10x Genomics, Inc. Q4 FY2024 Earnings Call

Thank you. And good afternoon, everyone. Earlier today, 10x Genomics released financial results for the fourth quarter and full year ended December 31, 2024. 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 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 Adam Taich, our Chief Financial Officer. We will host a question-and-answer session after our prepared remarks. We ask analysts to please keep to one question so that we may accommodate everyone in the queue. With that, I will now turn the call over to Serge.

Thanks, Cassie. And good afternoon, everyone. During today's call, I'll start with a brief overview of the product launches and foundational progress we made in 2024 and why we have a great setup to execute on our long-term strategy. Next, I will highlight our key priorities and focus areas for 2025. Then, Adam will provide a more detailed look at our financial results, business trends and revenue guidance for the year. Adam will also touch on recent developments around the academic funding environment. As previously announced, we finished 2024 with total revenue of $611 million, down 1% compared to the prior year. On the background of an increasingly challenging macro environment, 2024 was a year of change for us. First, we launched major new products across all three of our platforms. While this entails extra effort from both our sales team and our customers to understand trial and transition over to the new portfolio, these launches have been met with tremendous customer response. Second, within our single cell portfolio, we introduced a number of new products that deliver lower price per sale and per sample. We believe there's great potential to grow single cell revenues by reducing prices to increase volumes over time. And finally, we embarked on a major reorganization of our sales force to support the growing diversity of our products and customers and to allow us to scale into the future. While all these changes entail some near-term challenges, we're confident that they better position us to capture the tremendous long-term opportunity we see ahead. I'll start with the product innovations we introduced in 2024. First on our Chromium platform. Last year was the biggest year of Chromium product launches in our history. We introduced a new microfluidic architecture, GEM-X and a slate of new products and capabilities. Once again, we raised the bar on performance, on data quality, on robustness, on scale. We rolled out powerful new capabilities to improve ease of use, sample prep and data analysis and we did it all with products at lower prices. We also established a new standard for scale and cost. Customers can now run million cell experiments with a single chip and in a single run. They can also do so at a price point of $0.01 per cell with our GEM-X Flex assay. And with our on-chip multiplexing products, customers can now get down to $600 per sample at any scale. We also launched Chromium Xo, an instrument that provides a low-cost entry point so more researchers can access instrument powered workloads and performance advantages of Chromium single cell analysis. Our goal is to democratize single cell to drive it to ubiquity and routine use. This past year, we took major steps in this direction, both in product capabilities and pricing. The average price per Chromium reaction decreased as we proceeded through 2024. This was expected as customers transitioned over to our lower priced GEM-X products. The drop was more pronounced in Q4 with the first quarter in which GEM-X Flex and on-chip multiplexing became available to customers. In conjunction with lower prices, we saw sequential increases in reactions sold throughout the year. While we expect it will take time for volume growth to offset the lower prices as a result in overall revenue growth, we are motivated by the early interest and adoption of our new assays. Turning to spatial. 2024 was also a big year for our spatial platforms with product revenue growing 33% year-over-year as the portfolio continues to become a larger portion of our overall business. A significant contributor to the excitement for spatial last year was the new products we launched, notably Visium HD and Xenium Prime 5K. Within our Visium platform, we launched Visium HD, which brings spatial discovery to a new level by enabling whole transcriptome spatial analysis at single cell scale resolution, critically enabled by our CytAssist instrument. Visium HD increases the resolution of the Visium platform by over three orders of magnitude all while leveraging the same robust and easy-to-use workflows that the Visium platform is known for. Since its launch, we've continued to see positive momentum from our customers. In the fourth quarter, customers continued the trend of ordering Visium in larger volumes, and new to Visium customers are now overwhelmingly opting for Visium HD. We also continue to execute on our robust Xenium R&D pipeline across our assays, applications and software. We started the year by launching our widely requested multimodal cell segmentation kit, which leverages advances in assay chemistry and sophisticated machine learning algorithms to significantly improve the determination of cell boundaries. We also added new content, expanded sample compatibility and drove major advances in data analysis. Finally, we launched Xenium Prime 5K, increasing Flex by an order of magnitude to 5,000 genes. Xenium Prime 5K features brand new chemistry and software to deliver excellent per gene sensitivity, specificity and spatial fidelity. The enthusiasm from customers for these launches only adds to our excitement about the Xenium platform and its long-term potential to be the most significant technology since the arrival of MGS. We're encouraged by the robust utilization trends we are seeing from researchers and by reorders from customers purchasing additional Xenium systems as they experience firsthand the platform's benefits. In addition, there has been a growing number of publications and a coalescence of interest from researchers who are planning cohort studies on Xenium, further fueling our conviction in the opportunity ahead. Both Visium HD and Xenium 5K have been met with exceptional feedback. In fact, one customer called the arrival of these technologies a watershed moment in spatial transcriptomics, reviewing biological complexity at unprecedented resolution. We share our customers' excitement and believe in spatial’s potential in scientific discovery, translational work, and ultimately clinical applications. Alongside the product innovations we introduced in 2024, we also embarked on a major reorganization of our sales force in order to realize the full potential of our expanding product portfolio and evolving customer mix. As we mentioned on our Q3 call, we created greater specialization by establishing our capital equipment, biopharma and emerging account teams, all with the goal of improving focus and creating more defined roles with targeted incentives. We've made meaningful progress with our new sales model since its introduction. While we still have open roles to fill, we're gaining traction with hiring and onboarding. Our team is creating new opportunities at a faster pace. And we're bringing more consistent attention across customer accounts of all sizes in both biopharma and academia. Overall, we believe we are on track for our new sales model to be in full force by midyear as expected. As we kick off 2025, we're executing against several key priorities. First, finishing our commercial transformation and transitioning researchers to our new product portfolio. Our goal is to start taking advantage of the benefits that these foundational changes enable and deliver consistent execution quarter-after-quarter. Second, we are working to drive more volume and greater use of single cell through lower prices. We firmly believe in the elasticity of demand of our products. That's why we're working to democratize access to our tools, delivering better products, better workflows and better pricing so more customers can do more single cell work more routinely. Third, we plan to leverage our new single cell portfolio and the momentum we have in spatial to unlock exciting new growth opportunities, including in biopharma, translational studies and large scale single cell projects. Let me share a bit more about each of these. We believe we have the opportunity to deliver outsized growth in biopharma. Today, this segment makes up around 15% to 20% of our total revenue and we intend to expand biopharma to be half of our business in the future. In addition, there has been rapidly growing interest in using single cell and spatial for translational cohort studies, and we believe it's still early days. As we look forward, we expect both the number and scale of such studies to continue to increase as researchers work to transform how we understand, diagnose and treat disease. Another significant growth opportunity is enabling large scale single cell studies to map out gene functions and construct AI models of biology. The convergence of our technologies and AI has the potential to transform how research is done. Just last week, for example, the Chan Zuckerberg Initiative launched its unprecedented billion cell project. We're extremely proud to partner with both CZI and Ultima Genomics on this landmark initiative to fuel rapid progress in AI model development in biology. And finally, as we move through 2025, we will continue our focus on managing costs, taking a disciplined approach to spending so we can maintain the strength of our balance sheet. When you take a step back, it is clear just how vast and powerful the opportunities for single cell and spatial truly are. It seems not a week goes by without a new exciting revelation being made using our technologies. Let me highlight just a few that have inspired and motivated our team recently. As featured in Nature last month, researchers relied on Chromium, Visium and Xenium to demonstrate how different immune cells emerge and are deployed to fight infection in the small intestines. In a recent Nature cancer paper focused on diagnostic markers in brain tumors, the authors demonstrated how spatial transcriptomics, previously restricted to research, now shows potential in routine diagnostics. And it's not just scientific journals taking note of all the revolutionary potential of our technologies. Recently, the Atlantic described a goal of our work, the virtual cell, as the holy grail of science. The potential of our tools to accelerate natural biology and advance human health has never been more clear. That's why we do what we do. That's why we believe the opportunity in front of us is so large. With that, let me turn it over to Adam.

Thank you, Serge. I'll start by reviewing our financial results for the three months ended December 31, 2024. Then I'll review our financial results for the full year 2024 and I'll finish by discussing our outlook for 2025. All growth rates provided will be on a year-over-year basis unless otherwise noted. In line with our previously announced preliminary results, total revenue for the quarter was $165 million, an increase of 9% sequentially and a 10% decrease year-over-year. Looking at our revenue breakout, total consumables revenue was $133.5 million, down 5%. Chromium consumables revenue was $97.7 million, down 17%, driven by lower reaction prices and spatial consumables revenue was $35.8 million, up 61%. Moving on to instruments. Total instrument revenue decreased 37% to $24.4 million. Chromium instrument revenue was $10.9 million, down 2% and spatial instrument revenue was down 51% to $13.4 million, driven by fewer Xenium instruments sold. Services revenue was $7.1 million, up 35%. Looking at our revenue by geography. Americas decreased 16% to $87.2 million, EMEA decreased 2% to $49.8 million, and revenue in APAC was down 5% to $28 million. Turning to the rest of the income statement. Gross profit for the fourth quarter was $111 million compared to $115.8 million for the prior year period. Gross margin increased to 67% from 63% in the fourth quarter of 2023. This was primarily driven by a change in product mix, predominantly fewer Xenium instruments sold. Total operating expenses for the fourth quarter decreased to $160.8 million compared to $171 million for the prior year period. This decrease was primarily driven by a $19.6 million in-process research and development expense related to a technology acquisition in the prior year period, partially offset by an increase in outside legal expenses. R&D expenses increased to $67 million compared to $65.3 million for the prior year period, primarily driven by higher laboratory materials and supplies. SG&A expenses increased to $93.8 million compared to $86.1 million for the prior year period, primarily driven by increased outside legal expenses. Operating loss for the fourth quarter was $49.8 million compared to a loss of $55.2 million in the fourth quarter last year. Net loss for the period was $49 million, flat to the fourth quarter of 2023. Turning to our full year results. Total revenue for the full year ended December 31, 2024 was $610.8 million, representing a 1% decrease over full year 2023. Total consumables revenue for the year was $493.4 million, up 3%. Chromium consumables revenue was $372.3 million, down 11%, and spatial consumables revenue was $121.1 million, up 104%. Total instrument revenue was $92.7 million, down 25%. Chromium instrument revenue was $35.2 million, down 26%, and spatial instrument revenue was $57.5 million, down 24%. Services revenue was up 57% to $24.6 million. Looking at our regional results for full year 2024, Americas revenue was $347.8 million, down 7%, EMEA grew 12% to $159.8 million, and revenue in APAC was $103.3 million, flat to prior year. Turning to the rest of the income statement for full year 2024. Gross profit was $414.5 million compared to gross profit of $409.3 million for the prior year. Gross margin increased to 68% compared to 66% for 2023. This was primarily driven by a change in product mix, predominantly fewer Xenium instruments sold. Total operating expenses for 2024 decreased to $609 million compared to $674.6 million for the prior year. The decrease was primarily driven by a $61 million in-process research and development expense related to a technology acquisition in the prior year period and lower personnel expenses, partially offset by higher outside legal expenses. R&D expenses decreased to $254.7 million compared to $270.3 million for the prior year, primarily driven by lower personnel related costs. SG&A expenses increased to $344.3 million compared to $343.3 million for the prior year, primarily driven by increased outside legal expenses, partially offset by lower personnel related costs. Operating loss for 2024 was $194.6 million compared to a loss of $265.3 million for 2023. Net loss for 2024 was $182.6 million compared to a net loss of $255.1 million for 2023. We ended 2024 with $393.4 million in cash and cash equivalents and marketable securities, an increase of approximately $5 million from December 31, 2023. Turning to our outlook for 2025. We expect full year revenue to be in the range of $610 million to $630 million, representing 0% to 3% growth over full year 2024. At the midpoint, this guidance implies double-digit growth for both Chromium reactions as well as our overall spatial revenue. With this outlook, we are making the following assumptions. First, we are not anticipating improvements in the overall macro environment and generally expect it remains similar to what we experienced in the second half of last year. That said, it has been a very fluid situation over the past few weeks and days with heightened uncertainty surrounding NIH funding. As we've shared previously, we estimate total NIH funding exposure to be about 20% to 25% of our revenue. Our guidance range contemplates previously anticipated weakness in NIH funded research based on delays and reductions in new grant funding and how broader uncertainty around funding may impact customers' budgets and spending patterns. However, the current guidance range does not reflect the potential impact of the recently announced 15% cap on indirect costs should that be fully implemented. Second, our goal is to democratize single cell analysis and we remain committed to driving increased access and usage of our products and customers' labs. We expect Chromium consumables revenue to be modestly down this year as our lower priced products become a larger portion of our sales. And finally, we continue to execute on the commercial changes that we made last year. As previously discussed, we anticipate some lingering impact from these changes during the first half of 2025 as we fill open roles, particularly in our Xenium team. We have conviction that these were the right structural changes to make and remain on track to be fully complete by the middle of the year. As Serge mentioned, we continue to focus on managing our spend. We are taking a disciplined approach to our expenses and are driving efficiencies throughout the organization. We ended the year with $393 million in cash and cash equivalents and we feel confident about our strong balance sheet and we are well positioned for the long term. At this point, I'll turn it back to Serge.

Thanks, Adam. Before we open it up for questions, I want to thank the 10x team. I'm so grateful for your tireless work, unwavering dedication and obsession with customer success as we continue to push through boundaries and higher challenges together. I have full confidence in the talent and tenacity of our team as we execute on our 2025 priorities with urgency and excellence with the 10x way. That's how we'll advance our mission and create value for all stakeholders, both now and over the long term. With that, we will now open it up for questions. Operator?

Your first question comes from Dan Brennan with TD Cowen.

Maybe the first one would be just on kind of single cell pricing. Serge, you talked about and Adam talked about the investment in price that you're making, and you still expect there to be some pressure on consumables this year. Just give us a sense of kind of where are we in the evolution? It looks like if we just took your consumables divided by reactions, price was down about 11% in '24. So how do we think about what's baked in for '25? And kind of what's the gap today between your price and the competition and kind of how much narrower does it need to get?

It's important to recognize that we offer various products with different configurations tailored to diverse customers and their applications. Each customer approaches their experiments with distinct priorities; for some, the cost per cell is a priority, while others may focus on the cost per sample or per experiment. We believe we present highly valuable offerings to all these customers across various applications, especially following our product launches last year. Our primary goal is to expand the market, and we see significant untapped potential in the single-cell segment. Last year, we made considerable progress in overcoming pricing barriers and enabling new applications, which will facilitate increased volumes. With our current product lineup, we are positioned to enhance volume growth this year. Furthermore, we anticipate that the transition into our new product range will lead to lower average selling prices per reaction due to the shift in our product mix.

And your next question comes from the line of Patrick Donnelly with Citi.

Serge, I know you mentioned the NIH briefly. It seems like there could be a new potential 15% cut that isn’t reflected in the guidance. Can you discuss how customers are responding to that news? I'm aware of the NIH involvement, but regarding the academic market, how do you view that and what’s the best way to evaluate the risk associated with it?

Let me just turn over to Adam to clarify the specifics on NIH.

Let me provide some clarity on the assumptions behind our revenue guidance. We estimate that total NIH funding accounts for approximately 20% to 25% of our total revenue. At the midpoint of our guidance range, we are projecting a mid-single digit decline in NIH funded projects for our customers in 2025, resulting in an estimated impact of around $7 million on our revenue. This assumption stems from a cautious approach, reflecting the spending patterns you mentioned and the delays we observed from our NIH funded customers in the latter half of last year, along with the funds flow announcements in January related to the NIH. Since then, the situation has been quite fluid, as you've pointed out. The indirect funding costs were capped last Friday but were temporarily suspended by a judge shortly after, and we anticipate further challenges to these new rules from universities and others. The ultimate outcome of these announced changes remains uncertain. Consequently, we have not included these recent developments, which are rapidly evolving, into our guidance. Generally, our customers utilize direct funds to acquire our products, including instruments. While this potential cap on indirect costs is not reflected in our guidance, I want to share our broader perspective on these recent updates. The NIH has said, it expects the indirect cap to save more than $4 billion annually, which would imply an 8% cut to the overall NIH budget. So based on our 20% to 25% exposure, we estimate that this potential 8% reduction, if fully implemented across both direct and indirect funds, could result in approximately a $10 million to $15 million impact to our revenue. Again, not accounted for in our 2025 guidance. I would add that, apart from the quantitative impacts, we have to acknowledge the collective and heightened uncertainty surrounding funding is going to have an additional impact on the confidence of our customers. This can further impact customer spending patterns, their ability to make purchases and the timing of their purchases. So we're here to support our customers as they navigate this uncertain time, which unfortunately distracts from the important work they're doing to push science in the world forward. Given its critical role in funding advanced research and discovery, the NIH has historically received bipartisan support and we hope and expect that will continue as conditions normalize.

And your next question comes from the line of Dan Arias with Stifel.

Serge, can you just add some color to your comment on Chromium volumes? It looks like Chromium reactions were basically flat this year, down a point or two, I believe. You're guiding to double-digit growth in 2025, which is a pretty big step up, particularly given the environment right now. So where is the confidence in going from zero to 10 plus? And just where is it coming from? Is it discrete projects like billion cells? Do you think you opened up the market with some of these new products? It would just be helpful to sort of get your take on how you're feeling about going to that level of acceleration?

One thing to keep in mind is that we experienced a sequential increase in reactions from Q3 to Q4, which we view as the beginning of a trend we are establishing. We expect this trend to continue into this year. This increase is linked to several factors we've previously mentioned, including new products, new price points, and new configurations. These changes are opening up more use cases and encouraging more consistent usage among existing users, as well as attracting new customers to single cell research who may not have considered it before. Additionally, there are large projects, such as the CCI, where many researchers are looking to expand their single cell studies. Until recently, pricing posed a significant obstacle, but we believe this positive trend will persist, and we expect the momentum we saw starting in Q4 to carry on.

And your next question comes from the line of Puneet Souda with Leerink Partners.

Serge, I'm concerned that the indirect cuts are not reflected in your guidance. Customers are indicating that purchasing instrumentation is quite risky during periods of significant uncertainty, which researchers haven’t faced before. Indirect cuts typically affect leading institutions, medical schools, and private universities that have substantial indirect exposures, often between 60% to 80%, and they are expected to reduce to 15%. In such circumstances, the uncertainty increases, particularly as some of your innovative products are targeting these areas. Given what we've seen in the first week and the level of conservatism present, alongside the potential for prolonged legal cases and Congressional actions, I'm trying to grasp why indirect cuts are not factored into the guidance.

Our goal is to provide clarity on our management approach for the year. As mentioned, the current situation is extremely volatile, with changes occurring constantly. We need to be cautious about making predictions on how things will unfold. Customers are understandably anxious right now due to the uncertainty. I want to stress that our exposure related to instruments is limited; only a small percentage of the instruments we offer are used in academic core labs, and those are primarily financed through direct funds. While we acknowledge the risks present in this uncertain environment, the potential impact is also limited, which is how we're approaching the situation.

And your next question comes from the line of Doug Schenkel with Wolfe Research.

I'm going to, I think, follow up with just a couple of clarification questions on guidance. And I'm sorry if I'm just being a little slow or maybe need a little more coffee late in the afternoon, but there's just a couple of things I'm not clear on. So the first is I think you talked about reducing your guidance by $7 million due to something relating to the NIH, which occurred prior to the news about the indirect cuts. So I want to just understand what the $7 million was. Then I believe you said your best estimate on the impact of indirect funding being capped would be an additional $10 million to $15 million. I want to make sure I have that right. That kind of gets at one of the big elephants in the room, which is the NIH. Then what I don't think you talked about was China and you weren't named in the same way Illumina was named, but there are obviously lots of concerns about what's going on in terms of demand for genomic tools in China, and I think it's broader than that in tools. So the first thing is, can you clarify what's in and what's not in for the NIH, how you're treating China? And then I think the other thing you haven't talked about is really pacing. And again, I'm sorry if I missed that. But given everything that's going on in the world, I could either see where folks are trying to accelerate activity in advance of uncertainty or they're actually slowing down and basically waiting for more clarity. What are you seeing and how are you treating that in guidance? And accordingly, how should we model things by quarter?

So let me start by addressing the China aspect. I believe you are correct. Incorporated into our guidance is an estimated mid-single digit decrease in NIH funded projects for our customers. We anticipated some instability before the indirect news came out last Friday, and this has been factored into our guidance, resulting in approximately a $7 million impact. This decrease in funding relates to 20% to 25% of our revenue, based on the conservatism we've been observing. Given the current uncertainties, especially after the indirect news, this is what we have considered from a direct funding standpoint. The $10 million to $15 million that is not included in our guidance reflects a complete 8% cut to the overall NIH budget. There are two separate funding pools: direct and indirect. This is the analysis we've been communicating. As Serge mentioned, we aim to be transparent and provide the right framework for understanding and assessing risk. So, with our 20% to 25% exposure, if there is an overall 8% reduction applied uniformly, we expect it could lead to a $10 million to $15 million impact on our revenue, which we did not factor into our guidance. Regarding pacing, we are currently in a unique situation, which suggests that the year may be more back-end loaded. Additionally, as we indicated back in Q3, we are still in the process of building and strengthening our commercial team. Hiring is progressing well, but we still have some positions to fill, and we are training the representatives we onboarded in Q4 of last year. We anticipate that once the team is fully operational, we will be ready to go from a commercial standpoint by the second half of the year. Consequently, when we consider quarterly pacing, we expect it will align more closely with what we experienced in 2023, where there tends to be more business activity in the second half than in the first half. Using our historical quarterly pacing from last year as a guideline could provide a good understanding of our expectations. Serge, do you want to address the question about China?

So Doug, there are a few concerns regarding China that people have. Firstly, there’s the news about Illumina and how it might impact us, considering many of our products are used alongside Illumina sequencing. The key point to note is that our products are compatible with nearly any sequencing technology, making it relatively easy for our customers to transition to another sequencing method. In fact, that's already occurring in many instances. Therefore, we do not expect a significant impact from Illumina potentially being removed from some of our customers' labs. Additionally, our technology doesn't attract the same level of attention there compared to other products like sequencing. There also aren't strong alternatives for our products in the region. Taking all these factors into account, although there are various issues regarding China, we believe our risk is fairly manageable. Moreover, China currently represents only a small portion of our overall business, accounting for 9%.

And your next question comes from the line of Tycho Peterson with Jefferies.

A couple of cleanups on guidance. I guess, Serge, can you talk about what you're baking in for contributions from the product launches last year? Just any color you can give on what you're baking in there? And then Chan Zuckerberg, what's in the guide for that and are there other similar projects you're baking in? Legal, I think, goes down post the NanoString injunction. So maybe just talk a little bit about spending there. And then one thing I want to understand on NIH is the funding has actually been good. I mean it was up 35% last year for spatial. I think you have $400 million of trailing 12 months funding available. When does that start to flow through? Obviously, there's a lot of noise here in the near term and I get all that, but the funding actually went up quite a bit last year.

So, regarding the first part of your question about new products, they will definitely play a significant role in our expectations for this year. We anticipate that nearly all of the Chromium business will transition to the GEM-X architecture throughout this year. We are also experiencing positive traction from the launches we made in the fourth quarter concerning on-chip multiplexing and GEM-X Flex, which will represent a larger portion of our overall product mix potential and will help drive increased volumes throughout the year. The larger projects we previously mentioned, such as CCI, are also included in our expectations for this year. When it comes to NIH funding, you are correct. If you look deeper into the overall funding trends, especially for single cell and spatial initiatives, they appear to be very promising and robust, which gives us optimism about how things will trend this year and beyond. However, we must remain cautious due to the current situation and the uncertainties surrounding it.

I think the last part, Tycho, your question around legal from an OpEx perspective, I mean, from an OpEx, we continue to manage our costs in a disciplined way. And we would anticipate our costs year-on-year to be roughly flat from an operating expense perspective, and that legal piece is part of it.

And your next question comes from the line of Tejas Savant with Morgan Stanley.

Just a couple of cleanups on the guide and then I have one on the legal side of things as well. So maybe, Adam, for you, any color on gross margin cadence through the year? There's a few moving pieces here. Obviously, you mentioned the pricing headwind and mix and so on but also potentially some of these large single cell projects come through. Does that sort of weigh a little bit on the gross margin line? Any color there would be great. And then on the IP litigation with Vizgen that was settled here, were you generally satisfied with the terms? Can you share whether they involve any ongoing royalty or licensing fees to you? And given the patent overlap between that case and the one with Bruker, I guess any color on how you think sort of that outcome positions you for the other case?

I will address the gross margin question and then let Serge handle the second part. Regarding gross margin, we expect it to be similar to what we ended with in 2024. There are a few factors to consider. For instance, product mix can have an impact, meaning that increased sales of Xenium could put pressure on margins. Additionally, we are facing general cost pressures due to inflation, which we are working to manage through operational efficiencies. When it comes to large projects, it's challenging to predict their timing, but we will strive to win those opportunities. If we do manage to secure some larger projects throughout the year, that could negatively affect gross margin, though we are not incorporating that impact into our current plan. We will reassess this as the year moves forward.

So on the Vizgen settlement. So yes, we're actually extremely happy with the outcome. Fundamentally, the settlement validates the intellectual property investments we have made, like fundamentally the importance of George's work on these foundational inventions around skin tissue. The team recognized the importance of this intellectual property early on and we invested in developing this IP and the product and R&D all around it. And I think this is a really great moment and a huge testament to the whole team. And yes, we're very happy with the outcome.

And your next question comes from the line of Rachel Vatnsdal with J.P. Morgan.

This is a follow-up on for Rachel. Just digging into the placements, how should we think about placements for Xenium and Visium next quarter and then in '25? And then on Chromium, what's the total pricing discount headwind you expect for next year for Chromium consumables?

Let me address both parts of your question. Regarding the Xenium instrument, we are expecting the entire spatial business to grow in double digits. We anticipate an increase in Xenium unit placements throughout the year and expect to sell more in 2025 than we did in 2024. We have a strong pipeline and a dedicated team focused on Xenium capital equipment, which is starting to perform well, although they still have room to grow in terms of hiring. As the year goes on, we believe that this team will continue to develop and capitalize on the opportunities within the pipeline, leading to year-on-year growth in the Xenium instrument business. As for Chromium consumables, we expect double-digit volume growth, which is included in our guidance. However, we’ve also indicated that overall performance could be modestly down. From this, you can conclude that we will likely see pricing react within a double-digit framework year-on-year, especially as we focus on new products aimed at enhancing accessibility for our customers.

Next question comes from the line of Dan Leonard with UBS.

I was hoping you could elaborate a bit more on your biopharma comment. I think you commented that's about 15% of your revenue could grow to 50% over time. Can you perhaps share what the growth rate for biopharma was in 2024? And just any more color around what the cadence would be to mix that part of your revenue?

Overall, the biopharma performance for the year faced challenges, particularly during the first part of last year. However, after implementing changes on the commercial side and establishing a new team in Q3, we observed a significant sequential improvement in Q4. The indicators we're seeing now, such as having the right people in place, new applications being introduced, and productive discussions with customers, suggest great potential for business growth. Historically, we've seen growth rates around 15% to 20%, but we're making conservative investments and uncovering substantial opportunities to accelerate towards a goal of around 50% growth.

Next question comes from the line of Subbu Nambi with Guggenheim Securities.

On gross margin, was a bit weaker than expected in the quarter. Was that just a function of high instrument mix or is there also some inefficiency associated with the rollout of new consumable products that are dragging on margin?

It was primarily a mix impact from Xenium. We didn't originally expect a budget flush towards the end of the year based on our observations. Earlier this year, we indicated that we did end up seeing this. So, when considering our guidance versus our actual results, a significant portion was due to the budget increase, a substantial part was from biopharma, and there were certainly some Xenium instruments that contributed to this. Therefore, when analyzing the gross margin trend throughout the year, that was really the main effect on what you pointed out for Q4.

And your next question comes from the line of Kyle Mikson with Canaccord Genuity.

A follow-up on biopharma that's a focus for you going forward. Could you talk about the biopharma spending assumptions in the '25 guidance given the budget logic experience at the end of '24? And secondly, just on the IP side, PTAB and validated all your claims sort of against still competitors' products? Just given that litigation, is there going to be even more competitive headwinds in single cell going forward?

Yes, we are certainly taking into account the growth trajectory within biopharma this year as part of our guidance.

And your next question comes from the line of Luke Sergott with Barclays.

Just quickly up here, I might have missed it. But did you give any sense or direction on the split between Visium and Xenium consumables in the quarter? And then unrelated, can you kind of give us some timing there on the billion cell project and kind of how that plays out and can they get that done in two, three years or what's needed there from equipment perspective?

The project is progressing rapidly. In terms of completion timing, this is a large-scale undertaking. It is not expected to be completed within three years, but it will require some time to finish.

Your next question comes from the line of Matt Larew with William Blair.

I have two unrelated follow-ups. The first is on the reaction on pricing commentary you gave, as well as GEM-X transition starting in Q4 '24. Is it reasonable to assume that you will grow single-cell revenue in the fourth quarter and your current plan, that's part one? And then part two, understanding any transition with respect to the challenges would be a challenge. Can you just talk a little bit about your customers in Europe in terms of what their behavior is like? Certainly, that has been a very rapidly growing category for you over the last four or five years, and that's an area where indirect cost pressures from 25%. So I'd just be curious to hear about any difference that's similar to customer behavior there.

Regarding the European business and overhead, your question seems to focus on indirect and overhead funding and its implications. It's worth noting that our European operations have performed relatively well over the past year. This performance suggests that a lower potential indirect rate exists in that market. However, when we consider the US, we must proceed with caution, as significant changes of this nature bring considerable uncertainty, impacting our customers' outlook. Nonetheless, in the long run, there is potential for this situation to improve, allowing research to progress at a strong pace.

And your next question comes from the line of Matt Sykes with Goldman Sachs.

Just back to the commercial changes you made last year, just as we think about the first half of this year, measuring your progress and the success of those commercial changes. I know you said that Xenium would likely be a little bit later. You made some comments about biopharma seeing sequential improvement at the end of last year. But how should we think about where sort of the leading indicators of success of these changes would be? Is it in Chromium CapEx, is it in consumables? What are some of the measures that we should be looking out for?

One important aspect to understand is that the changes we made were intended to be comprehensive. This represents a fundamental re-structuring of our go-to-market strategy, where we established new suborganizations within our commercial function that have a clear focus and defined incentives. This will have an impact across all areas of our business. We specifically set up a dedicated team to concentrate on Xenium, which will not only enhance Xenium but will also allow other sales executives to concentrate more on Chromium and Visium products. This shift should benefit those product lines as well. Additionally, by distinguishing the focus between academia and biopharma, we will support both sectors effectively. Overall, as we take a broader view, we feel we are progressing well and making good strides, as we previously outlined. We have made solid advancements in hiring, onboarding, opportunity management, and account coverage. Looking ahead to the rest of the year, we expect to be fully operational by mid-year.

And your next question comes from the line of Michael Ryskin with Bank of America.

I want to just follow up on a couple of earlier points, make sure I caught it right. I think, Adam, you talked about first half, second half seasonality in 2025. You guys occasionally give quarterly guidance as to whenever there's a thing to keep in mind. So just any additional clarity on 1Q specifically or are you just going to keep it by halves? And then the other follow-up question Serge, maybe a better suited for you, something Dan Leonard asked on earlier, your comments about pharma biotech growing to 50%. I just want to push on that a little bit more. I mean if you're at 15% to 20% revenue mix now, I realize that longer term for a lot of technologies in genomics and tools, there's growing use cases in translational research as you sort of move out of that earlier pure academic pure research setting. But if I look at your portfolio, these technologies have been out there for a while, this is not that new. And yet despite being on the market for, in some cases, five, 10 years now, you're still only at 15%, 20%. So I'm just wondering how do you get to 50%, right? I mean I would have thought that if you're really going to get there, you would have been further along the ramp now. Is there something from a commercial organization or from a customer use case that you think is holding you back and sort of keeping you out of pharma and biotech to a greater extent?

So, there are a couple of points to consider. First, the products have only recently achieved the maturity and capabilities necessary for pharmaceutical applications, which wasn't the case until a couple of years ago. It's essential to have the ability to work with fixed samples and tissues, particularly FFPE, especially when moving into later-stage clinical trial work. We now have this capability integrated across our entire product line, including the Flex product and FFPE compatibility on the single-cell side with Visium, and Xenium has been FFPE native from the start. This is an important context as we transition from early-stage discovery to later stages of product development, where fixation compatibility is crucial. Secondly, the processes of testing, validating, and gaining traction in the pharma and biotech sectors can be lengthy. We are beginning to see the rise of new applications that have been developing since 2016, which are now attracting considerable interest, such as large-scale CRISPR screens, which are highly relevant to biopharma and have wide applications across various companies. We are still in the early stages and are exploring numerous applications throughout the drug development process. Lastly, this growth also depends on having a well-targeted commercial team. Historically, our focus has been on academia, but we have now established a distinct organization dedicated to advancing our biopharma business. This requires a different sales approach and expertise, and we believe we are aligning the right resources to accelerate progress moving forward.

Thank you, presenters. And that is all the time we have for questions. This now concludes today's conference call. Thank you all for joining. You may now disconnect.