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

Hi, everyone. Good morning. My name is Tejas Savant, I'm the Life Science Tools and Diagnostics analyst here at Morgan Stanley. It's my pleasure to host 10x Genomics. And speaking on behalf of the company, we are lucky to have Serge Saxonov, CEO; and Justin McAnear, CFO. Welcome, gents. Before we get started, quickly important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out your sales rep.

So maybe, Serge, just to set the stage, so much has gone on over the last few months for 10x. What are some of the things you want to get across to the investor community? And what are you most proud of this year?

Yes. There has been a busy year, busy last few years, I would say. And sitting here right now, the thing that I would first probably highlight is the launch of Xenium, our latest, biggest, really exciting platform. We started shipping right at the very end of last year, and it has been on this amazing trajectory. The company has put a lot of resources, a lot of really hard work into making the platform and getting it to market and has been incredibly gratifying to see, a, the demand from customers and b, the performance of the platform in customer sense. And now that it's getting out there and getting installed and customers are running it, the feedback has been just phenomenal. And that has been like really, really gratifying and one of the most amazing things to see, especially as we look backwards over the last several months. At a high level, I would also emphasize, it's been nice to see this past year the progress we've made on the Chromium front. Especially if you look outside of Asia, there's been really nice, robust growth on our franchise and progress on the kind of the fundamental product capabilities that we feel like set it up really nicely for long term from robust growth for the long term. Made some nice progress on Visium and in terms of setting up that platform also for the long-term growth on the product side. And then and just kind of overall, I would say a lot of the things that you're seeing now and the manifestation in terms of the product launches in terms of customer traction, there's really a manifestation of the work that has been done over the past several years within the company, in terms of the product development, in terms of scaling up, all the different functions within the company and taking the long-term focus. It's something that I always emphasize, something I talk about. And oftentimes, you don't see what's happening internally until it comes out. I mean right now, you're seeing the manifestation of all that work and also what you're now seeing setting us up for the future, especially with that mindset.

Got it. So let's take a closer look at Xenium. You recently placed your 100th Xenium instrument there at the end of August. I think that would imply by our math, a little north of 30 units in the first 2 months of the quarter. How much of a ramp do you typically see in the third month of the quarter, really strong placements here in the first couple of months? And we've got an investor [indiscernible] doubling of that 30-plus is fair to expect for the third quarter here.

Maybe I'll talk about just...

Justin says it's okay to answer.

I maybe add some color that I can.

Well, let me just talk in broad strokes about what sort of the trajectory of Xenium out there in customers' sense. So coming out, we've talked about there's a lot of demand for this technology, a lot of demand in the near term and huge potential for the long term. It's been really gratifying to see kind of right out of the gate, we talked about in the last earnings call, just how much initial demand and the velocity of orders coming out of the gate has been great. What we've been seeing now more recently is there's that sort of inherent demand that's out there that's driving placements, but also now that customers are generating their data and talking to other customers and sort of that word of mouth is spreading. That's leading to more systems and more order and more demand. And so there is sort of this compounding effect that's also that we're now benefiting from.

Got it.

And what I would add on the press release is it was a really important milestone for us to mark. But the key point to take away from that press release is not just that we've placed 100 instruments, but it's just the great customer feedback that we highlighted and it is front and center in that release. And then also keep in mind, when you've got a new product that is mostly manufacturing operations limited, right now, it's not exactly linear as far as how we're producing and shipping. So I wouldn't try to read too much into it or extrapolate numbers based upon that.

Got it. So on that point, actually, Justin, have the manufacturing and operations improvements continue to ramp in line with your expectations here. Where do you currently stand on the manufacturing capacity and pace of installation versus your, I guess, your steady-state internal goals for those metrics?

Yes. Well, first of all, we're really proud of what our team has been able to accomplish. And we had some great success in Q2 in basically bursting through some of the constraints that we have. But once you do that, you encounter new constraints. And there's challenges that the team has faced every day and every week that we've mostly been able to overcome. But right now, our focus is to maintain a steady level of healthy manufacturing. And we're investing in advance as far as getting components inbound to make sure that we have the inventory to press further later on. But right now, it's just making sure that we can reliably manufacture what we did in the previous quarter.

Got it. Serge, back to you. Do Xenium orders still sort of handily outpace shipments? And what percent of some of the recent order and placement strength you've seen has been related to some of the special promotions you're running for [Cosmax] customers? Is there a time line for that sort of promotions to end?

Well, so I would emphasize, again, the general trajectory here, the high level trajectory of the business. The demand is there and now the demand is getting reinforced by the feedback that we're seeing from customers. We certainly work hard to accommodate customers, maybe the ones who might have made the wrong decision previously helping them kind of get onto the Xenium platform and we'll keep doing that as necessary. But big picture wise, we're seeing tremendous, tremendous demand and really robust interest in the platform going forward.

Got it. So 2-parter on the slope of the adoption curve, right? On the one hand, Justin, you pointed out manufacturing and certain sort of operational challenges that you work through as part of any new launch. But then on the other hand, Serge, you talked about the positive reinforcement, the virtuous cycle happening. And perhaps you see this in the orders where there's clusters of orders, where one customer orders the Xenium has good experience with it, and then that sort of generates a bunch of orders at labs where they are affiliated to that customer. Do you see that happening? And the second part of that question is really sometimes with these new launches, you get that initial bolus from key opinion leaders, then there's a bit of a plateau in the ordering and then you get a second peak further down the road.

So I think those are all relevant dynamics. You definitely see with all these technologies. And to some extent, we expect that there's going to be an initial bolus of demand, especially for something that has been sort of in an area for -- in the for a long time. At the same time, there's obviously been a clear competitive dynamic. So at the same time, yes, we do see customers as they learn about other people's experience, becoming more inclined to buy the instruments. In fact, we've seen customers who have bought an instrument have run it and then based on the result of the data, would then buy another one. And we perhaps see that dynamic play out as well. So I think, yes, there's definitely multiple sort of vectors that play, which is why it's useful to take a high-level view and seeing just how often do you see launches like this one out of the gate. You see this many instruments in a brand new market and a brand new field at this kind of price point and this kind of complexity come out of a gate with such velocity. Very hard for me to think of another predicate.

Got it. Got it. In terms of just the competitive landscape, right? So you talked about some of these customers coming over to the Xenium, finding the light, so to speak. But typically, when you do miss out on an RFP and customers decide to go with someone else's instrument, what is the pain point, right, that makes them sort of reach that decision? And then secondly, outside of the transcriptomics sort of related competition, we've had Bruker pushing harder with CellScape, Techne recently acquired Lunaphore. Do some of those transactions change the competitive dynamic at all for you?

So so far, in terms of what's happening on the protein side, it has largely been sort of more of a complementary kind of thought process that we see with customers and the market dynamics. We do anticipate we've talked about launching a protein capability on Xenium next year. So we're very excited about that, and I think that should be a very powerful capability. So that may change the dynamics somewhat, but it's not really -- not yet driving kind of our market as much. In terms of sort of RFPs and how those are coming through, I think a lot of it is just sort of the question of the past. We've been very careful not to kind of -- not to speak to the platform until we're ready to speak to the platform. And so that created an impression in some customers' minds around capabilities about the platforms that weren't necessarily grounded in reality. And that was sort of -- that was the thing that was creating some initial headwinds, but I think all of that is turning pretty rapidly in our favor.

Got it. And based on your customer conversations, how much of a differentiating factor does your onboard primary and secondary analysis provide? Is there any way to quantify sort of the time and cost savings that, that enables for the average customer?

Yes. I think in many ways, it's huge. It's something that's easy to underestimate and there's a tendency in our industry to kind of not paying as much attention to software that as perhaps it deserves. And we knew from the very beginning this platform is going to be -- this technology is going to be a beast in terms of how much computation it requires. And this is one of the fundamental advantages and capabilities that we've built out of the company precisely that's our prowess in software development, algorithm development and data analysis. And we apply that prowess to the development of the platform going from the very beginning. And it is clearly manifesting itself in the platform's performance and success. All the software is built to run on instrument in line on board. So we put a lot of compute onto the instrument. And then what that means is that once the customer -- the compute is happening in parallel to the instrument run. So once the instrument is done pretty much immediately, the customer can now work with the data. And we also built really nice visualization tools to let them work with the data. So no time lag and no additional cost. And those costs can get really, really challenging if you don't do things right because again, large amounts of data, very difficult to move around and very costly to store and to analyze. So we -- from the beginning, we built a system to make sure those were not going to be barriers and challenges to our customers.

Got it. Turning to Xenium consumables. You've said it's too early to get to steady-state pull-through just yet. But how do you think about sort of max pull-through on the platform? And in steady state would sort of 25% to 30% of that max pull-through will be a fair assumption to use for our models eventually?

Yes. I wouldn't get too aggressive on the modeling at this point. And there's a few things to consider about that. One is just right now, it's very early days. And there's a pretty wide range as far as utilization. We have some early customers that are just ready to go and have it loaded up. And we have others who are focused on the custom panels and are taking the time to go through that design process before they ramp up the consumables. So again, still pretty early days. But there is some basic math that you could do just for rules of thumb. And so the theoretical capacity of it is probably just under $1 million, but it wouldn't be reasonable to assume that that's going to be the average. And so you can make some assumptions around what would one run every 2 weeks be or one run a week. But as far as which one of those it will be, I think time will tell.

Got it. Serge, you've talked about sort of 5K plex in mid-'24 adding new features, including SNVs and isoform mapping, et cetera. And then there's the multi-omic co-detection piece as well. Which of these 3 sort of categories excites you the most?

Well, so I think the ability to detect other types of variants is really, really exciting and something that's unique to our platform and something that was -- I think a lot of people -- it's easy to underappreciate because it would not necessarily be clear to people that it would be possible. So being able to detect SNVs, for example, in the context of cancer and actually being able to visualize them where they are in the tumor progression is an incredible capability. It's very exciting. And we have a number of customers who are like just sort of dying for that capability because we see that as the future of cancer analysis. And so it's very exciting. It is actually something that's possible to deal with the system already if you know how to design the probes and if you have sort of the specific targets in mind. And certainly, we are interested, we're excited about the 5K and especially with the quality of the data that will be generated by weather capability. And co-detection, again, with the proteins is something that our customers are also interested in. It's exciting as well. But I'll go back to say is like the sort of capability of detecting other types of variants. It is really exciting. And then it feels, again, I've said this before about this platform, it feels like science fiction in many ways.

Got it. Switching gears to chromium. Let's talk about placements a little bit. How are you sort of balancing your commercial focus between your single-cell portfolio and your spatial portfolio, particularly given the excitement around Xenium? And as we look to next year are sort of flattish to slightly up placements a fair way to think about how that installed base grows?

So let me just start in terms of just the commercial focus. And so one thing, and we've talked about this before, in terms of the full sort of company focus, we brought a lot of attention, a lot of investment into Xenium, across R&D, certainly across operations and especially this year, a lot of focus has been on Xenium, for sure. And that definitely kind of tip the balance somewhat in terms of the time and attention of our sales team. That has been a priority, and that has borne fruit clearly, it has been a very successful set of decisions that we have made. Going forward, we certainly want -- we intend to keep driving in spatial and Xenium in particular, but we'll also put additional focus now on to the Chromium franchise. I think like I said, there's been a lot of nice progress on that front as we look into our core geographies. And it set up really nicely for future expansion, both in terms of just the sort of the core usage of our existing customers in terms of adding new customers due to the additional capabilities and kind of the progress of the products that have been launched relatively recently and how much they set to grow going into next year.

Yes. And as far as the second part of the question, I think it's a little too early to start talking about expectations for 2024 placements. But a few things to keep in mind as we finish out this year and head into next year is the Chromium franchise has been really strong, putting aside the challenges that we've had in China. When you look at the Chromium consumables year-over-year, up over 20% year-to-date in both AMR and EMEA and basically in the mid-teens overall when you include consumables and instruments year-to-date year-over-year. Flex is something the customers that understand it and have used it are really excited about. That's a driver for Chromium IX and X placements. As far as our Chromium installed base is still, I think, a relatively smaller percent over all of those that have upgraded into the Chromium X or IX. And so I think that there's plenty of room for X and IX to continue to grow on the Chromium instrument side.

Got it. Serge, your thoughts on just the traction for some of these instrument-free approaches in single cell, Parse, Fluent, Scale bio, et cetera, do you run into them more often than before? And what's been sort of the user feedback on some of these approaches?

Yes. I mean -- so one point of context is that a lot of these approaches have actually been around since roughly 2016 sort of this combinatorial split-pool approaches. And customers have doubled in them across the years. There's been somewhat more -- starting -- we talked about this about 1.5 years ago or so, there's been more prevalence at least of the companies trying to kind of push them into this market and so it created some amount of noise. We've always had some amount of background competition in the single cell market. Companies come and go, usually trying to compete on price and to some extent throughput depending on how you define it. And I don't think that the story has necessarily changed materially. If you look at the price points where you can get to with Chromium, especially if you look at Flex, but also the approaches that you're going to -- you can use on the high-throughput kits with other products on Chromium, you can get to really nice price points and really massive throughput. At AGBT earlier this year, we showed experiments running 8 million cells in a single run on Chromium. And so those are not real advantages for any of those approaches. And then we have much better quality data, much wider set of applications, much better support, everything like just fundamental superiority in basically every dimension of product features. And a very large installed base. So there isn't -- I don't think there's necessarily a material change in terms of the market sort of competitive dynamics. Yes, there's some increased amount of presence of there by those companies. But we've seen in the past, they come and go. And we keep coming back to just the fundamental superiority of our innovation engine and the products and making sure that the customers are successful and love what we do.

Got it. On the Flex, how should we think about just balancing the fact that initially, it's a little bit lower revenue per sample. And then eventually, you expect strong elasticity of demand as customers run more samples. And over what time frame, do you think that sort of comes through in your numbers?

Yes. So the thing is that there's a lot of different variables at play here. So kind of giving an average number ends up being challenging. So one is just the awareness factor for people to learn about Flex. It's something that takes quite a bit of time, especially because it's something that we've been learning. There's so much of the current usage is already so well established with the existing products or gene expression our 3 prime, 5 prime products. And so switching people over to something new like Flex, which has amazing features and amazing benefits to offer, but it's a different kind of a product, a different kind of chemistry, takes amount of time for people to become aware of it, to become aware of the capability. I still go out in the field, I talk to some like very top customers, and I tell them, "Hey, like now you can do single cell FFPE and it still blows their mind," even though the capability has been out there for some amount of time. People don't necessarily internalize these things. So there's some amount of time like as people kind of learn about Flex, try it, right? And then there's a question of like from trying to like actually scaling up and then from scaling up, scaling up to the point where the lower price per sample is overcome by the volume, right? And so we've seen the scaling up going from trying to pilot, and we've seen this consistent pattern where you do -- you try a small experiment. You go to a larger experiment and you go to a larger study and that takes -- you think in terms of a couple of quarters, 2, 3 quarters time, and then you probably need to give it another sort of quarter or 2 in terms of scaling up to larger studies that would not have been possible in the absence of the product to price point. And we're seeing that. There's a number of customers out there that are contemplating larger and larger studies that were not in contemplation before.

Got it. Is Feature Barcoding now live on Flex?

Feature Barcoding, it's for protein detection, yes, on Flex. There's a little wrinkle. It's been live on the singleplex Flex. It's now live on multiplex. So you can do kind of the -- the products have then become full feature, very exciting capability.

Got it. So just stepping back, as you think about the Chromium franchise, do you think sort of 15% growth in steady state is a fair way to think about it over the medium term? Or is it sort of hard to frame that number at this point because you don't know how much appetite that will be for spatial, which may or may not sort of take away from some of that single sale enthusiasm in the near term. How do you think about that dynamic?

So yes, a couple of things. It is -- like we always said, there is greater for us -- there's great certainty around the end point. And especially at the endpoint, when you combine sort of about 3 franchises, 3 platforms, it's very clear to me that -- and our customers, when you talk to them on precedent that ultimately, the future has to come down to where you measure everything with single cell context and with spatial context when that's relevant, right? That's got to be the future. We're all headed in that direction. How it splits out between the sort of 3 different technological approaches, that's a little harder to tell. Clearly, there's always going to be a place for dissociated approaches like by Chromium, lots of applications, of course, Chromium is here now and has a lot of momentum going forward. And so we feel really good about the expectation the Chromium should be a robust -- should have long-term robust growth for a long time to come. Precisely how that translates into specific numbers, around 15% or slightly higher, slightly lower, so it's a bit hard to tell, especially since these dynamics tend to be not strictly linear, not strictly monotonic because there's lots and lots of customer segments that the platform is set to go into a different velocity at different times. And so again, feeling really, really good about the long term. I think there's tons of robust growth ahead of us both in the near term and in the long term. Precise numbers are kind of necessarily somewhat challenging to put on.

Fair enough. Justin, one for you. I mean as you think about the midpoint of the guide this year, how should we think about upside versus downside? You called out China, one of the themes that's come up more and more in my conversations here in the last couple of days has been the anticorruption crackdown as a bit of an incremental headwind. I don't know if it really applies to you in China as much. But just give us an update on the distributor inventory situation and what you're hearing from your customers on the ground?

Yes. So I guess, I'll start with the first part of your question, just how we think about guidance overall. So on our last earnings call, we raised our guidance range to 600 to 620, midpoint of 610 based upon the strength that we saw in spatial driven by Xenium, and that was partially offsetting some of the weakness that we saw in China continuing on. And then we talked about what our expectations were for the rest of the year in China, specifically was that Q3 and Q4, we expect it to be roughly flat to Q2. And so we did have higher inventory positions, and that's something the team is continuing to work through. And so we are working with our customers to bring those inventory positions down. And so really, you see a bigger impact on the shipments in the current period. We're in a situation where you're bringing inventory down quarter-over-quarter. Overall, in China, we're -- we feel good about the customer optimism that we're seeing. And just overall how our products are regarded there. As far as the anticorruption crackdown, that's nothing that we've heard of specifically right now that would impact our business there.

Got it. And in terms of the Xenium launch impacting gross margins, how do you think about sort of that dynamic playing out into the back half of this year and into 2024?

Yes. So first off, there's a few important points to take away. The first is that for the base of our existing products, gross margins are relatively stable. And the change that we're seeing in gross margin right now is due to the investment that we're making in Xenium instrument placements. And keep in mind, this instrument was one that we optimized for performance and time to market, and we sought to build the best instrument in the space, and we felt -- we feel that we succeeded at that. And so right now the way that we're looking at Xenium instruments, it's all about prioritizing placements right now for the consumable pull-through that will follow. So as we continue to place more instruments, there will be an impact on the gross margin. Over time, as the consumable streams ramp up, those will help offset the margin of the instrument. There are cost reductions that we've already taken, although relatively small ones. As we ramp up the volume overall, there's going to be some benefit from just the fixed cost being spread over more instruments. But keep in mind, too, right now, we've got a really well-performing instrument. And we don't want to mess with that too much in the near term as far as swapping out components. And so we feel good with the balance that we're striking right now with optimizing the placements and the profile that we have. But we do feel that it will continue to improve over time.

Got it. And just sort of pulling on that string a little bit more in terms of your OpEx and expectations for cash flow breakeven. Should we sort of assume that given the sort of really good momentum you're seeing on the Xenium franchise, free cash flow breakeven probably sort of comes through in the first half or the mid-2024 time frame.

So just to be clear, this is something that we're still driving towards in Q4. I think it's going to be close. I think it could be easily be on one side or the other, and it could come down to shifts in working capital. Right now, putting that goal out there and getting the whole company behind controlling our cost, while still trying to balance our aspirations for growth, it's been really important and really proud of how the whole company has been able to rally behind that. Driving that discipline was huge. But I think in the near term, the pressures that we're going to see in Q4 are going to be the Xenium inventory build. Some of the investments that we're continuing to make for installation, training and support as we seek to place more Xenium instruments over time. And then just the placements of the instrument itself. It has been a competitive environment out there. There has been a lot of noise, although the performance data is starting to come through right now, and that's going to be a good tailwind for us. We have had to discount the instrument deeper than we normally would have. And so we'll see how those trends emerge or change towards the end of the year, but there has been some pressure there.

Got it. Last question for you, Serge, on the ongoing litigation. You've got a decision coming up. It sounds like on the other side of September 19 here, so fairly quickly in terms of the European UPC. So just how do you feel about that? Any updates from the hearings that have already happened? And beyond that sort of decision, how should we be thinking about sort of the next key dates to watch for? And how this thing eventually sort of settles out? I didn't say settlement. I said how this settles out.

Like we've got multiple cases, on multiple patents and multiple jurisdictions, on multiple products going. And I'm not going to go into details, but obviously, we've invested a lot in R&D. We invested -- we said from the beginning, we made those investments with -- in order to build out this franchise and to make sure that we can practice these inventions ourselves. So we have no intention to license our intellectual property. But our focus is really on the customers. Like I said, this is all in service of making sure we can develop the very best products to the customers and deliver the very best experience. And that's what the full company is focused on right now, and that's what you're seeing happening in the field and you're seeing the fruits of that. So that's what I would emphasize.

Got it. We covered a lot of ground. Thank you so much for your time, guys. Appreciate it.

Thank you.

Thank you.