Ladies and gentlemen, thank you for standing by, and welcome to the 10x Genomics First Quarter 2021 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Mr. Eric Jaschke, Director of Investor Relations and Strategic Finance. Thank you. Please go ahead, sir.

Thank you. Earlier today 10x Genomics released financial results for the first quarter ended March 31, 2021. If you have not received this news release, or if you would like to be added to the company's distribution list, please send an email to [email protected]. An archived webcast of this call will be available on the Investors tab of the company's website 10xgenomics.com for at least 45 days following this call.

Thanks, Eric. Good afternoon and thank you for joining us. On today's call, I will start with a brief review of our performance and execution during the first quarter. Next, I will discuss our views on current market dynamics, our vision for the Century of Biology, and our investment across the business to achieve this vision. We got a strong start to 2021, with first quarter revenues growing 47% year-over-year, to $106 million, as we continue to drive adoption of our Chromium and Visium platforms. While we saw strong results this quarter, there are indications that our customers are not yet back to normal productivity. This is largely due to COVID-related protocols which disproportionately impact decentralized experiments. That said, our conviction in the vast opportunity we have remains as strong as ever. The frontiers of biology continue to expand, with 10x leading the way. Our rapid pace of innovation has continued with the launch of breakthrough products for both our Chromium and Visium platforms. At our inaugural Xperience event, we were inspired by a global customer community and their intense engagement in our technology applications and product roadmaps. It is precisely this engagement that defines the urgency of our mission and commitment to our customers.

Thank you, Serge. Total revenue for the three months ended March 31, 2021 was $105.8 million, compared to $71.9 million for the prior year period, representing a 47% increase year-over-year. Consumables revenue was $93.1 million, which increased 52% over the prior year period. Instrument revenue was $11.1 million, which increased 22% over the prior year period. Service revenue was $1.6 million, which increased 21% over the prior year period. The increase in consumables revenue this quarter was primarily driven by the growth in the instrument installed base. The increase in instrument revenue was driven by increased instrument placements during the quarter. Service revenue increased due to a larger number of instruments coming off of their initial one-year warranty and on paid service contracts. North America revenue for the first quarter was $51.8 million, which increased 30% over the prior year period. EMEA revenue for the first quarter was $19.2 million, which increased 46% over the prior year period. APAC revenue for the first quarter was $34.8 million, which increased 83% over the prior year period. Now turning to the rest of the income statement, gross profit for the first quarter was $88.8 million, compared to a gross profit of $56.8 million for the prior year period. Gross margin for the first quarter was 84%, compared to 79% for the prior year period. The increase in gross margin was driven primarily by lower accrued royalties related to ongoing litigation.

Thanks, Justin. 2021 is off to a strong start. I want to thank our employees for their continued dedication and excellent execution so far this year. You are the reason for our success and the foundation for our successes in the future. I would also like to thank our customers for their incredible response to our inaugural Xperience event. Their engagement surpassed even our highest expectations, and reaffirms our vision for the future and the vast opportunities ahead. With that, we will now open it up for questions. Operator?

Thank you. Your first question will come from the line of Doug Schenkel with Cowen. Your line is open.

Good afternoon and thank you for taking my questions. My first one is just building off of one of the last things that Justin talked about, his remarks on lab activity remaining at about 90% of normal. I'm just wondering if there are instances that you could detail where certain parts of the world are maybe more open than others. And as we've moved into the second quarter, what parts of the world or what types of labs may have opened up more than others? And thinking about other parts of the world where there is a little bit of a resurgence, are you seeing a change in activity? So, that's the first question, trying to dig a little bit deeper on that 90%. And then the second topic is on Visium. It's great to hear that Visium FFPE, and I think HD are on track for first-half commercial launches. FFPE, we're pretty clear, HD I just want to make sure. And you indicated that most of the early FFPE interest is from new to 10x translational customers. On that, I'm wondering what you're doing commercially to support those customers that you haven't necessarily gone after as aggressively in the past. And I'm wondering if you're hearing anything in terms of large retrospective studies. I'm just curious if you have any visibility from partners or customers that the Visium technology is increasingly going to be used in this context with a quick path to peer-reviewed publications. Thank you.

Well, Doug, that's quite a bit to cover. I'll begin with the regional highlights. The situation is quite dynamic and is changing frequently. In Europe, we observed a strong recovery in the U.K. despite facing some challenges related to Brexit and new import regulations. Demand there has been robust, and we are seeing it return to a more typical state. Scandinavia is experiencing a similar trend, but France, in particular, has seen significant slowdowns, especially recently, which has posed challenges. Moving to the Asia-Pacific region, China, Korea, and Japan have largely returned to what we consider the new normal. Southern Europe is facing additional issues, and while India is a current hot topic, our business there is not substantial enough to make it a major concern for us. In the U.S., starting with North America, Canada has been particularly sluggish due to the government delaying their usual budget release until the end of the first quarter, which made it difficult to secure orders. In the U.S., we initially encountered slowness in Southern California and the West Coast, but that has really improved over the past few weeks. Overall, while there are several positive developments, we are also facing some sporadic challenges. I believe we are quickly approaching a better situation in the latter half of the year, although the first half did have its difficulties.

Yes, Doug, and so this is Serge, and on the Visium question. Just for clarification; Visium HD is coming in the first-half of next year, which is what we indicated at the Xperience and early in the year. Visium FFPE is on track for this quarter, so just as you suggested. And yes, we're excited about the product. Most of the customers are new, which is based on the preorders. But I want to reemphasize that it's very early. We've just started taking preorders, and it will take some time before there's a transition to large retrospective studies. First, customers are going to be testing out the product, and then they'll start collecting the samples to move forward.

I think it was just the last thing was just the retrospect; I was wondering about the support of translational customers, and any insight as to whether retrospective studies are going to get going quickly here.

Yes, I would be careful in assuming how quickly that can happen, because customers need to first buy the product and get onboarded with it and test it, which we feel pretty optimistic about. We have seen great performance that we've observed internally. And as far as our commercial execution, yes, we have been building up our team over the past year with this in mind, first with the original Visium, and now Visium FFPE. We are building out overlays within our commercial function. Our science and technology advisors, who are specialists within the sales force, and also on our support organization have been intentionally investing aggressively into people with expertise to help our customers with the workflow in Visium.

Okay.

Yes, Doug, and just to add, is there anything special for FFPE. It’s interesting because in FFPE, these more traditional customers that are used to tissue are really not going to be the issue, which has been more of the challenge as we've been onboarding our traditional customers who haven't worked with tissue. But for FFPE, we're gearing up to help on the data side of it, because a lot of these customers have not worked with high content data that you get off a sequencing application. So, we have been increasing our ability to provide the sort of computational support on the back-end.

Okay, thanks so much, guys.

And the next question will come from the line of Tycho Peterson with J.P. Morgan. Your line is open.

Hi, good afternoon. This is Julia on for Tycho. Thanks for taking our question. So, wanted to follow up on Visium FFPE. How much of the translational opportunity can you address with FFPE? I mean, does that get you access to the majority of translational users, or do you still need a broader protein menu, maybe an automated instrument, besides the CytAssist on an instrument to further enhance?

And also, Julia, just major points here, look, we have a pretty robust pipeline on Visium FFPE with respect to the product side. We're also seeing great feedback and initial response from our customers. So we do see that this product will address the market quite well in the upcoming future. We will put on protein capabilities which will help, and CytAssist will help us as well. So, I think that's the way we are looking at it over the next year; there will be a combination of all these capabilities to really provide a solution for translational customers. As we've seen with Chromium, we see this as a platform with many products in the future, and many applications to address all the different kinds of ways that the customers will end up using this platform.

Yes, Julia, this is Brad. Just to also add, the world has not been able to do true unbiased gene expression across tissues. And I think this is something that people are really excited about, regardless of the other products they're using today. So, I think as this becomes clear, this is going to be an important growth asset for FFPE.

Got it. That's helpful. And then also, I was wondering, I'm curious about your thoughts on the clinical side of spatial. Obviously, this market will take time to develop and mature, but I think there are encouraging signs that spatial biomarkers are being developed and starting to be listed in guidelines. So, curious, what's your expectations around the timeline of clinical spatial market development? And is this clinical market something that you can address with Visium HD, or is that really for the In Situ technology?

Well, I mean, the clinical markets, generally speaking, tend to develop somewhat slower than people expect. Our near-term focus is still on sort of the research and translational applications, because those will form the foundation for clinical applications down the road. And yes, when we think about the clinic, just from first principles about what the best platform is for the clinic, we are not thinking in terms of In Situ. That is not to say that Chromium and Visium will not have applications that will be very powerful and useful. But the In Situ approach lends itself particularly well to the clinical context, by virtue of being an integrated system and being explicitly targeted, in a format that the clinicians and pathologists are already used to.

Got it, very helpful. And last one from me, last quarter you mentioned you're adding 100 employees frontloaded this year with a particular focus on the sales force side. Could you give us a progress update on that?

Yes. So, we have very ambitious hiring plans this year. We actually plan to add about 400 employees over the course of this year, and end the year around 1,300 employees. So, we did frontload our hiring in our internal plans to have more of the hires in Q1 and Q2. We are running slightly behind that aggressive internal plan, but I’d say we are pretty much on a straight line pace right now overall.

Got it, very helpful. Thank you.

The next question will come from the line of Tejas Savant with Morgan Stanley. Your line is open.

Hello everyone. Good evening. I have a quick question regarding your guidance. You mentioned that lab capacity is still somewhat limited and that there is a patchy recovery across different regions, as Brad pointed out. Are you incorporating some caution into those expectations? Specifically, with the launch of Chromium X, are you anticipating that customers might delay orders for the current version of Chromium due to the upcoming release? Also, while the HD launch is still a year away, are you noticing any changes in demand at this point?

So, let me start with the latter part of your question, and then maybe Justin can talk about the guidance. In terms of the Chromium demand, we're not seeing any sort of waiting on the current customers for Chromium X, which is coming in the second-half. Our Visium HD may be marginal, but not really meaningful to the extent that people are waiting, because as you said, it's already a year away. So, I would say those dynamics are not having a material impact on revenue right now.

In terms of guidance, our new product launches on the schedules that we've previously communicated have all been contemplated in the range of $480 million to $500 million that we've put out. As far as instrument placements, people waiting on those for the Chromium X, that's not something that we've seen; placements were strong this quarter, and we expect continued demand going forward.

Got it, very helpful. And one quick follow-up on the In Situ side, Serge can you share some feedback on the CartaNA early access launch that you had, what are customers saying to-date, particularly around specs or areas for potential improvements? Now I know that there’s not a straight line between CartaNA and the eventual In Situ solution that you'll bring to market, but any key learnings. And then if you can walk us through what remains to be done in terms of those specs evolving on the final version of the platform, I think that will be very helpful?

Yes, so in terms of the CartaNA program, first of all, it is fully subscribed. One of the key learnings is just a lot of interest, specifically for the In Situ solution due to our reputation. I think that customers are excited by it. We're investing, and you mentioned correctly that the chemistry that we're using right now is not representative of what the final product is going to be, which is going to be a combination of our internal developments and acquisitions that we made. We are investing pretty aggressively, and we are definitely learning from all these collaborators. When we're ready to talk about the actual roadmap, we'll share that information.

Got it, got it. And one final one for me, any thoughts on the evolving competitive landscape, I mean, obviously a lot of folks are looking at spatial and In Situ, there's a couple of platforms in early access, et cetera. I’d love to get your thoughts on how you see the competitive positioning evolving for Visium and then eventually for your In Situ platform. And is that something that you're baking into sort of the platform development efforts as well for In Situ?

So, in terms of competitive positioning, we've talked about having three platforms: the Chromium, Visium, and the upcoming In Situ. We see them as fundamental and complementary. If you want to draw the difference between the Visium and In Situ approaches, Visium is special with the arrival of CartaNA. It's the ultimate discovery platform, and it will be challenging for In Situ approaches to reach that level. We have great conviction in Visium. Regarding the interest in the In Situ market, a lot of companies are working in this area. It is still early for many of them, so it’s hard to comment on specific competitors given the limited information. I want to emphasize that we're investing aggressively, leveraging our scale and relationships with customers. We have a good handle on what people want, guiding our development, and we have a track record of building great products with innovative features.

Super helpful. Thank you, guys.

All right. And then our next question will come from the line of Derik De Bruin with Bank of America. Your line is open.

Hey, Serge, Justin. It's Mike on for Derik. Thanks for taking the question. I want to sort of go back to your comments on the pace of reopening, the status of labs around the world, and your expectations going into the year sort of where they are now. As we look forward over the rest of the year, I imagine you'll get that 90% of various levels of capacity up to 95% and 100%. Can you give us an update on sort of your internal thinking of when that'll happen? Is this sort of a Q3 event in your mind now, or Q4? I imagine that as vaccines roll out in the U.S. and Europe, that number is going to creep higher. So just what are you anticipating in terms of getting back to a normal operating environment?

Thanks, Mike, this is Justin. Going back to last quarter's call, our view hasn’t changed much from then. During that call, we spoke about Q1 being at roughly 90% of lab capacity being available at varying efficiency levels. We expected that to carry forward into Q2, which is what we are seeing today. We mentioned that we expected things to start improving in Q3, and not really feeling the full impact of that until Q4. Q4 is normally a big quarter for us due to customer seasonality. We expect the fourth quarter of this year to be outsized compared to a normal quarter. Overall, our expectations haven’t changed from last quarter, and things are progressing like we expected.

Okay, all right. And then, as some of these labs reopen, I realize there's a lot of moving pieces here. But for example, you called it out that California started the year slow and sort of ramped back up. As you got into the quarter, was it a gradual reopen? Or was there a burst of orders? I'm not talking about instrument purchases necessarily, but more about chromium consumables, Visium. I imagine that were labs were shut down, they may have drawn down their inventory a little bit. When they're reopening, are you seeing sort of a bolus of orders as people stock back up to start running at full speed?

Hey, Mike. This is Brad. I'll take that. It's interesting because we've definitely noticed a level of caution among our customers as they return to the lab. There’s always a concern about potential temporary access limitations. For instance, we've had situations where someone tested positive in the lab, causing it to shut down for a time. And of course, biology doesn't wait for anyone. Another trend we've seen in the first quarter is that as people commit to returning to the labs, they're being more conservative, possibly ordering a four-reaction kit instead of a sixteen-reaction kit due to shelf life considerations. Customers want to avoid being caught off guard. So yes, there are various levels of this. We've seen labs gradually come back online since mid-last year, which is a typical pattern. It starts off a bit slow as they rev up their biology, but then we see the orders come in. On the instrument side, we've had strong engagement and interest from customers looking to onboard and acquire their own instrument for single-cell applications, particularly with Chromium, which is intriguing for technology adoption.

Okay, and that's helpful. And then one last one for me, obviously Visium FFPE is still in very, very early stages, but anything you can comment on in terms of cross-selling between Chromium, the Visium, and sort of the overlap between customers? Is that getting a little bit higher? Are you getting a little incremental pull as you go into some of these more translational customers realize it's early, but just wondering how we should be thinking about that?

So, I would say that the flow from Chromium to Visium is clear. You can look at publications among those customers. However, the opposite flow we don’t expect to see much. Translational customers are typically used to working with good tissue, so I think Visium really serves as a platform for that.

Next question will be coming from the line of Patrick Donnelly with Citi. Your line is open.

Great. Thanks, guys. Serge, maybe following up on Mike's question there on Visium, can you just talk about kind of the repeat customer and reorder rate? On Visium, obviously, you have a pretty nice initial user base here. How have you seen the customer activity on the reorder rate side?

Yes, that's a good question, and something we've been monitoring closely. The reorders have been robust, and have been increasing consistently since launch, so we are happy with that. You can sort of see it in terms of publication rate too, because that tends to correlate; those are the people that are reordering and able to get through the experiments. One point to highlight is that those who onboarded during the pandemic have found it more difficult to get going, but those who onboarded pre-pandemic are doing particularly well compared to those we had to onboard afterward.

Understood, okay. And then on the low throughput kits, can you just talk through the initial reception there? Obviously, you lowered the bar to enter the market for your customers. Just wondering where you're seeing the most uptake, where you're seeing the interest, and how the reception has been there so far?

The reception has been robust and aligned with our expectations, and it’s been consistently well. I would say, mostly among our existing customers. We observe that dynamic, especially initially, with clients trying to start new studies or just experiment to try out new sample types, economics, and expand the use cases for the existing platform. We expect this is the kind of thing that accrues benefits over time, and we’re not counting on selling that particular kit, but it’s really about what follows after that kit.

Okay, great. And then one for Justin, and maybe Brad, you can chime in as well. Just in terms of 400 employees this year, how many are expected to be customer-facing sales reps? And in terms of those, how long does it typically take them to become productive? Is it quarter two or is it quicker than that? We’ve lost some color on that front.

Yes, Patrick, this is Brad. We kind of set out we would hire roughly 100 people in the commercial organization. We're well on our way to doing that. In terms of the second part of your question, it's usually about six months for sales reps to get ramped up. Less so on the technical side because we’re often hiring individuals with experience from our customers, so they come up rather quickly. However, on the sales side, about six months tends to be typical as we search for experienced personnel who know their territories.

Next question will be coming from the line of Dan Arias with Stifel. Your line is open.

Good afternoon, guys. Thanks for the question. Serge, on the CellPlex kit, it sounds like you've been in the field for a little bit. I'm curious if you're seeing any dampening effect on consumables as you have labs taking advantage of the lower pricing. But to Brad's point, maybe not scaling up fully, just due to the size of the experiment. And then maybe looking out a bit, conversely, if you're starting to get a sense that there's a percentage of the user base that might take advantage of the capabilities there. Are you seeing some signs that you can actually drive platform placements on the back of that?

The demand for CellPlex has been quite robust; we're pleased with the initial response. Whether that's having a dampening effect on consumables, that's an interesting question, and certainly something we're monitoring. It's hard to tell explicitly right now; we may need to wait another quarter to correlate those patterns from customers who order those CellPlex kits. It's conceivable that it could have some dampening effect. Still, the rationale for this product is to greatly expand the single-cell ecosystem and ultimately have a greater impact by attracting numerous other experiments onto the platform. So far, we haven’t seen anything that would undermine that thesis. If anything, our thesis has been reinforced by the rate of initial orders.

Yes, okay, all right. And then maybe just on Visium HD, I don't know whether you mentioned this on one of the other calls that you had, but can you just remind us if you have any idea what the economics per 10x will be there? Is there a higher cost per sample that the HD workflow drives, or is it more or less in line with what you have now with the 1.0 kits?

We haven’t talked about Visium HD pricing or economics yet, so that will be a bit premature.

Next question will be coming from the line of Matt Sykes with Goldman Sachs. Your line is open.

Hi, guys. This is Dave on for Matt. There has been a lot of interest in In Situ, clearly huge opportunity for you guys. If you could talk a bit about what fields of study you expect to see the most interest between oncology, neuro, immune, and developmental areas.

Yes. Well, you hit on the key ones. I think, all of them certainly have a lot of interest. When looking at single-cell projects, that’s a natural fit for the technology. It complements Visium as it validates the markers discovered initially and tests them on larger sets of tissues. So certainly, developmental biology applications, neuroscience is a big one, and oncology as well. Ultimately, I think because we have such a close fit for clinical applications down the road, I expect to see these emerge predominantly in oncology and related areas. However, keep in mind that In Situ will be focused on targeted applications, making it practical to do unbiased discovery given the amount of data pulled on individual molecules. A significant part of the next year or two is really understanding these biomarkers so we can curate those panels for In Situ.

Great, all right. Thank you. We've seen an explosion of interest in the study of proteomics. Notably, several companies have gone public in that space recently. So, can you talk about the demand for your protein expression platforms and any correlation there?

Yes, we do see significant protein measurement work being performed on our products, particularly with Chromium. A large fraction of the single-cell experiments, whether measuring expression or analyzing something else, is initiated with proteins through our feature barcoding technology. It's a considerable and growing part of our application space, especially given interest from those who haven't measured proteins before. We believe that for our single-cell and spatial type applications, using well-conjugated antibodies for specific regions is the way to go, as it provides the best method to measure these analytes with single-cell resolution, which is a significant advantage.

Great. Thanks. And last one on the gene expression panels; could you talk about which panels have seen the most customer interest between the fixed gene panels and the custom panel designs?

Yes, so that question is a bit scattered. But to your first question, neuroscience is definitely up there along with development biology and oncology. I can't express that one significantly outperforms the others, as they all seem to resonate as we observe the application for single-cell usage.

Next question will be coming from the line of Matt Larew with William Blair. Your line is open.

Hey, good afternoon. Thanks for taking my question. Serge, you alluded to the experience event. So, maybe just you or Brad could comment on what metrics you're using to judge the success of that event, particularly in light of some of the reduced lab activity and budget issues you mentioned?

Yes, I'll take that. This was a great success for us. We initially positioned this as somewhat of an alternative to what we would typically do at AGBT. It has grown into a much bigger event for us that we want to proceed with. First, it's about numbers. We had over 3,000 people consume this over the two days we put it out. There's engagement, which is another critical metric. We had nearly 300 questions come in during those several hours, indicating a high level of interest and engagement with our internal teams. This was incredibly motivating and reaffirming. We also tracked new attendees; we were above our targets, with over 1,000 of those being new contacts to 10x. So overall, I think we've checked all the boxes here, and that's something we want to evolve moving forward. This focus on our customers created an excellent venue for us that we probably couldn't even have achieved at an in-person event. We'll continue to improve this year and in years to come, but we were very happy with the results.

Okay, and then the ATAC + Gene Expression product that launched last September, you're making impressive strides there. Just curious if there are any data points or trends you can provide relative to other product launches that reinforce your bullish view on it.

Yes, it is trending well. We don't break out individual products, but it’s certainly a product that seems to resonate well with our target customers. The response has been excellent, and we are enthusiastic about the science that is emerging from it and the orders we're seeing.

Additionally, we were able to launch a precursor to that product with the ATAC-seq. We prepared the market well, as it became clear from early on that customers were eager for the ability to perform gene expression and ATAC on the same cells and nuclei. We delivered this approximately two years after that initial inquiry, and it appears that people were indeed ready for it.

Next question will be coming from the line of David Westenberg with Guggenheim Securities. Your line is open.

Good afternoon. This is John on for Dave. As we look toward In Situ, I recognize you're unable to elaborate too much on R&D efforts. But can you discuss what’s necessary versus what’s nice to have, such as 2D vs. 3D proteins, RNA, DNA test results sequencing on the platform? Thank you.

A lot of it involves a question of when, not what. We will be ensuring that when we bring our first product to market, it has the right set of features to meet market needs. We haven't discussed specific features yet, as that's part of our learning experience with customers while we build our roadmap.

Okay, and when considering how Chromium grows—new customers, new applications, and larger applications—can you rank these three levers driving revenue growth?

Let’s say they're all important. Adding new customers drives long-term growth, although every new customer takes some time before their contribution becomes meaningful. We're focused on achieving this. Expanding applications and capabilities for our existing customers is also crucial, as they have larger budgets, allowing them to enhance their spending on our products. None of those three are more critical than the others; we are pressing ahead with all of these imperatives to drive revenue growth.

Okay. Thank you.

No further questions on the line. Presenters, back to you.

Thanks for everyone for staying on the call. We look forward to chatting with you in the future. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.