Earnings Call Transcript - TXG Q2 2022

Operator, Operator

Good afternoon. Thank you for attending the 10x Genomics Second Quarter Earnings Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to pass the conference over to your host, Cassie Corneau with Investor Relations and Strategic Finance at 10x Genomics. Thank you. You may proceed.

Cassie Corneau, Investor Relations and Strategic Finance

Thank you, and good afternoon everyone. Earlier today, 10x Genomics released financial results for the second quarter ended June 30, 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 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; Justin McAnear, our Chief Financial Officer and Jim Wilbur, our Chief Commercial Officer. With that, I will now turn the call over to Serge.

Serge Saxonov, CEO and Co-Founder

Thanks, Cassie. Good afternoon and thank you for joining us. Revenue for the second quarter declined 1% year-over-year in line with our pre-announcement in mid-July. Our results this quarter fell short of our expectations as we navigated challenges in both the macro environment and with our execution. While some of these issues are behind us, we expect others will persist into the back half of the year. Based on these lingering headwinds in our first half results, we now expect full year revenue in the range of $500 million to $520 million, representing growth of 2% to 6% over the prior year. While our topline growth this year will be slower than our previous expectations, we firmly believe the underlying opportunity for single cell and spatial technology is as strong as ever. On our call today, I will focus on what we're doing to ready our organization for a next phase of growth. Justin will provide more details on the specific impacts to our second quarter revenue and our outlook for the year, as well as give additional color on steps we're taking to strengthen our financial profile. I'm proud of our track record of product innovation and the growth we have delivered over the past few years. We have progressed at a truly rapid pace amidst a very challenging environment. And with that incredible speed, we have quickly outgrown some of the processes and systems that got us here. And while we have some work ahead of us, we are building from a great foundation. For starters, our fundamentals are incredibly strong. We're focusing on the strengths that have always differentiated us: driving our innovation engine, providing a superior customer experience and investing in the long term. In parallel, we will improve our execution and implement tools and processes, so we can increase leverage and scale to the next level of growth. And finally, I continue to have full confidence in both our vision and our approach to achieving that vision. We have built leading platforms for single cell and spatial biology and we're just getting started. As the only company to have the three fundamental technology approaches for single cell and spatial biology under one roof, we're uniquely positioned to be the best partner to help researchers around the world interrogate, resolve and master biology. Now, let me share a bit more about our progress and pipeline in each of our three platforms. Starting with Chromium, which is the unambiguous leader in single cell analysis. During the quarter, we continued to see solid demand for Chromium X Series instruments. We are proud of the broad appeal and demonstrated success of the platform in its first full year since launch. Customers are enthusiastic about the new platform and its expanded capabilities, including access to our fixed RNA profiling kit, which is exclusively available on X Series. Turning to consumables where the breadth, performance and workflow of our broad menu of assays is an important differentiator for us and for our customers. As planned during the quarter, we began shipping two new kits designed to help make more samples and more sample types available for single cell analysis. It has been great to see the early energy for both our nuclei isolation kit and our fixed RNA profiling kit. The nuclei isolation kit, our first offering to help ease sample preparation provides a simple scalable workflow to make frozen tissues and previously challenging sample types more accessible for routine single cell analysis. This is a great example of how our continued innovation and workflow simplification will help expand our opportunity, bringing new labs and researchers into the 10x ecosystem and increase utilization among existing customers. It's early, but we're really excited by the strong initial adoption of this kit. We're also really pleased with the early feedback on our fixed RNA profiling kit, which we believe has the potential to be transformative to the Chromium franchise over the long term. This assay enables researchers to lock in cell states at the point of sample collection and removes time and transport constraints typically associated with the single cell workflow. It also offers a number of significant advantages including improved gene sensitivity, increased sequencing efficiency and built-in sample multiplexing to achieve lower price at scale. While adopting a new workflow takes time, researchers have been running pilot experiments and side-by-side comparisons to see firsthand the performance of this assay. The feedback has been universally positive. At the AGBT conference in June, we demonstrated how our fixed RNA kit can also unlock for the first time ever FFPE preserved samples for single cell analysis. This is a groundbreaking capability that we believe has the potential to be a real game changer as it opens up vast volumes of archival samples. Given that all the progress to date in single cell has been made using fresh or frozen tissues, we expect this breakthrough capability should enable much more research, particularly in translational settings. Looking forward, we are excited about our Chromium pipeline. We're on track to launch BEAM-Ab and BEAM-T by the end of the year. Now, turning to Visium, while we're still early in the Visium lifecycle, we continue to be encouraged by the wider sustained adoption of the platform as the leading tool for our unbiased spatial discovery. In Q2, we saw increasing adoption of Visium FFPE which exceeded fresh frozen and sales for the first time. To date, our customers have relied on Visium in almost 300 papers and preprints. This is an important leading indicator and it also demonstrates the success the discovery and translational researchers are already having with the current Visium platform. In June, we began shipping Visium CytAssist, our first spatial instrument. While it's still very early, we are pleased with the initial response and demand we're seeing from customers. By addressing the key challenges our customers have faced with the Visium workflow, CytAssist will enable more routine use of the Visium platform. It should also significantly expand the number of samples that can be run on Visium. We believe that ease of use, overall experience and performance is much better for customers and the data generated using the instrument is superb. CytAssist will be a key enabler for the Visium platform going forward. In June, we also launched the second version of our Visium FFPE assay. We're making it available exclusively on CytAssist so customers can take full advantage of the instrument's ease of use and higher quality data. This new kit will give researchers higher performance and a better and more reliable workflow and an added flexibility of larger captured areas. I also want to provide an update on Visium HD and our work to develop a high-resolution whole transcriptome offering. This has proven to be a very ambitious undertaking. Bringing up this new technology and associated manufacturing capabilities at the quality, scale, and resolution our customers expect is taking more time than we anticipated. As a result, we no longer expect to launch Visium HD this year. While we aren't providing an updated timeline right now, we are fully committed to delivering this capability to researchers as soon as we can. Turning to Xenium, we continue to make great progress in the platform, which we expect to begin shipping by the end of the year as planned. At AGBT, the energy, interest, and enthusiasm from customers were stoppable and exciting to see so broadly. Internally, what has been particularly inspiring to our team is the strikingly powerful data we’ve been getting from our experiments, showing great levels of sensitivity, specificity and flexibility on challenging samples. This has been reinforced by the positive reactions of customers with whom we have shared the data. We built the Xenium platform with several key design principles in mind. The goal is to be able to determine cell types and cell space in the tissue of interest and measure what each cell is doing. Apart from being used to work across a wide range of tissues, sample types, applications and biological systems. And importantly, Xenium was designed to enable routine use. We believe from launch, Xenium will have the highest throughput of any in-situ instrument enabling researchers to analyze the most tissue area of single molecule resolution in the least amount of time. And finally, we designed Xenium to scale with customers' evolving research needs. Future kits will be able to support the measurement of thousands of genes and infectious proteins on the same section. We firmly believe in Xenium's differentiated position, both at launch and as we look ahead at our comprehensive long-term roadmap for the platform. Our team has established collaborations with key opinion leaders to inform and validate the development of future gene panels. We're combining this customer input with our wealth of single cell data to design a broad menu of high-quality curated gene panels, specific to both tissue types and application areas. Researchers will also have the ability to select large numbers of custom genes. We believe our leadership in single cell and spatial transcriptomics gives us a particular advantage with Xenium because most in situ experiments make use of single cell data to determine the genes of interest and to contextualize in situ analysis. Stepping back, we continue to have every confidence in our technology leadership across each of our three platforms. We believe our cadence of technological advancement and velocity of new product launches is unrivaled. Our pipeline is exciting and ambitious and has already resulted in five major product launches this year. Looking forward, we are eager to build on this momentum and our track record of breakthrough technologies. Now, let's spend a few minutes on commercial. For the past few years, we've grown incredibly fast, too fast that the infrastructure we built didn’t always scale with us, especially in commercial areas. In recent quarters, it has become clear that what got us to this point of growth wasn't going to get us to the next. We're proud of the breadth and talent of our global commercial team. This is a group that has worked tirelessly to drive adoption of our technologies and support customers at every phase of their experiments. Our challenge and our opportunity is to make sure our team has the right leadership, tools and processes, so we can increase leverage, scale to the next level of growth and unlock the massive opportunity we have ahead of us. Implementing better systems and tools will help us improve both our commercial execution and the customer experience in a number of ways, and here are a few I'd highlight. First, we will reduce friction in the sales process and make ordering and reordering more efficient for our customers and our sales team. Second, we'll establish more rigorous and metric-driven sales tactics to consistently manage our customers through every step of the sales cycle. We'll do this by establishing universal processes, robust training programs and better analytics that help with customer outreach and engagement. And third, we believe the right processes and systems will help us improve visibility and information flows, both within commercial and between commercial and the rest of 10x. Altogether, we believe these will help our sales teams be more efficient and effective with their time and know-how to prioritize their efforts to have the biggest impact. This is essential as we further expand the breadth and depth of our portfolio, increase adoption with existing customers and continue to make inroads with new customer segments and applications. Now, I'm really excited to have Jim Wilbur on board as our new Chief Commercial Officer to lead this work. Jim has dedicated his entire career to building transformational tools in the life sciences. He comes to us from Meso Scale Discovery, a highly regarded global leader in instruments and assays that have revolutionized protein measurement. Jim understands both strategic and granular levels of the industry. He knows what drives customer and sales team behavior. He has a deep scientific and technical background, pride in developing high-performing teams and is fundamentally a builder which is vital because we have so much more building ahead of us. He is a seamless fit with the 10x mission and culture and we're thrilled to have him here. Now, I'll turn it over to Jim to say a few words.

Jim Wilbur, Chief Commercial Officer

Thanks Serge. I'm really excited to be here. What struck me about this opportunity is the scope and scale of what's possible. It’s already well-established that single cell analysis has been transformational in our understanding of biology. My belief, and I know it's one you all share, is that single cell has become is really just getting started. I believe the future will bring an enormous expansion in the number and types of researchers and investigators using these tools and the types of questions that are going to get asked and answered. It's been an amazing start that has absolutely exceeded my expectations. We're building on a great foundation and we'll give our talented team the resources and support they need to get absolutely everything out of the tremendous opportunity ahead. This journey towards ever higher levels of commercial excellence is going to be fun.

Serge Saxonov, CEO and Co-Founder

Thanks, Jim. In addition to our broad commercial reach and powerful innovation engine, we see our strong cash position as an important differentiator, especially in this environment. We will be deliberate in protecting it, while also continuing to invest in our strategy and long-term growth. Last week, we took action to reduce our global workforce by approximately 8%. You heard me say it's the people of 10x who make the magic happen, which is what makes decisions like these so difficult. While the actions we made affected every organization, there was less impact among our R&D and field-based customer-facing teams. The changes were made, especially for those directly impacted, but they were necessary to make 10x more resilient in the current environment and more focused on our mission to drive our next phase of growth. We don't expect these changes to have a material impact on our near-term execution or our long-term growth trajectory. Looking at the work ahead, we're incredibly grateful to our team for their dedication to our customers and tireless pursuit of our mission. To recognize their hard work and impact, we are making investments to further strengthen retention and sustain the team's high engagement. As I shared, during times of change we are staying focused on what's constant, our mission and our opportunity. We expect that in the future, just about old tissue samples, whether for basic research or for clinical diagnostics will need to be analyzed as single-cell resolution in spatial complex and at large scale. The endpoint is clear, but as 2022 has shown, the path together is not linear. Yet through their research discoveries and publications, our customers remind us with increasing frequency of the tremendous potential of our technologies to accelerate the mastery of biology and ultimately Advanced Human Health. Here are just a few of the recent discoveries and pressing questions that have inspired and motivated our team in recent months. In Times Magazine, we saw publications of the first large-scale cohort studies linking population genetics with single cell sequencing. These studies rebuild an extensive catalog of molecular signatures in autoimmune diseases, opening the door to a new era of functional genetics. Our tools enabled the discoveries of molecular signatures in two recent studies of age-related macular degeneration and glaucoma. These studies will help with better diagnosis and treatment of these devastating eye diseases. One of the central questions in CAR-T therapy is teasing out what determines success and survival of injected CAR-T cells. Our customers are using our immune profiling and gene expression solutions to help answer that question in order to improve and help administer T cell therapies. And just last week, a study was published on samples from patients who suffered heart failure. The research has performed single nucleus RNA sequencing on close to 1 million cells to reveal the underlying biology and point to interventional opportunities and personalized treatments. It is clear that discoveries like these have enormous potential to transform how we predict, diagnose, treat and ultimately cure disease. This is why we do what we do. This is why despite all the progress we've made, we believe it's still early days, and this is why we are so confident in the endpoint and that 10x is the best company to deliver on it. Now let me turn it over to Justin for more details on our financials.

Justin McAnear, Chief Financial Officer

Thank you, Serge. Total revenue for the three months ended June 30, 2022, was $114.6 million compared to $115.8 million for the prior year period, representing a 1% decrease year-over-year. Revenue was flat compared to the first quarter of this year. Consumables revenue was $97.9 million, increasing 1% over the prior year period and flat compared to the first quarter of this year. Instrument revenue was $14.7 million, decreasing 13% from the prior year period and up 2% from the first quarter of this year. Service revenue was $1.9 million, increasing 7% over the prior year period. Our Q2 results were impacted by macro headwinds, as well as some internal challenges. This was particularly evident outside of the U.S. Starting first with APAC. Revenue for the second quarter was $18.1 million, decreasing 15% from the prior year period and down 47% compared to the first quarter of this year. Revenues in the region were impacted by lockdowns in China that increased in scope and duration beyond the assumptions that we shared on our Q1 earnings call in early May. They extended into June and spread beyond the Shanghai area, impacting customer activity and resulting in lower sales. Turning to EMEA. Revenue for the second quarter was $25.6 million, decreasing 11% from the prior year period and up 25% from the first quarter of this year. While revenues in the region improved sequentially, results were impacted by unfavorable currency fluctuations, delayed customer reorders related to the previously discussed cold chain logistics issue and some execution challenges. In the Americas, revenue for the second quarter was $70.9 million, increasing 8% over the prior year period and up 19% compared to the first quarter of this year. Turning to the rest of the income statement. Gross profit for the second quarter was $86.9 million compared to a gross profit of $110.9 million for the prior year period. As a reminder, in the second quarter of 2021, we booked a one-time reversal of $14.7 million of accrued royalties related to a litigation settlement. Gross margin for the second quarter was 76% compared to 96% in the prior year period. The decline in gross margin was primarily due to the accrued royalties reversal in Q2 2021 as well as changes in product mix and the increased manufacturing and logistics costs. Total operating expenses for the second quarter were $150 million, an increase of 24% from $121.3 million for the second 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 second quarter were $70.7 million compared to $53.4 million for the second quarter of 2021. SG&A expenses for the second quarter were $79.3 million compared to $68.7 million for the second quarter of 2021. Operating loss for the second quarter was $63.1 million compared to a loss of $10.3 million for the second quarter of 2021, primarily due to the impact of increased personnel-related expenses. This includes $36.3 million of stock-based compensation for the second quarter of 2022 compared to $26.9 million for the second quarter of 2021. Net loss for the period was $64.5 million compared to a net loss of $11.1 million for the second quarter of 2021. We ended the quarter with $500 million in cash and cash equivalents and marketable securities, net of restricted cash. As we are operating in a macro environment with increased economic uncertainty, we implemented a reduction in force of 8% of our global workforce to reduce spending, preserve cash and strengthen our financial profile. We estimate that we will incur between $5 million and $6 million of costs consisting primarily of cash severance, which we expect to recognize in the third quarter of 2022. In addition, we have canceled a number of open hiring requisitions and reduced our near-term hiring plan while implementing targeted reductions in non-headcount spend as well. Our goal is to be free cash flow positive by the end of 2023. Over the next few quarters, we expect elevated levels of capital expenditures and subsequent cash burn as we finish construction of our operations facility in Pleasanton. Completion is expected at the end of Q1 2023 and we are evaluating options to finance the facility after completion. Now, turning to our revenue outlook for 2022. We now expect our full year 2022 revenue to be in the range of $500 million to $520 million, representing growth of 2% to 6% over full year 2021. In the first half of the year, we experienced a slower-than-expected rebound as we emerge from the pandemic environment. This was driven in part by macro factors, some of which we expect to continue into the back half of the year. While we continue to have confidence in the tremendous opportunity our products are unlocking and the underlying demand for our technology, we are adjusting our expectations for the second half to reflect a more modest rate of increase and lingering macro headwinds. Thus, we expect Q3 revenue growth in the low to mid-teens percent over Q2, and we'd also expect Q4 to exhibit the same seasonality that we've seen in the past, barring any material changes to the macro environment. We look forward to providing additional information on our business at an upcoming Investor Day planned for later this year. Stay tuned for more details to come. At this point, I'll turn it back to Serge.

Serge Saxonov, CEO and Co-Founder

Thanks, Justin. Before we start Q&A, I want to thank our team. The work we do at 10x is both challenging and exciting. And that's what makes it meaningful and worth it. I'm so proud of this team and the tremendous impact you're making. I couldn't be more optimistic and confident about the future. Thank you for all you're doing every day to push 10x, our mission, and science forward. With that, we will now open up for questions. Operator?

Operator, Operator

Absolutely. We will now begin the Q&A session. The first question is from the line of Matt Sykes with Goldman Sachs. You may proceed.

Matt Sykes, Analyst

Hi, good afternoon. Thank you for taking my questions. To start, I appreciate all the insights on 2022 and the macro factors involved. I know you might provide more details later this year, but could you share any early thoughts on how we should expect 2023 to look in terms of growth? You have several new products launching, and while I understand there has been a delay with Visium HD, the introduction of these new products could influence the growth rate. Assuming some macro factors start to improve by the end of this year, can you provide any insights on what 2023 may look like for your company?

Justin McAnear, Chief Financial Officer

Hi, Matt. First off, there's a lot to be excited about when we think about 2023. So as you mentioned, a lot of new products coming out; it's going to be the first full year of Xenium. It's going to be the first full year of CytAssist and fixed RNA as well. And I also think that we're going to start to see us reaping some of the benefits of improvements in just systems and tools and processes that we've spoken about on the commercial side as well. But as far as giving any color past that, right now I think we'll get through Q3 and Q4 without forecasting too far ahead of what we're seeing. And we will share more of a view on the key drivers on 2023 later in the year in the Investor Day that we mentioned.

Matt Sykes, Analyst

Got it. Thanks, Justin. Appreciate it. And then maybe one for Jim or Serge. Just you talked a little bit about some of the commercial strategies you're going to put in place when harnessing the data analytics. Could you maybe give a little bit more color in terms of where you feel like the greatest areas of improvement could be, whether it's engagement with existing customers or maybe trying to penetrate new areas? And what the type of efforts that you put together in terms of data analytics? How that could enhance that? I'm just trying to get a sense for from a timing perspective how we could expect to see some of these changes you're going to do to commercial strategy as it starts to take place? Thank you.

Serge Saxonov, CEO and Co-Founder

I want to highlight that much of what we will be doing revolves around the mechanics of commercial execution rather than the core of our strategy. We are confident in our markets and the customers we are targeting, and we believe we have the appropriate products and high-level strategy to engage them. Regarding the tools and systems we plan to implement, we need to focus on acquiring new customers as well as increasing usage among our existing ones. Over the years, our business has grown more complex, and the number of customers has significantly increased. Therefore, it’s essential to equip our teams, especially our sales representatives, with better tools to optimize their time and effectiveness. We will need improved analytics, information flows, and resources. This will be a major undertaking, and while it won't be an instant transformation, we should expect to see meaningful progress in the upcoming quarters.

Matt Sykes, Analyst

Thanks very much.

Operator, Operator

Thank you. The next question is from the line of Derik De Bruin with Bank of America. You may proceed.

Michael Ryskin, Analyst

Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow up on Matt's second question there. Jim, I realized that you've only been in the role for a couple of weeks now, but wondering if you could give us a little bit more of an update on your thoughts on some of the commercial revamps going forward? How do you think about retention of the existing sales force versus some turnover that we've already seen and we could probably expect to continue to see. Can you give us a timeline on how long you think until the organization will be in the right place to sort of implement the strategy? I guess put in another word, for how much longer is there going to be a revamp versus when will you be ready to go forward?

Serge Saxonov, CEO and Co-Founder

So Mike, let me address that question. As you mentioned, Jim has been with us for all our business days, so I want to be cautious about discussing the specifics. One thing I want to highlight, as I mentioned earlier, is that the team is very capable. The entire commercial team is strong. We believe in the team, and we have been focusing on bringing in new leadership, tools, systems, and processes. This will drive our progress over the next several quarters as we implement these changes. I don't believe there's much more to say on this. I would also advise not to worry too much about team turnover, which hasn't been significant at this point.

Michael Ryskin, Analyst

Great. I have a follow-up question. Recently, there has been considerable discussion regarding Halo users versus non-Halo users, especially as the installed base has expanded. I was curious if you could provide an update on whether you are observing ongoing trends in this area. Have the initiatives you've implemented to address these differences resulted in any improvements? It would be helpful to understand the situation regarding pull-through per system or perhaps on the utilization side. Thank you.

Serge Saxonov, CEO and Co-Founder

I wouldn't say there's been a significant change since our earlier discussions this year. The data shows a lot of fluctuations, making it difficult to confidently assess long-term trends at this point. It would be more accurate to summarize these insights over a longer period, like a year. Overall, we have observed similar patterns where instrument owners maintain consistent usage and brand loyalty, while daily users tend to engage with the products less frequently.

Operator, Operator

Thank you, Mr. De Bruin. The next question is from the line of Dan Arias with Stifel. You may proceed.

Daniel Arias, Analyst

Good afternoon, guys. Thanks for the questions. I have a little problem with my phone or hopefully that doesn't get in the way of being able to ask these here. But Serge or Justin, maybe just back on new products, but more focused on this year. Should we think about some of the key new portfolio elements there, fixed RNA side of things, etc., playing a role in the Q3 to Q4 step-up that you’ve alluded to as a part of the outlook?

Serge Saxonov, CEO and Co-Founder

We certainly feel good about these products. I've mentioned there in particular, it's a new instrument. So there's quite robust demand we're seeing from customers. Certainly, as you've heard me saying multiple times now, fixed RNA profiling is a very exciting product. The one note of caution there is that it's a new workflow, and it takes some amount of time for people to benchmark it against our previous workflows. So there's going to be some amount of ramp that we still need to kind of see how that performs.

Justin McAnear, Chief Financial Officer

And Dan, as far as the step-up from Q3 to Q4 goes, what we're really getting across there is just we'd expect Q4 to exhibit the same type of seasonality that we've seen in the past. And then typically, with new products, we don't typically subscribe to too much volume to new products right at launch or right after launch. And we're always launching new products, and they do typically take a number of quarters to get traction before they become meaningful.

Daniel Arias, Analyst

Okay. Maybe, Serge, just as a follow-up, I wanted to ask a question about CellPlex. As you've thought about the moving parts and the dynamics in the single cell market today, and you think about that product seemingly being important for the long-term adoption of single cell. I'm just curious if you think in the short term that there's any negative impact that you're seeing on consumables growth just from reducing the per sample cost but maybe not seeing the volume increases at the same magnitude this year?

Serge Saxonov, CEO and Co-Founder

Yes, this is something that we've been watching, I would say, on several fronts. CellPlex is one high throughput, HD kits is another one that has sort of some of the similar dynamics of reducing price per data point in order to drive volume. I would say so far, to the extent that we feel like there has been fairly minimal kind of the extent of cannibalization on that front. There is some, but that also has opened up some new projects and studies. So on the net, I don't think there's a material change yet that we're seeing.

Operator, Operator

Thank you. The next question is from the line of Tejas Savant with Morgan Stanley.

Tejas Savant, Analyst

Hi, guys. Good evening and thanks for the time here. So Serge or Justin, perhaps, can you just share some color on trends in July and into August here? I'm just trying to sort of juxtapose what is essentially sort of the mid-teens miss for 2Q versus the $100 million plus that you're taking down the guide by? And any specific color on Americas growth here? Was that essentially related to commercial missteps year-over-year, 8% a little bit underwhelming?

Justin McAnear, Chief Financial Officer

Hi, Tejas. As far as your first question goes on trends to date, when we gave our updated guidance, we also gave some color on how we expect Q3 to go with a low to mid-teens percent increase from Q2 to Q3. And so far this quarter, the trends that we're seeing support that view. And then as far as your second question, just around overall growth in the different regions. The biggest impacts that we've seen are in APAC and EMEA, to a lesser degree in the Americas. But within all regions, we have seen some degree of slowness coming out of the first part of the year.

Tejas Savant, Analyst

Got it. That's helpful. And then just as a follow-up. One of your peers in spatial here called out this mix shift, if you will, away from multicellular resolution platforms to single cell or subcellular imagers. What are you hearing from your customers? And what does that imply for your Visium platform going forward, particularly in terms of the HD slippage here into next year?

Serge Saxonov, CEO and Co-Founder

We have not observed a significant slowdown in the adoption of Visium. The use cases have varied, and it's still early in that market. Visium, particularly Visium FFPE, has been experiencing strong growth. Overall, we are optimistic about the future of Visium, especially with the upcoming launch of CytAssist, which is expected to enhance the platform's growth. There is considerable excitement surrounding in situ projects, and in light of what was shared at AGBT, we are making significant investments in Visium. I'm looking forward to launching that platform later this year, as we have received a lot of interest from customers and there is also considerable enthusiasm here internally.

Tejas Savant, Analyst

Got it. Thanks for the time, guys.

Operator, Operator

Thank you. The next question is from the line of Patrick Donnelly with Citi. You may proceed.

Patrick Donnelly, Analyst

Hi, guys. Thanks for taking the questions. Maybe a similar run to Tejas’s first question there. Just in terms of the visibility, Justin, can you talk about overall the visibility for this business? I mean, obviously, three months ago you guys maintained the guidance. You kind of knew about the Europe and China headwinds where you were somewhat known. North America seems like it came in pretty light. Can you just talk about just the general trends, visibility into the overall business as we move forward here?

Justin McAnear, Chief Financial Officer

Hi, Patrick. Before diving into the main question, I want to touch on the factors that affected our Q2 performance. The main reasons for the Q2 miss were the prolonged lockdowns in China and the impact of currency fluctuations. Historically, China has accounted for about 15% of our business, but in Q2, their performance was significantly lower than usual. During our last earnings call, we reiterated our guidance based on the assumption that the lockdowns in China would ease by May, but they continued into June and expanded in scope. Additionally, currency issues were significant in Q2. Since 45% of our revenue comes from outside the U.S., the impact of currency fluctuations went beyond the 17% we typically see from direct foreign currency sales. This situation was exacerbated by our distributors, who sell in U.S. dollars but deal with customers using foreign currencies. We also anticipated stronger growth rates as we emerged from the pandemic, especially following a depressed Q1 due to the Omicron variant. As we entered Q2, we expected an acceleration that hasn't materialized yet. Currently, while we're anticipating a modest increase, it won't meet the higher expectations we had earlier this year. Therefore, we plan to forecast based on the more modest growth rate we are observing now.

Patrick Donnelly, Analyst

Understood. Okay. And then one, Serge or Justin can answer this one. I mean just in terms of kind of the balancing of kind of growth and profitability, you guys came out of the IPO, obviously, spent pretty aggressively going after this big opportunity, you put up great results for a couple of years stretch there. Now kind of pruning the workforce and being focused on profitability. Can you just talk about how you guys balance that internally, again, still talking about the opportunity being very significant at the same time, focused on profitability. So maybe just talk about how you find that balance where you kind of direct the incremental dollars from here and kind of think about chasing growth versus I guess profitable growth versus kind of any growth. Maybe just a little bit of color there. Thank you.

Serge Saxonov, CEO and Co-Founder

We're currently in a growth phase, and the potential for expansion is greater now than it was at the time of our IPO. I believe this opportunity is unprecedented in the life science tools sector, and our primary focus is to capitalize on it. Over the past few years, since our last deal, we've increased our team size significantly. However, this growth has also led to added complexity within the organization, with more layers and specialized roles being created. As a result, we need to streamline our operations, taking into account the current economic climate and our revenue growth, which requires some adjustments. While we are committed to investing for growth, we are also mindful of the need to be cautious in our spending, aiming to achieve positive cash flow. Balancing these aspects is crucial as we continue to navigate our growth strategy.

Patrick Donnelly, Analyst

Got it. Thanks, Serge.

Operator, Operator

Thank you. The next question is from the line of Daniel Brennan with Cowen. You may proceed.

Daniel Brennan, Analyst

Hi, guys. Thanks for taking the questions. Maybe the first one is on single cell. So you highlighted, Serge, upfront incredibly positive fundamental environment, but obviously, the last couple of quarters hasn't been as evident to us. So can you just give us some insight on what the underlying market in single cell is growing at? Has there been any slowdown from 3D spatial cannibalization? And between the drag from the one-off factors and how your base business is doing, it'd be interesting to get some more color there. I know there was a question earlier on the halo effect. So maybe you can just give us a little more flavor there. And I have a follow-up. Thank you.

Serge Saxonov, CEO and Co-Founder

Yes. The first half of the year had a variety of impacts that make it challenging to identify long-term trends based solely on the last two quarters. Returning to the fundamentals, those remain unchanged. There is a clear need for single cell resolution across many applications in life sciences and biology. I don't believe there is any significant impact from cannibalization between spatial and 3D spatial technologies at this stage, as neither technology is widespread yet. Additionally, the recent slowdowns can be attributed to broader macroeconomic factors that Justin mentioned. Everyone is still trying to understand what the new landscape of research looks like following the pandemic over the past two years.

Daniel Brennan, Analyst

Okay. Got it. And then on 3D Spatial, well, I know you haven't really broken out specifics on the business in the past. It would help to get some color around how we think about the relative size of that business and/or your share? And when we think about, at least, if you're not going to share that, but at least if you would think about the new product impact on ‘23, like is this an incremental driver to year-over-year growth or just potentially a material driver of growth? Thanks.

Jim Wilbur, Chief Commercial Officer

Hi, Dan, I'll start with that. We don't currently separate Visium from our other reporting. We will provide more information about our plans for it at the Analyst Day mentioned in the prepared remarks. However, I can share that in terms of trends over the last few quarters, its percentage of overall revenue has remained fairly stable, meaning it has been consistent in volume compared to the rest of the business.

Operator, Operator

Thank you. The next question is from the line of Julia Qin with JPMorgan.

Julia Qin, Analyst

Hi, Good afternoon and thanks for taking the question. First on Visium HD. Could you give us a little bit more color on the nature of the delay and give us a little more detail on what's the bottleneck that remains to be addressed? And how confident are you that it's going to be addressed in the rough near term?

Serge Saxonov, CEO and Co-Founder

Yes. As I mentioned, this is a very ambitious project. We have been working on new technology and manufacturing capabilities. While the initial data for Visium HD appears promising, we have encountered some technical and manufacturing scheduling challenges as we scale up. We are dedicated to providing this capability, and we are confident that it is achievable because we have the data to support this. However, it will require more time. We are modifying our product development strategies, but we are not yet prepared to discuss the specifics or provide an updated timeline.

Julia Qin, Analyst

Got it. And then on Visium, just making sure if you're still on track to launch that by year-end? And are you taking preorders to take advantage of this year's customer budget?

Serge Saxonov, CEO and Co-Founder

Yes, we are on track to launch Visium before the end of the year, and we have started taking preorders for these instruments for that reason.

Operator, Operator

Thank you. The next question is from the line of Matt Larew with William Blair. You may proceed.

Matthew Larew, Analyst

Hi, good evening. I want to just quickly follow up there on Julia's first question. Could you just confirm is it technical feasibility issues that you're still working to address? Or are those issues that you've solved and it's a matter of scale up and manufacturing where the quality and consistency needs to be maintained? Just trying to assess whether this is a technical feasibility or feasibility at scale issue?

Serge Saxonov, CEO and Co-Founder

Well, it is really feasibility at scale issue, because, again, internally, we have shown that it works, we see in the data and then transitioning into a scale is where there have been new challenges that we have encountered.

Matthew Larew, Analyst

Okay. And you mentioned last quarter that the delays with HD were affecting current Visium demand. Has that still been the case? And are you sensing that customers are trialing other products? Just curious what your conversations with customers have been about the delay?

Serge Saxonov, CEO and Co-Founder

Well, it's still very early. So we'll have to see how that plays out with customers. Like I said last time, HD was stalling some customer sales. It may actually unlock some going forward, but it's too early to speak at this stage.

Justin McAnear, Chief Financial Officer

Hi, Matt. Good question. Earlier, we had said that we expected to be roughly flat year-over-year. I think with what we've seen so far actualized in Q1 and Q2 and then just the adjusted expectations that we have for the back end of the year. I would say at this point, we'd expect it to be flat to slightly lower than last year.

Kyle Mikson, Analyst

Great. Thanks guys for the questions. Justin, you mentioned the goal to be free cash flow breakeven or positive by the end of '23. Obviously, that's a quarterly number you can get there. Could you just talk about the underlying assumptions behind the expectation, at least directionally?

Justin McAnear, Chief Financial Officer

Hi, Kyle. Regarding our goal to achieve free cash flow positivity by the end of 2023, we see this as a significant milestone for establishing a solid financial foundation on our journey to profitability. We're exploring various revenue scenarios for 2023, and we are currently adapting to our environment. I expect this adaptation to continue as long as it does not compromise our long-term growth objectives. We will provide more information about the factors influencing our 2023 revenue later in the year. We are also committed to ensuring that our spending aligns with our revenue performance. Additionally, we anticipate elevated capital expenditures in the upcoming quarters, though I expect these to decrease afterward. It is essential to note that once our operations facility is completed around Q1 2023, we will see a reduction in capital expenditures. We plan to spend approximately $140 million to $150 million on capital expenditures over the next year, with a significant portion of that front-loaded in the next couple of quarters.

Kyle Mikson, Analyst

All right. That was great. Thanks for that. And then for Serge, just given some of the departures recently among the commercial and the marketing leadership as well as the reduction last week. I was just wondering if you could talk about what gives you optimism that you're not going to suffer from any brain drain or a slowdown in your trademark kind of product innovation pipeline strategy? You alluded to retention earlier in your prepared remarks. Just was wondering if you could kind of expand on that.

Serge Saxonov, CEO and Co-Founder

I want to emphasize that the comment about retention was made with a forward-looking perspective. We have not experienced significant departures in terms of talent, and I would actually argue that the level of talent in the company is currently at an all-time high, possibly even higher than before. Therefore, I am very confident moving forward, especially from that perspective.

Kyle Mikson, Analyst

Okay. Great. Thanks, guys.

Operator, Operator

That concludes the Q&A session and also concludes today's call. Thank you for your participation, and enjoy the rest of your day.