10x Genomics, Inc. Q1 FY2022 Earnings Call

Hello and welcome to the 10x Genomics First Quarter 2022 Earnings Conference Call. My name is Katie and I'll be coordinating your call today. I will now hand over to your host, Cassie Corneau, Investor Relations and Strategic Finance to begin. Cassie please go ahead.

Thank you and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the first quarter ended March 31, 2022. 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 e-mail to investors@10xgenomics.com. An archived webcast of this call will be available on the Investor tab of the company's website 10xgenomics.com for at least 45 days following this call. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release 10x Genomics issued today and in the documents and reports filed by 10x Genomics from time to time with the Securities and Exchange Commission. 10x Genomics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Joining the call today are Serge Saxonov our CEO and Co-Founder; and Justin McAnear, our Chief Financial Officer. With that I will now turn the call over to Serge.

Thanks, Cassie. Good afternoon and thank you for joining us. On today's call I will start with an overview of our performance during the first quarter. Next I will discuss our progress and momentum with customers and share an update on our upcoming product launches, including more detail on Xenium and the exciting opportunities we have ahead across all three platforms. Then I will hand the call over to Justin for a more detailed look at our financials, business trends and our outlook for the rest of the year. Revenue for the first quarter totaled $114 million, up 8% year-over-year. These results reflect the slow start we experienced in January and February, largely driven by the impact of the Omicron surge as we described during our year-end call in mid-February. As we moved into March, the effects of Omicron had partially abated outside of China and customer productivity started to resume. We are now back on site with our customers and the excitement for Chromium and Visium portfolio and pipeline is palpable. In recent weeks I personally had the opportunity to visit a number of our customers in person, which has further reinforced my conviction in the long-term growth trajectory for each of our three platforms. So while we'll continue to navigate some near-term headwinds, I have more confidence than ever, there is enormous opportunity ahead. Every day we're seeing more customers and more studies that all point to the same thing: 10x is replacing the legacy toolkit of biological research in transforming how we understand biology, ultimately, faster biology. During the quarter, we continued to see solid demand for Chromium instruments, led by the sustained enthusiasm and broadening appeal of the Chromium X Series. We're actively working to upgrade our current customers to ensure they have access to the most powerful tools available for single cell analysis. The upcoming launch of our fixed RNA profiling kit, which will be exclusively available on the Chromium X series, helped drive instrument demand with new customers and accelerate the replacement cycle among existing customers as expected. Turning to consumables. Our high throughput kits delivered strong growth. Increasingly customers are adopting HD kits to scale existing studies with more samples or more cells. We're also excited to see our customers designing new experiments specifically for HD at a size and scale previously considered unattainable. We believe the strong adoption of our HD kits, robust reorder rates and the growing number of new labs conducting pilot studies are indicators of the value researchers gain from high-throughput single cell analysis and is a great indicator of future growth. We also saw solid demand across our growth portfolio of standard throughput single cell consumables this quarter. The performance and breadth of our offerings covering gene expression, immune profiling, epigenetics, proteins and multiomics is unrivaled and helps drive growth with both our most seasoned labs and our newest adopters. Multiomics, in particular, continues to be among the fastest-growing products in our history, experiencing broad adoption across a diverse set of applications. We believe the combination of our product performance, easy workflow and diversity of applications creates real value for researchers that no other company can match. Moving on to Visium. In Q1, we continued to see solid demand for both fresh frozen and FFPE. While it remains early in the life cycle, we are encouraged by the wide adoption of Visium as the ideal spatial discovery tool. In fact, according to the Museum of Spatial Transcriptomics paper published in March 2022 addition of Nature Methods, Visium has been cited in more publications than any other spatial biology tool and has been used to generate nearly 125 public data sets. No other method has even half as many. The Nature Methods paper also noted that more institutions have published using Visium than using the next three other spatial methods combined, demonstrating the breadth of Visium adoption. This confirms our view that Visium is the leader in spatial biology. Overall, we executed as planned in Q1 and look forward to building momentum as we move through the year. Our team is focused on three key areas to deliver in 2022 and to accelerate growth into 2023 and beyond. First, driving our extensive new product pipeline; second, scaling our commercial organization; and third, strengthening our operational capabilities. Let me share more on each area beginning with R&D, where we are continuing to drive our strong cadence of technological advancement and product development. As we showcased at our second annual Xperience event in February, we have a very exciting and ambitious pipeline in each of our three platforms. Starting with Chromium. Chromium has long been the leader in single cell analysis, yet we continue to see a massive opportunity ahead. It’s evident by the rapid growth and diversity of experiments, applications and publications that single cell methods are replacing the conventional toolkit for measuring biology. To make Chromium accessible to every biology lab in the world, this year's pipeline is focused on new products to drive broad adoption, remove bottlenecks and give researchers a more flexible and streamlined workflow. In the near term, we're particularly excited about two new kits that we believe will help realize the expanding potential for single cell analysis, remove obstacles to larger scale multi-sized studies and open up more single cell applications in translational research. This includes our fixed RNA profiling kit, which has the potential to be transformative to the single-cell franchise over the long term. This product resolves a common challenge our customers currently face working with live cells. With this kit, researchers can fix their tissue at the time of collection and store it until they're ready to begin the single cell workflow. In addition, researchers can batch multiple samples as well as analyze gene expression on surface proteins from the same cell for multiomic analysis. This product also offers significant performance advantages, including higher gene sensitivities than any of our flagship assay and is the most sequencing efficient assay in our chromium portfolio. Our upcoming nuclear isolation kit is another example of how we're easing the chromium workflow for our customers to help them run more samples and more kinds of samples. Many samples present challenges for single cell analysis due to the difficulty of the association or encapsulation of individual cells. This can be because some tissues are particularly difficult to work with or because researchers would like to freeze their samples at collection to be processed for single cell analysis later. To address this challenge many researchers have turned to nuclei, which can provide single-cell information from such samples but at the cost of much more difficult and unpredictable sample prep workflows. Despite these difficulties and the need for highly specialized expertise, nuclear analysis has been rapidly growing in popularity. And now our nuclei isolation kit will greatly simplify this workflow, so more researchers can access single-cell data from frozen samples and challenging tissues. We believe this kit will help accelerate the adoption of multiple chromium assays including Multiome and ATAC, which require single nuclei as input. We're now taking pre-orders for both products, which we expect to begin shipping over the coming weeks. Turning now to Visium. We expect to round out a core set of the capabilities on the Visium platform with several new products focused on enabling more analysis through the introduction of Visium+ protein, more samples with the launch of our Visium cytosis instruments, and more resolution with Visium HD. Our Visium+ protein product enables simultaneous gene expression and high-plex protein analysis in the same tissue. It also offers larger capture areas and an improved workflow to give our customers more flexibility and confidence. We're looking forward to launching this product mid-year. In addition, we're excited for the upcoming launch of the Visium cytosis instrument, which will simplify the logistics around the Visium workload by bridging the gap between histology and molecular biology. Pegasys will also open up the archive of tissue samples already stored in preexisting slides, significantly expanding the number of samples that can be run on Visium. We expect to ship Pegasys next quarter. And finally Xenium. As we announced in February, we plan to ship the first instruments by the end of the year. We have already received extremely strong interest in the platform from many customers eager to be among the first to receive Xenium and we feel great about the large funnel of opportunities we're building. We're very excited about the competitors and differentiation of our initial launch as well as our plans to unlock the full capabilities of the platform through our extensive product roadmap in the years ahead. Through our close partnership with customers and our Cartana Access Program, we have unique insights into the capabilities and features researchers are looking for. Customers have told us they need a high-plex, easy-to-use and scalable platform that can differentiate cell types and states in the tissues of interest and measure the right genes and pathways. To enable this we're developing Xenium to have great performance across all key metrics including multiplex levels, sensitivity, specificity and throughput. And in particular, we know from customers that high throughput is critical because it determines whether the instrument is practical for reuse. We've designed our Xenium analyzer to have the highest throughput of any instrument in its class. We believe Xenium will enable researchers to analyze the most tissue area at single molecule resolution in the least amount of time. We also believe having all three methods, single cell, spatial and in situ together, will be a real advantage for the research community and a real differentiator for us. Most future experiments currently make use of Chromium or Visium data. We are in the best position to deliver a seamless experience to customers across all three platforms. This will be reinforced by our support team, who consistently receive great reviews from customers. Because this is an emerging field, researchers know their needs will evolve over time. So they want a trusted partner that will innovate and grow with them. Our track record here is unparalleled. Much like we've done with our Chromium roadmap, we will enable more analyses, new classes of measurements, and truly transformational capabilities in the Xenium instrument as we move forward post-launch. We're committed to delivering rapid product advancements to ultimately establish Xenium as the unequivocal leader in in situ analysis. We are able to develop a world-class platform through the strength of our internal product development and intellectual properties. We already have over 200 patents issued and pending in the in situ field, including key patents that will enable features that we believe will be extremely valuable to researchers, including high throughput and high sensitivity. With respect to our overall patent portfolio, we recently passed the extraordinary milestone of having more than 500 patents issued, with almost 1,400 patents issued and pending. As we have said before, it is our policy not to license our patents, but to differentiate ourselves from our competitors by protecting our sole right to own and practice our intellectual property. With our robust pipeline across all three platforms, we're on track to make 2022 the most exciting year of product launches in our history. Now turning to commercial, throughout the company, we're thrilled to be back in person with our customers. For the past two years, the inability to connect in person in their labs and other conferences has challenged the proliferation and adoption of new technologies, including single-cell tools, especially among mainstream biologists who are new to the 10x levels of scale and resolution. Yet we know, the number of researchers interested in single-cell is rapidly increasing, as evidenced by the growing number of new customers entering the 10x ecosystem, either instrument owners or scale users. We believe the pandemic has made it more challenging for many of our halo customers to scale and become routine users of single-cell analysis in their research. There can be many reasons for this, whether it's the challenges of working with live tissues or secondary quality-related impacts like supply chain constraints or labor shortages that reduced staffing levels and limited opportunities for training, collaboration or best practice sharing. The core part of our strategy is to enable as many researchers as possible to become routine users of single-cell. We have found that customers who own instruments consistently grow their usage over time. We're focused on driving instrument placements for both new customers and halo users. We also want to ensure our existing customers have the best technologies for single-cell analysis, which is why we are focused on upgrading researchers with chromium controllers to our Chromium X series. We have now established a broad base of installed instruments, representing a great foundation for future growth. And while we've made good strides within academic labs, we see a large opportunity ahead both with our existing customers increasing their usage and with new customers entering the ecosystem. We're gaining traction throughout pharma and seeing strong growth among biotech companies increasingly adopting single-cell and spatial labs. And as we look ahead, we're also continuing to expand the breadth and depth of our commercial team. We're on track to add nearly 100 new roles and to finish the year with a commercial team of more than 500 employees worldwide. We are continuing to gain traction with our dedicated tissue specialists we onboarded last year. As we prepare to launch Xenium, we've deployed a separate specialized market development team dedicated to spatial and in situ. This should ensure the rest of our commercial organization maintains focused momentum on growing adoption of our current market portfolio. Before we move on, I want to acknowledge Brad Crutchfield, our Chief Commercial Officer, who had previously announced he will be leaving the company by the end of the year. Under Brad's leadership, we have built and scaled the global commercial organization that is a real differentiator for 10X and an excellent foundation for future growth. While he's not joining us on today's call, Brad continues to lead the commercial team through this transition period. We have initiated the search for our next CCO and have proactively made several changes to the commercial team in advance, including realigning regional leadership and welcoming a new Head of Commercial Operations. I want to thank Brad and the entire commercial team for their focus on execution and unwavering commitment to our customers. Finally, turning to operations and the work we have underway to expand and strengthen our manufacturing capabilities. We're continuing to make substantial investments in our global operations network by adding production capacity and new capabilities to deliver differentiated products and support the long-term growth trajectory of the business. Since opening our manufacturing center in Singapore, we have continued to ramp production at the site. We're also building out our new Pleasanton facility and look forward to co-locating more of our R&D operations teams to enable tight collaboration and fuel our rapid pace of innovation. In addition, our team is working hard to proactively manage our global supply chain in what remains a very dynamic and challenging environment. We are working closely with our partners and are continually evaluating our ability to source key compliance. We're also expanding our distribution network and carrier options to help alleviate global logistics constraints. We believe our efforts and investments to scale and fortify our operations and supply chain are essential to supporting our growth and enabling our product roadmap. Our team is fully focused on driving our innovation engine, scaling our commercial organization and advancing our operational capabilities in 2022. We're bringing the whole company effort to delivering this year and building momentum for 2023 and beyond. I want to thank the entire 10x team for their hard work, focus and dedication to our customers and to our mission. Now, let me turn it over to Justin for more detail on our financials.

Thank you, Serge. Total revenue for the three months ended March 31, 2022, was $114.5 million compared to $105.8 million for the prior year period, representing an 8% increase year-over-year. Consumables revenue was $98 million, which increased 5% over the prior year period. Instrument revenue was $14.4 million, which increased 30% over the prior year period. Service revenue was $2.1 million, which increased 31% over the prior year period. Looking at our regional results, revenue for the Americas was $59.7 million, increasing 15% over the prior year period. EMEA revenue for the first quarter was $20.5 million, increasing 7% over the prior year period. Finally, APAC revenue for the first quarter was $34.3 million, in line with the prior year period. As we shared on our earnings call in mid-February, we had a slow start to the year, driven by the Omicron surge in certain geographies. This was especially pronounced with our academic research customers, which represent approximately three-quarters of our revenue. As we moved into March, the effects from Omicron largely abated in North America and Europe, while the operating environment was improving in these regions. COVID-driven lockdowns in China towards the end of the quarter severely impacted lab activity there. While these lockdowns had minimal impact in Q1, we expect they will more adversely impact Q2 revenue. Additionally, our Q1 results in Europe reflect the impact of a process breakdown in the region's logistics cold chain that led to intermittent assay performance issues. Our support team was able to trace the root cause of the sporadic issues back to products that had fallen out of required refrigerated temperature ranges. This breakdown resulted in a number of European customers receiving products that had spoiled and needed to be replaced. We have implemented additional safeguards in our logistics operations and we are working with impacted customers in the region. Turning to the rest of the income statement, gross profit for the first quarter was $89 million compared to a gross profit of $88.8 million for the prior year period. Gross margin for the first quarter was 78% compared to 84% in the prior year period. The decline in gross margin was primarily driven by a change in product mix, increased manufacturing and logistics costs and higher accrued royalties. We expect our gross margin will trend slightly lower during the year, due in part to changes in product mix and the impacts of inflation and increased supply chain costs. Total operating expenses for the first quarter were $130.8 million, an increase of 32% from $99 million for the first quarter of 2021. The increase in operating expenses was primarily driven by higher personnel expenses including stock-based compensation, increased research and development expenses and infrastructure costs, partially offset by a decrease in outside legal expenses. R&D expenses for the first quarter were $64.1 million compared to $41.9 million for the first quarter of 2021. SG&A expenses for the first quarter were $66.7 million compared to $56.9 million for the first quarter of 2021. Operating loss for the first quarter was $41.7 million compared to a loss of $10.2 million for the first quarter of 2021, primarily due to the impact of increased personnel-related expenses. This includes $26 million of stock-based compensation for the first quarter of 2022 compared to $16.2 million for the first quarter of 2021. Net loss for the period was $42.4 million compared to a net loss of $11.6 million in the first quarter of 2021. We ended the quarter with $539 million in cash and cash equivalents and marketable securities net of restricted cash. Our strong balance sheet is an advantage, especially in the current environment. Now turning to our outlook for 2022. We continue to expect our full-year 2022 revenue to be in the range of $600 million to $630 million, representing growth of 22% to 28% over the full year 2021. Looking at Q2, we are still experiencing some lingering impact from the cold-chain driven spoilage in Europe, which we expect to be fully resolved by quarter end. Additionally, we are continuing to navigate near-term impacts driven by the macro operating environment which include second order COVID effects, supply chain and logistics risks and most significantly lockdowns in China, which are scheduled to end in mid-May. Looking beyond Q2, we are optimistic about the remainder of the year. The enthusiasm from our customers for our product portfolio and pipeline remains strong. As the operating environment continues to improve, and our newer product launches have an increasing impact on revenue, we expect to see an acceleration of growth in the back half of the year. We still expect our annual revenue split to be about 40% for the first half and 60% for the second half of the year, with slightly more weighting to the back half of the year, reflecting the Q2 factors we just mentioned. At this point, I'll turn it back to Serge.

Thanks, Justin. Our conviction in the vast opportunity ahead and our long-term growth potential is as strong as ever. One of the central learnings, and perhaps the greatest revelation of the last several years of biological research, is the pervasive cellular complexity in just about every biological system. There is now a growing appreciation that eventually all tissues will need to be analyzed with single-cell contact on a large scale. We believe this is going to be true for research, clinical and full therapeutic applications. Our goal is to bring this future forward. This is why we have been investing aggressively in our three platforms: Chromium, Visium, and Xenium. Together they encompass all the major technological approaches for addressing cellular heterogeneity at scale. Having all three approaches under one roof will create tremendous value for customers who will benefit from an integrated experience, our track record of technological advancements and our focus on customer success. And while we are proud of what we've accomplished so far, relative to where we're going, we're just getting started. Our team is driving hard to execute this year and to finish with momentum that will strengthen our position to accelerate growth in 2023 and in the long term. We know what the endpoint is and we're confident we're the best company to deliver on it. With that we will now open it up for questions. Operator?

We take our first question from Tejas Savant from Morgan Stanley. Please go ahead.

Hey, guys. Good evening and thanks for the time. Serge, maybe to kick things off on Chromium can you share some color on where you stand in terms of the upgrade cycle for your base controller users? And then have you seen utilization of customers who upgraded to the X and iX earlier in the cycle, start to trend up here? And then any color you can share on the Halo user ordering trends as well would be helpful?

Yes. So in terms of the upgrade cycle, we're in the early stages of that. As we said before when we first introduced the X, it was really aimed at the top tier, so the top 10% maybe of our customers who are interested in sort of the leading edge of single cell analysis doing things at high throughput. We have since learned there's more interest across our customer base and a lot of new customers have been onboarding with the X, since later in the quarter and especially this quarter we announced that fixed RNA profiling is going to be available, specifically on the X, which has spurred kind of more interest in upgrading across our entire customer base. It's still quite early I would say but it's a meaningful trajectory to go in that direction, especially as we head further into this quarter. What was the second question?

It was on the utilization for the customers who have upgraded earlier?

Yes. So it's too early to tell at this stage. I mean certainly the people who are interested in the X in the first place would tend to be earlier customers. And so they would naturally kind of have higher usage patterns to begin with. So at this stage, it's too early for us to kind of place a precise estimate of the usage patterns and to differentiate between kind of the selection and the actual usage of these. But directionally, it's trending in the right direction. And as far as halo and instrument owners is concerned, this dynamic has not really materially changed from what we've seen historically and it's early to say given all the sort of noise in the last quarter but having said that, we're always driving new instrument placements that have been our focus. The key thing, and this has been very consistent, is that we see instrument owners continue to do well. They keep increasing their usage. They keep adding and scaling up their experiments. That pattern has been consistent across the years and continues to be the case. Our goal is to keep adding instruments, selling more instruments to existing customers whether they're halos or not and also driving new people into the ecosystem with instruments.

Got it. That's helpful. And Justin just a quick follow-up for you on the guide, I think, I heard you say the lockdowns in China are expected to end in May. So is it safe to assume that you're expecting a full recovery to normalize activity in China in the back half of the year, or are you assuming a more conservative slope of the recovery there?

We're expecting this to normalize in the back half of the year. And just for reference, China was about 18% of our revenue in Q1, about 15% of our revenue last year for the full year. Really the biggest impact that we're seeing right now is in Shanghai and the surrounding area, and that's 30% to 40% of our revenue in China is in that area. There has been an impact in Q2 and we are expecting it to start lifting here later in this month. We are expecting it to normalize in Q3 and Q4.

Very helpful. Thanks for the time, guys.

We take our next question from Dan Brennan from Cohen. Please go ahead, Dan.

Great. Thank you. Thanks for taking the questions, guys. Maybe the first one just on the updated guide or some color that you provided. So it seems like Justin, typically it's 40-60 but maybe a little bit below that. So if we say like 39% to 40%, it seems like Q2 is somewhere in the $110 million to $135 million range which would imply a pretty good ramp even a bigger ramp in the back half of the year. So maybe on that back half year could you just give us a sense of how we think about the impact from some of the new products Chromium X and kind of the fixed kit in the newly kit and then just to be clear I guess the HD product that's not going to impact '22 right? That's going to be all in 2023? And then I have a follow-up. Thank you.

Yeah. I'll start and then Serge can add some color. But as far as looking at the first half of the year compared to the back half of the year we have some specific headwinds that have impacted us both in Q1 and in Q2. As we head into the second half of the year, we're largely expecting those to go away. With new product launches for any one product in the quarter that it launches, we don't expect a huge impact to revenue but we have multiple new product launches that are going on throughout this year. We have newly introduced products as well that have been picking up traction over this year. All of those point to and support this acceleration in Q3 and Q4.

Great. Can you provide more details on the new products? Regarding product X, Serge mentioned that initially, you thought about 10% of customers would be interested, but it seems that number has increased. Could you clarify whether this is mainly the core labs that are adopting it? Is it more appealing to the pharmaceutical sector? How much more than that initial 10% are we seeing? Additionally, concerning the fixed kit and the nuclei kit, why was the decision made to roll out the fixed kit only for product X? It seems that many smaller researchers might also want that fixing capability, so why not make it more widely available? Also, could you share any insights on how these kits might attract more interest from the biopharma sector, either this year or in the future? Thank you.

Yeah. So on the first question like the short answer is like every customer in terms of Chromium X where we see it going now? Remember, we have the X and we have the IX which is kind of coming into a somewhat lower price point. Yes, initially the interest was from the top tier of customers, but we saw kind of in the second half of last year really the interest has been across the board. Sure, the core labs are sort of natural purchasers as well as people on the forefront of single-cell research, but we've seen new customers coming in kind of almost by default, if they have funds, certainly going for the X. For sure when we look at biotech and pharma, that's where the demand has been very much focused on the X series. As we look around, we definitely see it being applicable kind of in a very broad fashion. There are a lot of improvements under the hood in the instrument itself. Ultimately, as we think about where the world is going and where we want our customers to be, where the customers themselves want to be is just better for everyone; we no longer want to convert to this new technology. That was a big part of our thinking and a big part of why really fixed RNA profiling is also only compatible with the X. We see the X, especially the IX, being very broadly adopted across the board.

If it's possible, Steve, one last question. Regarding HD and Xenium, you mentioned that the profile of Xenium is superior to what's currently available and how well Visium is performing. I’m not sure if you've addressed this before, but when considering the overall opportunity for HD and Xenium compared to your core Visium product, how should we view the relative opportunities? Is there any way to help frame that? I understand you're not providing specific numbers in the model today, but at least on a relative basis, how should we think about the scale of these opportunities?

Yeah. I mean directionally like our feeling at this point is like Visium HD relative to the standard Visium has a much higher potential, like a multiplicative potential as we think into the future. Xenium, we feel very strongly about its potential especially when we think about the long term. There are somewhat different use cases and I think they're going to be largely complementary. I think both HD and Xenium offer substantially higher opportunities than what we are currently seeing with the standard resolution of Visium.

We take our next question from Derik De Bruin from Bank of America. Please go ahead.

Thank you. This is Mike Ryskin filling in for Derik. I would like to follow up on Xenium. You've mentioned a few times that you expect to ship it by the end of this year. It seems like you're not quite ready to take orders yet, but if you are, could you share when you expect to start building that order flow? Additionally, can you provide any expectations for how many placements you anticipate in the first year? I understand it might be a slower launch due to its uniqueness, so what types of customers are you initially targeting? Any more details on that initial phase would be appreciated.

Yes. So we're not taking orders yet. Although, we've had a lot of discussions and engagements with our customers around it. The interest, as we said, is very strong. There's a lot of kind of very nice pipeline of customers that is forming. Our focus is going to be on customer experience, very much so. That is going to determine more than anything else the numbers that we're going to be shipping. From the perspective of demand, it looks incredibly encouraging at this stage, and as we kind of project to what people are interested in doing near-term and in the medium-term and the long-term, I think the trajectory of this platform is looking incredibly strong.

And anything you can disclose in terms of the financial ASP, the gross margin profile or anything like that?

Yes. We haven't disclosed the exact pricing on that. These earlier placements are going to be lower margin. It's a complicated instrument. It's going to be higher touch. As far as the quantity, the focus initially is not going to be on quantity. It's going to be on customer success. When looking at the financials, I expect a low financial contribution this year just due to what the initial focus is going to be.

Okay. And Justin, if I can squeeze in a follow-up regarding what you disclosed in the prepared remarks regarding the issue in Europe. I was wondering if you could go into a little bit more detail on that. How do you know there's not going to be any lingering impact? Could you give us a sense for the scale of it? Are you sure that these customers are going to be fully able to recover? Just sort of walk us through exactly what happened there. And was it on the QTC side on your front or some of the shipping? Just if you could provide more color on that would be helpful.

Yes. This was a very complex and intermittent issue, really a multivariable problem to figure out. Our products need to be shipped in a temperature-controlled environment, both while in transit and when being stored. We found that in part due to pressures on the overall global supply chain that includes increased delays and some processes on our side along with our partners that needed to be tightened up operationally. What this led to was shipments sporadically falling out of those temperature-controlled ranges. When they got to the customer it wasn't apparent to the customer that the product had spoiled until they actually ran the experiment. When we looked at this and troubleshot it and got to the root cause, we implemented some additional safeguards both to improve the monitoring ability for the shipments in transit and in storage and then our processes and quarantine procedures when we detect that that product has fallen out of the temperature-controlled ranges. When we look at the impact, the amount of products replaced was relatively small. We're talking a couple of million dollars in Q1 and about a couple of million dollars planned and executed already in Q2. The bigger impact was while we were troubleshooting with these customers; there was a delay in ordering while they worked through the troubleshooting to get the root cause and then we shipped them the replacement and then they did the experiment again with the replacement.

Great. Thanks, guys.

The next question comes from Julia Qin from JPMorgan. Please go ahead.

Hi, good afternoon. Thanks for taking the question. So first I have a follow-up on the Chromium X, IX upgrade cycle. Can you maybe give an update on the current placement mix between existing and new to 10x users? And then over what time frame do you expect the majority of your Chromium users to upgrade to the X and IX? And do you think that the fixed RNA profiling kit is enough to lift near-term bottlenecks, or are there other remaining bottlenecks that you are hoping to address with additional solutions?

So far, the mix has been fairly balanced, with about half of our customers being new and the other half being existing ones for the X. However, this mix has started to change due to the introduction of the fixed RNA profiling kit. It's difficult to predict how long it will take for most of our customer base to make the switch. We will need to observe how things develop over the next few quarters. However, given the initial interest and expectations for high throughput, we anticipate a relatively quick transition to that point. Regarding the removal of bottlenecks, the fixed RNA profiling kit will certainly be a significant enabler. We are also pursuing other solutions. We continually develop new protocols and share those innovations. While this won't necessarily address every bottleneck, it will certainly be beneficial at this stage.

Got it. That's helpful. And then in terms of converting the halo users, do you think that the pandemic impact has been the main hurdle in terms of helping these customers ramp? And is your current upcoming new offerings enough to convert them, or do you think it would take some other initiatives to convert these halo users?

We've always been focused on placing more instruments and we're going to keep doing that. It's hard to deny that the pandemic has made it more challenging for them. I think that will certainly help. New product capabilities will help customers scale up as well, like the ones we were just talking about. Our salespeople and commercial team being on site is something that has been missing for a while, and now that we have people on site who can actually engage with customers and help them scale up, that should be a significant accelerant going forward.

Great. Last one for me on Xenium. So I understand the initial launch menu is going to be 400 plex with a path to 1,000 plex over time. Are you able to specify what time frame you anticipate to reach that higher plex menu? And do you think that 400 plex is enough to gain initial traction since the system is positioned more for validation rather than discovery? Just any color on that?

Yes. So we haven't discussed the timeline to get to other plex levels but we do feel strongly that having the right genes in this panel is really important. All of the current platforms that exist out there will be used for validation and what is necessary. Having a slightly higher plex level is not going to be as impactful as having the right genes in your panel, and we're focused on ensuring we have the right kinds of panels for the right tissues. This is where it helps to have close relationships with our customers and also having a lot of internal expertise derived from our Chromium and Visium experience to put those together.

We take our next question from Patrick Donnelly from Citi. Please go ahead, Patrick.

Hey guys, thanks for taking the question. Justin, when you talked about the potential near-term impacts looking at 2Q, you mentioned COVID still lingering. Can you just talk about what you're seeing on that front, what the customer activity looks like? I assume it's lower on the total pool of headwinds versus the cold chain logistics in China, but you did call it out. So I just wanted to check on that and hear what you're seeing in the field.

As far as impacts for Q2, we talked about LDR. That's a headwind in both Q1 and Q2 specifically in Europe. As far as COVID impacts from Q1 to Q2, really in Q1, that was a nominal AMR and EMEA impact. In Q2, it's the China lockdowns that are the primary impact. Overall, as we've mentioned over time, the second order impacts are really not having to do with closures or shutdowns but more just impacts on growth rates due to people not being in person, manpower supplies, and things like that. But generally, we have seen improvements there since we were back in person looking at mid-March. So that has been improving. But again, it's more of an impact on growth rate than it is on the current state.

Yes. One of the big things that has been happening literally over the last two months less than that is that we see people are back at personal conferences. This has not existed before and there is this whole sort of almost fervent activity that we're seeing happen with customers and now with our field teams as well. They can interact with people and pick up on projects that have been dormant for a while or initiate new projects. This has been something more challenging to do over the last two years as people have dealt with various types of impacts. We expect that to start abating as we go into the second half of the year.

Okay. That's helpful, Serge. And then Justin maybe just one on the margins. You mentioned margins being impacted by product mix. I assume cold chain issues didn't help. As you look homeward in the balance of the year and even in the midterm, you've mentioned some of the new products being a little lower gross margin. What's the right way to think about the margin profile as we progress this year and then even in a kind of steady state for the company?

As for gross margin, we are expecting it to trend lower this year, not by a significant amount. Some of the increases we've seen on material costs and supply chain costs are already in the Q1 results but there still remains additional risk for the factors that we've called out before including increased raw material costs and logistics costs. Product mix is a big driver as well. We've talked about our newly introduced products and products that we have in our new pipeline having a lower gross margin than existing products. This will be true with the Chromium X and IX and it will be true with Xenium when it launches as well. Those are the biggest factors on gross margin.

We take our next question from Matt Larew from William Blair. Please go ahead, Matt.

Hey, good afternoon. A couple on HD. Perhaps I missed it but I know last quarter you mentioned HD was expected to launch at the end of 2022. So is that still on track? And I think last quarter you also mentioned that you received – sort of folks that were waiting for HD that maybe that was putting some pressure on Visium demand. So I just wonder how that has trended throughout the quarter as well.

Yes. We don't have an update on the timing, still working towards launching at the end of the year. On the second question, yes, that definitely has been an effect. We've been seeing customers waiting for HD. There are definitely a lot of customers that are jumping in and doing the standard definition Visium and getting great results and great data and ramping up. But certainly, more people are looking forward to HD. So there's likely some amount of stalling with our standard version at this stage.

As for SG&A in particular, obviously it's another big year for hiring but maybe a little later than we thought it'd be in the quarter. Are you having difficulty filling any roles, or is that maybe just kind of in line with a typical step down? How should we think about SG&A building throughout the year? As far as sales and marketing, we expect to hire over 100 folks in sales and marketing this year. That has been tracking along pretty well just looking at how we've been able to grow from Q4 into Q1. SG&A overall is a much smaller amount of hires in G&A. But we have been able to find folks to hire there. R&D is really the hardest area that we found to hire overall.

The next question comes from Matt Sykes from Goldman Sachs. Please go ahead.

Hi, thanks for taking my questions. Maybe just following up on Matt's last question just for overall OpEx trends as we think about over the course of the year just given the number of product launches you're getting through this year in terms of R&D trends over the course of this year and maybe into next like how are you thinking about the OpEx cadence over the course of this year?

So this year in particular we're building ahead for the Xenium launch. On the sales and marketing side, we're starting to hire those support staff now. You'll see increases now that were really for towards the end of the year. The heads that we hire towards the end of the year will really enable 2023. There definitely is a higher ahead impact for sales and marketing in particular.

Got it. And then Serge maybe a big picture question for you. You've talked in the past about the potential complementary nature of having the three platforms on Xenium launches. As you think about longer term with Xenium in the market, do you think that could help reinvigorate or reaccelerate growth, and particularly Visium or any other platforms as customers kind of see the entire ecosystem?

Well, yes I see there's definitely synergy. I think there’s a reciprocal relationship between the platforms. Chromium and Visium mostly occupy the discovery side of the world and Xenium will exist in the validation side. As I said on the call, Xenium will have applications in tissue experiments; there will be natural use cases to draw in and run Chromium and Visium experiments to map things out and discover the right markers, cells, and cell types. We see all the different platforms pushing each other and I also want to emphasize the customer experience from the same perspective. Given that so much of the use integrates actually makes use of all these data types together, having a single customer experience is going to be important and valuable to customers as they go back and forth between the platforms.

This now concludes the Q&A session and thus concludes the call for today. Thank you all for joining. Please disconnect your lines now.