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

Hi, everyone. This is Rachel Vatnsdal, from the Life Science Tools and Diagnostics team with JPMorgan. Thank you so much for joining me today. I've got 10x Genomics on stage. I'm first going to introduce Serge, CEO of 10x. He is going to start off with a presentation around 20 minutes, give or take, and then I'll shift to Q&A. If anyone in the room has questions, please feel free to either submit them via the app or you can pin me directly.

Thank you. Really great to be back here. So before we begin, I want to point out our safe harbor statement on Slide 2 and invite you to visit our website for additional disclosures regarding forward-looking statements made today. So 2023, we had another strong year, finishing with $619 million in revenue, representing 20% growth from a year before. We had big increases in customer publications in intellectual property and in our installed base of instruments. In the fourth quarter, we had $184 million in revenue, which represents 18% growth from a year before. And importantly, we had $49 million in Spatial revenue. And for the full year 2023, we had $135 million in Spatial revenue. And for a long time, we have been well known as the leader in single cell analysis. And now in 2023, we have also [indiscernible] in Spatial Biology as well. And the big reason for that, the key driver, really, the big story of 2023 for us was the launch of our Xenium platform. We sold over 250 instruments in just the first 12 months of launch. This is a really, really special trajectory, both in terms of customer demand and in terms of our ability to scale up operations and manufacturing. It's really rare to see this kind of trajectory, this kind of momentum right out of the gates. The platform is also met with incredible enthusiasm by customers. And you can see this across the board, across social media, conference presentations, customers talking to each other. Xenium has also emerged very clearly as the top-performing system in the market, best sensitivity, best specificity, best throughput, best biological insights. And this is based on the work done by multiple independent researchers doing really rigorous, really careful studies using their own systems, their own data in their own hands. And so now as we enter the new year, more and more customers have actually gone through the full cycle of buying these systems, installing them, running, generating insights, making discoveries, putting those together with publications, and actually having papers published. This is truly remarkable speed and really speaks to the special trajectory and the enormous potential of this platform, which is why we truly believe that Xenium is offering a new age of genomic analysis. So this is just the beginning for Xenium, and in many ways for the company as well. We built 10x with the premise that this is the century of biology, that some of the greatest value-creating opportunities in history lie ahead of us, that will transform health care that will transform the world. And that the key challenge, in fact, the crux of the opportunity is that we still understand relatively little about the underlying biology. What we don't know, what we don't understand that it's much greater than what we do understand. And our goal at 10x is to accelerate that understanding the mastery of biology to ultimately advance human health. And the most salient thing about biology, what makes it particularly unique and particularly challenging is it's immense complexity. Each one of us has close to 40 trillion cells, each one of those has this really complex long genome. And within each cell, there's a myriad of individual molecules, interacting with each other in all kinds of complex dynamic ways. And there's just no getting around the fact that in order to understand biology, you need to be able to confront the complexity. You need to be able to actually measure these biological systems, tissue samples at the resolution and that scale that actually is able to capture that complexity. And to do that, the world needs new generations of tools, new generations of technologies. And that's what we built 10x for, to deliver new generations of tools, new generations of technologies, to accelerate progress in science and ultimately, medicine. And so from the beginning, we focused on building up foundational capabilities, building up deep expertise across multiple different disciplines, setting up the right processes, nurturing really tight multidisciplinary culture to enable collaboration at speed. And then we also think really deeply about where the world is going, what are the big questions that need answering and then work backwards to determine what products, what technologies need to be developed in the service of those questions. And then once we gain conviction, we move fast with speed to deliver awesome breakthrough products. And so this capability, that's what we call our innovation engine, ability to build breakthrough products fast and also knowing what products to build. This we see as a core foundational advantage. And our innovation agent has been incredibly productive across the years. Many breakthrough products, a lot of innovation, revolutionizing multiple fields in biological research. And we take real pride in our ability to innovate, to move fast, to be nimble, and increasingly, we are now able to do this at larger and larger scale to command more and more resources to fuel our innovation engine. To complement our product development abilities, we also scaled up our commercial engine for global reach and top-notch customer experience. We have a large worldwide [indiscernible] sales force. We have a best-in-class support organization that's just obsessed with customer success. And this, the commercial reach, we see as another core pillar of our advantage. We have also built out really strong capabilities in our operations organization, which is really, really important because we need to be able to manufacture and reliably deliver what are really sophisticated, really complex technologies to our customers and be able to do this at really high quality. And so now we have created this foundation to scale well into the future and to be able to optimize costs and drive the right structures over time for wider and wider adoption. And so we have used these capabilities to build out products that we believe will enable the future of biological research. It became clear to us early on that the ability to preserve single-cell context and Spatial information, is going to be critical across just about all measurements in biology. And from first principles, there's really 3 ways of doing this technologically. And those are the 3 -- those ways are represented by the 3 platforms that we have developed at 10x. The Chromium Single Cell platform, Visium Spatial, and Xenium In Situ. And so having them all under one roof gives us confidence we have the full set of solutions for the future of biological analysis. So first, the Chromium Single Cell platform. So this, Chromium is the biggest leader in single cell. It's the platform that really catalyzed the single cell revolution that really created the single cell market as we know it today. It works on the associated cells, allows customers to take individual cells across thousands to millions of cells in a single experiment and analyze each across a broad array of analytes from transcriptomics to epigenomics to proteins to immune receptors and also be able to do it together simultaneously in a multiomic context. The system is known for its really high performance, quality of data robustness. There's thousands and thousands of customer labs around the world using Chromium across just about every area of biological research. And there's now this large ecosystem of customers data sets protocols that provides real value to our customers because it allows them to collaborate with each other to learn from each other to put their data in the context of other data sets. So Chromium has come really far in a really relatively short amount of time. But at the same time, we believe the potential for the platform is much greater still. The cell is the fundamental unit of biology, and the vast majority of research that can benefit from single cell analysis doesn't yet. And so our goal is to keep investing aggressively in the platform, both in terms of product development and in terms of commercial focus. Now turning to Visium, which is the leading platform for spatial discovery. It works on tissues. It measures the full transcriptome across the entire tissue section and for each molecule that measures, it's able to map that molecule to its position within the tissue. And by virtue of that, it generates spatial data, and because of that, it ends up bridging the worlds of histology and genomics together, the worlds previously existed far apart from each other. Since the initial launch of the platform a few years ago, we have added many new capabilities, including last year multiomic protein profiling. We now have over 500 [indiscernible] instruments installed throughout the world. This is the instrument that has really supercharged the platform, delivered really top-notch workflow, really high-quality data. Visium is really the ideal tool for unbiaspatial discovery. But once you know what you're looking for, you know which genes you want to focus on, then Xenium becomes the ideal platform of choice. And so what Xenium allows you to do is to measure large panels of molecules directly in tissue, in situ and then integrate the imaging-based approach. It provides an incredibly detailed view of your tissues, individual molecules that subcellular resolution, something that felt just like life science fiction just a few years ago, is now available in hundreds of labs around the world. The system is fully integrated, provides end-to-end workflow, intuitive software, it's designed for routine use. So it just works in customer sense despite the really complex sophisticated technology underneath. Produces very clean data, custom panels, and importantly, it's compatible to H&E staining, which makes it compatible with standard pathology workflows. Now our 3 platforms provide highly complementary insights, highly complementary data, and having them all under one roof provides a lot of value to our customers. So most Visium and Xenium application experiments, for example, make use of Chromium Single Cell data. Many Xenium experiments naturally lend themselves to further exploration with Visium and vice versa. And so the best way for researchers to get the maximum out of insight from their sample is to apply all 3 platforms in combination. And so there's a big advantage to customers to being a part of the 10x product ecosystem because it allows them to get the best insights, the best value and the best support across the board. So products have been used to make discoveries across just about every area of biology, every disease, every therapeutic area. It's in fact, really hard to think of an area of biology where our products have not led to major discoveries, major breakthroughs. And one common theme, one of the big learnings over the past several years of all this research, it's just the pervasive heterogeneity that exists across just all biological systems, all tissues. And what this means is that in order to understand biology, you really need to get to the level of individual cells. You need to understand what they are doing, and how they interact with each other. And which means that it is our belief that over time, every sample will need to be analyzed with single cell context with spatial information. In many ways, if you look at how our products are already used, you see the evidence of that in the marketplace already. The way that our customers use our products, they're essentially replacing much of the conventional toolkit of standard life sciences. That often times presents a challenge for us of estimating market size because we're not displacing any particular technology, we're not contained to any particular application. We are gathering dollars and customers from all across the ecosystem. We're creating new markets. But one way to estimate the opportunity is to look through the lens of the types of questions that researcher ask, and estimate how many dollars are flowing into answering those questions and which ones of those questions can be most readily answered using our tools. And if you look through that lens, 4 categories of questions emerge. First is atlassing. So this refers to baseline characterization of biological systems, what cell type cells, cell states exist. Next is figuring on genetic mechanisms, really the subject of functional genomics, growing downstream from DNA, from gens, from variants to figuring out what they do, how they actually behave, what biology they influence within cells, within tissues. And this is really the domain of functional genomics, where the genomics field has been focused on for the last 10-plus years. The third category is what is really mainstream biology. If you think of a typical biologies that are focused on a particular system, particularly gene pathway, cell pathway. And here, the opportunity is to give them a much larger context, the genome scale cell-specific context to truly illuminate the biology they've been trying to understand. These customers, by and large, are not necessarily very technology-sophisticated, so ease of use, data analysis, and cost becomes important to them. And the fourth category is translational applications in biopharma and for clinical research. These applications typically follow -- come after basic scientific research with the intention of specifically impacting human health. We've established strong [indiscernible] here, but it's still really early. There's a lot more coming here. Now I'll touch briefly in a little bit more detail on two of these areas. So first, atlassing. This is where single cell really got going really kind of exploded out of the scene. And on first glance it might appear that this is a pretty contained application because once you construct your atlas, you're kind of done. But the fact is biology is incredibly complex. And despite all the work that has been done towards atlassing, it's still really early days, and there's much more to be done going forward to really reflect the actual complexity of biology. And so researchers are looking to do much more to larger and more atlases to move beyond just transcriptomics, towards multiomics, towards spatial information, toward more phenotypes, development stages, diseases, expand out to more human populations, geographies [indiscernible]. And so because of that, there is these large efforts around the world to put more funding larger projects to do more atlassing experiments. And then on the other end of the spectrum is atlassing -- is translational applications, whereas our technology stand to start with atlassing. Over time, we expect them to become increasingly critical for translational work. And we're already seeing that potential in the trajectory we're seeing in the business now over the past several years. Based on the publications have been coming out, based on the clinical trials they have started using our products. And also based on larger consortia studies that have been coming together like the MOSAIC study that we talked about earlier last year, which entails analyzing thousands of clinical samples to look for biomarkers and to build predictive models for cancer. And what's really remarkable is that up until recently, our products were not really even suitable for translation applications, which is now changing with the arrival of Chromium Flex product, with arrival of cross-platform, FFPE compatibility, with the protein capability coming on to our spatial products. And so going forward, we see this growing opportunity in translational applications, and we intend to [indiscernible] to it and put additional commercial focus towards realizing it. And so we have these big markets, these big opportunities in front of us. And now we have major drivers that will propel us to take full advantage of these opportunities. So first, underlying all of us is our foundational strength, and that's in technology and product innovation. And we're going to keep releasing new products to deliver better insights, more workflows, better cost structure to keep driving into our markets. The cell is the fundamental unit of biology. And so we expect single-cell approaches to keep expanding into more and more areas of scientific research. For the same reason that the cell is the fundamental unit of biology, we expect that the expansion of translational applications as well. Spatial biology has been on a really strong trajectory right out of the gate, and we expect that to continue as it delivers the new era of genomic analysis and transforms multiple fields, and we expect it to be a big growth driver for us going forward. And over the coming years, we also expect to see increasing evidence of clinical utility starting of these approaches, which will set us up really well for future markets down the road, but also will serve as an accelerant to further accelerate these other drivers, especially in translational applications. And so now when we think about innovation and future product development, a really important core principle that animates our decision-making that drives how we think about new products is the belief in the universality of these technologies. These are general purpose tools that are meant to go to address all areas of biologies that can answer a really broad spectrum of research questions. And it is our imperative to drive wider and wider adoption to democratize their use to propel them to ubiquity. And that means, first, we're going to keep investing in core capabilities to measure more and more biology to drive more and more insights at a greater and greater level of detail, means raising the bar on more analyze more applications, more multiomics to drive higher resolution, higher sensitivity, more multiplexing, more scale, more throughput, measure more cells and more tissues. It's also really critical to keep investing in ease of use. Our products are known that they just work in customer hands, but what works in one customer's hand might not be so easy to use for another customer, especially as we enter in new customer segments, especially as we are reaching to wider and wider adoption. And so we're going to keep investing in workflow optimization, addressing experimental logistics, sample prep, sample breath, data analysis, computation, delivering more efficient insights. And finally, lower cost, we strongly believe there is huge elasticity of demand in our markets. At this stage, our opportunity set is not really bound by samples or by dollars. And so our goal is to deliver the right pricing structures to capture more and more of the economics from the ecosystem. And that means driving down costs along multiple vectors along lower cost per cell, per tissue, per sample, per experiment, per project. The key is to deliver more and more value per dollar of customer spend to convert more and more life science research to this new generation of tools and technologies. And so it's along these lines, so we're very excited about future capabilities. We will be bringing out to Chromium. Chromium is well known as the best performer system for single cell analysis, along multiple dimensions, has the widest diversity of applications. And now we have a number of developments in the works that we'll be talking about later this year that will really raise the bar on performance, take Chromium to the next level, advances in sensitivity, cell recovery, throughput and scale, ease-of-use applications. And these developments will also put us on a path to lowering cost over time, so that over time, we can drive to the price point of $100 per sample. And we believe that as we advance in that direction, the market for single cell analysis will expand tremendously. Turning to Xenium. We have exciting developments coming throughout this year. First, cell segmentation. This refers to the ability to accurately map sell boundaries in customers' tissues. Now Xenium launched with really robust cell segmentation approach. But this is a really challenging problem to make work across all different tissues, across all different samples. And we've been making great progress, in terms of stance, in terms of chemistry, in terms of computational approach, and really excited about releasing this new product, this new version of cell segmentation later this quarter. Then in the second quarter, we're going to release a huge increase in Flex level that the Xenium platform can enable. Now our strategy of having highly customized panels that are suitable for people, for customers' applications has been very successful. But many customers are also interested in larger panels, whether to measure more genes or just not to have to customize. And so we've been -- we've pushed the envelope along several areas in a truly multidisciplinary 10x fashion, to deliver this new capability, to scale up Flex level by an order of magnitude, while delivering really high quality, high sensitivity, high specificity, all within a 5-day run across a large tissue area. Then later in the year, in the second half of the year, we're also going to deliver in-line multiplex protein capability, detection along with gene expression. Now Xenium from the beginning have the ability to take protein in line with gene expression using immunofluorescence. But within immunofluorescence, you can only detect 1 or 2 markets at a time. So with this, you'll be able to scale up to larger panels, and this is something that a lot of our customers are really excited by. And finally, as towards the end of the year and beyond, we'll be releasing more mid-plex gene expression panels to give our customers even more flexibility and more options. And the important thing to recognize here that this is just the beginning. What is really exciting about Xenium, what's been exciting to us from the very start is the amount of technological headroom that this platform affords. So we have many years' worth of development ahead of us to keep driving to add more applications, to add more throughput, to drive down cost over the years. So we can't wait to introduce those capabilities to our customers. And now for Visium, as I mentioned, over the past several years, we've released a number of really important new features, new products, new capabilities to the platform, so that at this stage is substantially more advanced than the state of the platform 4 years ago when we first launched. But one request, we've been hearing over and over again from our customers, it's the desire for high resolution. And the reason for that is that as great as Visium is, as useful as the data is, the resolution of current Visium is not high enough to detect some of the finer features in tissues, not enough to get down to the level of individual cells. And so for the past few years, we've been working on a product called Visium HD to deliver high resolution. Now this is a really ambitious undertaking, a really big technological challenge. And to give you a sense of just how ambitious -- this is a diagram that shows on the left, the technology behind the standard Visium, the current Visium, which is based around this 55-micron spots arranged in hexagonal pattern. On the right, is the technology that will enable Visium HD that shows this continuous [ slow on ] of 2-micron squares. Think of each square as a pixel. And there's over 11 million pixels that are driving underlying petition in Visium HD, compared to only 5,000 in standard Visium. So it's a huge difference in resolution several orders of magnitude. And so when you overlay the tissue on top of these arrays, the results look absolutely stunning. On the left, you see Visium, the standard Visium, which provides really useful data, but clearly, the picture is pixilated and missing some of the final details of the tissue. On the right is Visium HD, where you can't even see the individual pixels. It looks like an immunofluorescence image. But in fact, the pixels are there and behind each pixel is a whole transcriptome worth of data. This is beautiful data. It's absolutely stunning in the amount of information content that this product will be able to deliver. Of course, it's one thing to be able to generate the data set. It's a whole other thing. It's vastly more challenging to build a product, to make it work across many samples, many tissues, many settings. And here, we have the huge benefit of all the components and all the technologies we've developed in the meantime, most importantly, the CytAssist, which enables really compelling workflow, really high precision, really great data quality. And now you see Visium HD apply through across a range of samples with really beautiful data. So it's not surprising that if you look back across the last few years, this has been clearly by far the most requested single product in our history. Customers have been waiting for a long time for this product. And now I'm happy to say they're not going to have to wait much longer. Visium HD will be shipping this quarter. It's available for order now. We'll run on the largely growing installed base of CytAssist has great workflow, great data, we'll run across a large range of tissues, works in FFPE compatible with H&E and immunofluorescence, and we really can't wait to see what customers do with the product in their hands. And if you'd like to learn more about HD or any of our other products and technologies, please join us next month at the AGBT Conference in Florida. Thank you.

Perfect. So to start it off, you guys have preannounced this morning your 4Q results with revenue of $184 million beating street estimates pretty handily. So as you look back on 2023, can you walk us through some of the key highlights in the 10x story?

Yes. So I think the big part of the story, of course, as I mentioned in the beginning, was sort of the emergence of the spatial biology as a huge franchise as us being the leaders in it. The big part, the key story was really the launch of Xenium and has gone as well as any technology in the history of Life Sciences. In terms of the initial customer demand, customer instrument placements, our ability to scale up demand, you really have to go back to look back maybe to the NGS take to find anything that can compare. So it's been really exciting. In the meantime, we've made tons of progress within the company operationally in terms of product development, as you can see now with the momentum coming on the Visium side as we enter this year. And also despite like a number of macro challenges this past year, we've made good progress on our other franchises as well.

Great. And then I wanted to dig into placement in just this budget flush dynamic. So on 4Q, can you walk us through, did you see any level of budget flush, or were the placements that you placed in 4Q potentially any pull forward as well? And then as a clarification, can you walk us through the placements across Chromium, Visium, and Xenium within 4Q.

Justin, do you want to take it?

Yes. So as far as the fourth quarter budget flush dynamics go, it's really more of a regional story. Maybe starting with China, China was about what we thought it would be. It was down from Q3 to Q4. We saw some strength in EMEA and relative weakness in AMR. As far as looking at the customer segment dynamics, it was worse in biopharma. We saw less budget flush there. Relatively a little bit better in academic, but we still didn't see the same seasonality that we had seen in the past in Q4 from the academic customers.

Got it. Okay. That's helpful. Maybe just transitioning into 2024 then. As we go into this year, how should we think about framing up the top line expectations for 10x in light of some of these issues with China lingering, for example? And then can you provide any color on Chromium and just the broader spatial portfolio in those trajectories for 2024?

Well, so as we enter the year, there's like we have clearly huge momentum on the spatial side. Like the new product launch, we're really excited about what was going to happen with Visium HD. I think there's a lot of product momentum on the Xenium side as well. And we're really excited to be talking about what's going to be happening in Chromium as well. As I mentioned, there's a number of new developments that should be really welcomed by our customers. So I think we have a really nice, powerful setup as we think about the long term in terms of our product development and in terms of our sort of broad reach of our commercial force. But of course, there's also going to be still challenges as we enter the year. And especially given the number of new products and early products, you've got to be cognizant that of like pretty wide air bars at this stage. I don't know if you want to add.

Yes. And just to add to that. This was a solid quarter in Q4. I think that we finished the year in a strong way. And looking at 2024 outlook, we'll talk more about 2024 outlook when we get on our earnings call next month. But I do think that it's important that we don't get too far ahead of ourselves as far as expectations go, I do think that some conservatism upfront is appropriate given the macro trends and the product transitions that we've talked about. We've got a great cost profile heading into next year. Our focus on free cash flow positive has paid off. We were free cash flow positive in Q4. I feel good about our setup for overall 2024 as far as driving cash flows, although I wouldn't expect that to repeat in Q1 given the seasonal step down in revenue that we see from Q4 to Q1.

Great. That's helpful. Maybe just a follow-up question on China. So you mentioned some of the pockets of weakness there. How should we think about China and some of the puts and takes as we head into 2024? When do you have visibility on when that market could really return? And are you seeing any green shoots so far?

Well, yes, China has been a challenging market for us for, well, for a lot of people, for us as well. And one of the things that has sort of exacerbated that was the business model that we have in China, which involves multiple intermediaries. We sell through distributors, by and large, and those distributors increasingly over the last several years, sell to service providers, who themselves then sell to the end customers. And so the fluctuations in end customer demand kind of take a while to propagate through, and over the last 2 years because of COVID and then sort of the general economy disruptions there, you had sort of this effect of inventories getting built up at every one of those junctions, and it takes an amount of time to wind down those inventories and also just to gain visibility. Up until sort of the second quarter of last year, we didn't going to have people on the ground really in China from outside of our -- some of our salespeople. And we've been traveling there kind of getting firsthand knowledge and getting closer to our service providers, getting closer to our customers to get a better sense of the underlying dynamics and underlying inventory levels. Our view is that still it's going to take some amount of time to work with us. We've been making some amount of progress, working through those inventories. But it's one of those things where it's -- the last few years of thoughts, it's dangerous to predict recovery in China. And so we want to be cautious at this stage.

Yes. As far as current exposure in China goes, we ended 2023 and looking at full year, high single digits percent of overall revenue. Q4 was mid-single digits of percent of overall revenue. And when you look at 2023 compared to 2022, each of those declined approximately 4 percentage points. And so yes, I hesitate to call a bottom in China right now. But I can say that Q4 played out largely like we had expected it to.