side. So it's basically what the service providers hold that the distributors sell into once they order from us. And whenever there is a price increase, like we had at the end of the year, they try to make the most of that and buy ahead. But then when you couple that with the disruption like lockdowns, there's a magnifying effect of those 2.

Yes. All right. Well, I also want to touch on some of the growth drivers you highlighted. So first, I mean, let's talk about CytAssist. It's been about a little over, I think, 9 months now or maybe a little bit more than that since you launched it. Really strong uptake late last year and early this year. Anything you can comment on in terms of installed base, which customers you're seeing the best traction with?

So we have been -- we had reasonably high expectations going into the CytAssist launch, based on our experience with the Visium product and specifically kind of identifying that as excited as we were by the initial Visium launch by the fact that it really has this potential to bring the world of genomics, molecular biology together with histology and pathology, we also realized afterwards that it also presents its own challenge. Because you actually need to bring together these people who are not used to working together and the logistics of the workflow of making -- preparing slides and then having to do molecular biology on them and training the people, cross-training them in this area is really challenging. And CytAssist addresses all of that. It simplifies -- it kind of removes all these logistical complexities because it allows histologists to prepare the slides the way they've always prepared them and allows now the molecular biology to be done at a different site by molecular biology experts. It also greatly simplifies the workflow. It also allows people now to access all the slides that have been prepared bioRxiv -- biobank samples from the archives and so on. So -- and then also on top of that, it also produces really nice data, better quality data than anything else that's been there. So they -- it had a lot of really nice things going for it. And there was some amount of pent-up demand that got built up in anticipation of our launch. And one of the awesome things to see is that actually sort of our expectations have been validated in the market as -- based on the reactions from customers. So they've started running, people have started scaling, as Justin suggested, that actually we are now finding that drives increasing consumable usage as well on the Visium side. So there's -- and it's very clear to us now this is really the way to run the Visium type of workload. You really need that instrument. You need the CytAssist. And that sets us up. I think this is the foundation of the franchise really going forward.

Is there a scenario in the future where Visium is only available on CytAssist? Or is there any appetite to, maybe with next iterations, sort of move in that direction just to make it the same razor-razorblade model?

We are fairly convinced that it really is -- CytAssist is really the way to run this. And while the -- it's really the future of the platform where all the future generations of the assays will be based around CytAssist.

Okay. All right. And in terms of that higher utilization or whatever you want to call it, any way to quantify it? Is it just the beginning of an uptick or 10%, 20%, just directional numbers?

Yes, it was significant enough to stick out to us like outside of general noise that you would think looking at data like that. But I would caution that there's still relatively few data points over a shorter timeframe. So we've just got to be careful about interpreting that. But from the initial results that we saw, it looks meaningful.

Okay. All right. And then maybe on Xenium, another area of strength you talked about. Maybe just take a step back, compared to some of your prior product launches, this is an area where, at least from the beginning, there's a lot of chatter on competitive landscape and how it stacks up versus other platforms. So maybe just to start with, what do you see as the key areas of differentiation or what are customers citing as key areas of differentiation for you?

Yes. So maybe a couple of points. First of all, I would suggest that when we first launched single cell, it's easy to forget now, but there was actually a pretty competitive landscape back then. And what we emphasized back then certainly was throughput, cell number and quality of the product. And a lot of the same criteria apply here as well. So we talk about throughput as being a big differentiator relative to other in situ platforms that are on the market, because we knew from the beginning that was one of the key design specs, like a necessity for moving this technology from being an awesome general kind of exploratory proof-of-concept technology to something that could be a commercial product, is being able to run meaningful numbers of samples so that you could actually get good pull-through going and have a commercially viable platform. So we've always emphasized it, and we've built a system, and that is resonating for sure. But also what we built the system to -- as well as to optimize for data quality, so sensitivity, specificity. A lot of it comes back down to our fundamental chemistry that we're using on the platform, but also all the other optimizations we've done across the board, whether it's optics, hardware, software, chemistry and so on. And it is clear now that we are in the market in the first place, and we've done the study which we put up on our website as well to help people compare us against the other platforms is that we have far superior specificity. Again, it almost definitionally kind of comes down to our chemistry and also much better sensitivity than platforms out there. So the quality of the data is really, really spectacular. Now that comes along with big investments we made in the workflow, too, and we've got lots of kudos from customers around that, and also data analysis and software. So this is something that we see as a particular strength of ours going back to the very founding of the company. We've invested a lot in building up capabilities around software data analysis, bioinformatics. And we brought them to bear in the development of this platform, which is a particular challenge. The data that comes off of just the basic read-out, the images are enormous, lots and lots of data that's being generated by this instrument. And so we put a lot of compute, tons of compute on to the box itself to process this data to analyze so that it's seamless and easy to use to the customer. And that's another sort of feedback that we've gotten. The whole sort of experience end-to-end run-to-run from starting with your sample to getting insights has been really, really encouraging.

What's the -- who are the types of customers that are some of your early placements on Xenium? Is it someone that's been Chromium and Visium and actually CytAssist user in the past, it's usually people within the ecosystem? Or are you bringing in new customers?

Yes. So I mean, one thing to kind of keep in mind as a calibration that is hard to find, if someone is going to kind of jumping into adopt this kind of a cutting-edge technology, it's very unlikely that they would not have used single cell at some point in the past several years, right? So almost definitionally, the vast majority of our customers were adopting Xenium also have been Chromium users, and quite a few of them have used Visium and CytAssist. Although we do have some new customers, but by and large, these are sort of either new companies being formed or new kind of a new [ TI ], a new lab that's being formed. We're also seeing customers who are kind of going all in on the 10x ecosystem. Again, maybe it's a new company that's being formed, and we get a purchase order that combines Chromium X, CytAssist and Xenium all together. So there is a pretty substantial amount of sort of within ecosystem. But I do think there is a substantial interest more from translational use cases. I've heard lots of interest from customers in how this can ultimately go into the clinic or become kind of a clinical solution later on. I think that's still early. This is kind of looking down the road. Right now, we're still very much sort of early adopter technology evaluation phase.

Okay. And then you've been shipping them the Xeniums for a few months now. Any early feedback you're getting from customers? And sort of is that something that you're -- you talked about sort of a measured, gradual ramp as you go through the year. I imagine you're incorporating some of that feedback and learning from it as you continue to refine both operations and the platform itself.

Well, so the feedback has been really, really great from the beginning. And it is true. Like going into this, launching the very first instance of a platform of this complexity, we went in with eyes wide open, fully expecting that there's going to be -- there should be issues. You learn things in the field that you don't -- you can't ever catch fully internally. And certainly, there have been issues that would pop up here and there, and our teams have been phenomenal at jumping and addressing them. We've been getting lots of kudos from our customers around the sort of the help that we're giving them. And so by and large, the experience has been really great, and the feedback has been really good, which has given us confidence to certainly press increasingly on the platform in terms of sort of internal manufacturing and operations and scaling our strong positioning as well. So for sure, we're feeling really pleased and encouraged by the early customer experience. We see tons of demand out there. We're certainly leaning into this now with the sort of the full force of the 10x organization.

And when you talk about some of that feedback, I mean, you're constantly making refinements to your existing technologies, where you're putting up newer versions of the chemistry, newer versions of the instrument. Is the feedback you're getting more on the operational side or -- I mean you talked about already specificity, sensitivity and strength. Are there any areas there where people are trying to push you a little bit more or a bit less? Sort of like where is the focus?

So we talked at the AGBT -- at the AGBT Conference a couple of months ago, we talked about sort of our roadmap and talked about some of the areas we're working on. And one of the great things about being in the market is now you can use the information gained from the market to help you adjust your priorities. So we're certainly doing that. We've done that always. That's been sort of in the DNA of the company. We try to be very responsive to customer requests, so we can turn around next generations of assays, next generations of features. And so we're doing that actively, and we are, kind of in real time, adjusting some of the internal priorities. The universe of things we should be working tends to be pretty clear. But it's the question of like what is that rank order. And that's -- it's great to get this customer feedback now very clearly to keep feeding that in. And that's one of those things that -- it's an advantage that builds on itself. As you're getting success in the market, as we learned with Chromium, you can press that advantage by taking that early feedback and feeding them back into product development and then extending your lead as you bring those features back to the customer. So definitely doing that. Lots of work ahead. Like I said from the beginning, one of the things that excites us about this platform in general is there's tons and tons of headroom for innovation going forward. It's an awesome platform that we're starting with, and there's tons more to do. And we'd probably expect to keep pressing on the gas here.

And when you think about the 3 different -- I still think of as 3 different platforms, single cell, spatial, in situ as pretty separate ones. You talked about how a lot of it sort of goes to the same customers, [ they are going to do one ], they're going to do the other, right? Are you seeing more and more workflows being developed? Would that incorporate multiple platforms, where first, you're going to run it on the Chromium, then you're going to run it on Visium, then you're going to run the sample on Xenium? Is there -- are your customers starting to link these somewhat disparate technologies together?

So there's definitely interest on workflows we're seeing from customers where they are kind of running these samples. And in particular, we demonstrated this ability. You can run your Xenium experiment and then take the same section and actually put it on a Visium run, on a CytAssist and get the full data. And it's mind blowing. And in fact, we've seen people now talking about using our Flex kit to then also, on the same section, to actually analyze the RNA. So there's lots of possibilities, and people are definitely exploring it. Now this is sort of the cutting edge of the customers who are really willing to press on that. I think more typical is to use -- you run your sort of Chromium experiment to get this sense of the cells in your sample, and then you run your Xenium now and Visium as well to map those populations of cells you find in the Chromium to kind of understand what's going on in their specific spatial features. So we'll see. It's still very early days, obviously, with all sort of spatial platforms. But we do see certain interest in that at the very least and a number of people are working on that.

Yes. Yes. I mean it sounds like you think that there's opportunities to leverage the different technologies just to complete different parts of the picture, right?