Good afternoon, ladies and gentlemen, and welcome to the 10x Genomics Q3 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Lynn [ph], Investor Relations. Please go ahead.

Thank you. Earlier today, 10x Genomics released financial results for the quarter ended September 30, 2019. If you have not received this news release and 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 14 days following this call.Before I 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 take 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, including the company's prospective dated September 11, 2019. 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.This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 7, 2019. With that, I'd like to turn the call over to Serge Saxonov, the company's co-founder and chief executive officer. Serge?

Thanks, Lynn, and thank you, everyone, for joining us this afternoon. I'm pleased to welcome you to 10x Genomics' first earnings call as a public company to review our third-quarter 2019 results. Joining me today is Justin McAnear, our chief financial officer. Brad Crutchfield, our chief commercial officer, will join us for Q&A.As many of you know, we completed our initial public offering in September, raising $411 million in net proceeds. I want to express my sincere thanks to the awesome team we have assembled at 10x Genomics. Our progress is a function of their collective hard work and dedication. I would also like to take a moment to thank our investors for their support. And finally, I'd like to acknowledge the amazing work being done by our customers around the world. It is their work, their science, their discoveries that motivate us more than anything else at 10x. And as excited as we are about how far we have come, what really drives us is the sense that we're just getting started. And so now, revenue for the third quarter totaled $61.2 million, representing growth of 67% over the prior-year quarter.Based on these results, we're providing full-year 2019 revenue guidance of $238 million to $242 million. And before we get into more specifics on the quarter, I will take a moment to give you a sense of the vision that is driving 10x. This is the century of biology. We expect that many of humanity's most pressing health challenges will be solved by precision diagnostics, targeted therapies, and cures to currently intractable diseases. We also believe the biggest obstacle to this progress is that we understand very little of the underlying biology. In fact, the amount of biology we don't understand is vastly greater than what we do understand.…

Thank you, Serge. Total revenue for the three months ended September 30th, 2019, was $61.2 million, compared to $36.6 million in the prior-year period, representing a 67% increase. Revenue in the quarter was driven primarily by sales of consumables of $49.7 million, which has increased 86% over the prior-year period. Instrument revenue was $10.4 million and has increased 13% over the prior-year period.Service revenue was $1.1 million and increased 80% over the prior-year period. North America revenue for the third quarter was $35.8 million, representing 68% growth over the prior-year period. EMEA revenue for the third quarter was $12.1 million, representing 47% growth over the prior-year period. APAC revenue for the third quarter was $13.2 million, representing 89% growth over the prior-year period. Gross profit for the third quarter of 2019 was $45.7 million, compared to a gross profit of $31.4 million in the prior-year period. Gross margin in the third quarter was 75% as compared to 86% during the third quarter of 2018. The gross margin decrease was driven by higher accrued royalties related to ongoing litigation. These royalty accruals are booked against our legacy GEM products and will decrease as we transition more customers to Next GEM products.Total operating expenses for the third quarter of 2019 were $54.8 million, an increase of 18% from $46.3 million in the third quarter of 2018. R&D expenses for the third quarter of 2019 were $22.2 million, compared to $11.1 million in the third quarter of 2018, excluding in-process R&D expenses related to acquisitions. The increase was primarily attributable to higher investments in personnel, infrastructure, and supplies. SG&A expansion -- SG&A expenses for the third quarter were $32.6 million, compared to $19.1 million in the third quarter of 2018.The increase was primarily due to personnel costs with increased hiring across all SG&A…

Thank you, Justin. We started 10x Genomics with the goal of building technologies that will revolutionize biology. Since the company's inception back in 2012, we have been on a rapid pace of product innovation, product development, and product launches. We used this ability to innovate and develop new products as an important pillar of our competitive advantage.We have also built out a core strength with our commercial engine. This commercial leadership and close partnership with our customers allows us to have a unique view of the frontiers of biology to know where the world is going next. These insights are fed into our product development engine, helping us build products that are needed by our customers, thus furthering our commercial leadership. In this virtuous cycle driven by innovation and by customer success is the core of our strategy now and going forward. We can't wait to see the advances our customers will be making in the years ahead and the impact we expect to have in the coming decades. As far as we have come in a few short years, we're just getting started.And with that, we will now open it up to questions. Operator?

[Operator Instructions] Your first question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Thanks, I'll start with Visium. Just ahead of the launch, curious about early interest levels, how you think about the funnel, do you envision more going to core labs or individual users? And over time, how do you think about the platform evolving as well? Is there an opportunity to get it optimized for an FFPE?

Thanks, Tycho. Yes. So I think that Visium is something that we've been excited for a while. The cool thing is really now being able to see data and showing the data to customers and being able to share that with them. The -- at the high level, I would say the interest level is quite striking, both in like the mix of new and existing customers. In terms of kind of the details, I'll let Brad go into some of the specifics around your question.

Hi, Tycho. This is Brad. Yes. I'd echo what Serge said that we're seeing a much broader demand. The lack of the upfront capital cost is allowing broad adoption and across individual labs and even to core labs and even service labs. So it's really kind of across the board. So we're -- the customers are anxious to get the product, and we're really anxious to get it to them.

And in turn, is there a pathway to get it optimized for FFPE samples over time?

Well, again, there's no fundamental reason why this technology cannot work with FFPE, and that's certainly something that we've -- we seriously think about in our size.

And then as we think about the Next GEM transition, it sounds like it's been pretty seamless from a customer perspective. Is that your view as well? Or has there been any kind of hiccups as you kind of roll customers over to Next GEM?

Yes. I would say the first to our answer is yes, and it's been some -- I would say, surprising, like the ease of which people have been transitioning the number of issues has been minimal. In many product transitions, there's going to be some issues, but it's been minimal from the customer side. So we're quite pleased with that.

Yes. I'll just add -- this is Brad again. I just had -- we've really tried to build the level of transparency and trust with our customers. And as we brought this product out, they -- like we saw when we went from the version three to or two -- version two to version three of our three prime product about a year ago, there's an element of trust. And we've seen, again, a much faster uptake and transfer to the Next GEM products.

Last one is just on Chromium Connect. How should we think about the rollout there? And ultimately, what does that potentially do to pull-through on the system as you roll that out?

So, let's say -- we're still in trying to launch in early 2020. I would let Justin comment on kind of a layback we're expecting for the next year.

Sure. Hey, Tycho. As far as Chromium Connect goes, we're definitely excited about that product. It's a niche product that I think you're going to have to have a higher pull-through in there in order to justify the capital expenditure. So the pull-through we expect will be greater than our Chromium instrument. But because of the large size of the Chromium install base right now, I think it will take a little bit of time before you see the impact of that in our overall average pull-through.

Okay. Thank you.

Your next question comes from the line of Derik Bruin of Bank of America. Your line is open.

Hey, guys. This is Mike Riscowen [ph] on for Derik. Thanks for taking the question. Congrats on the quarter first of all and on the IPO; a couple of follow-up questions from me. The Next GEM chip conversion; could you give us a stat for where you were at the end of the quarter as a percent of your user base that you indicated? End of 2020 is still your target time line, but how far along into that are you so far?

Well, so -- I don't -- we don't that level of detail around the conversion stats. As I said before, it's going faster than we expected, and we have sort of increased level of confidence in terms of the 2020 endpoints. And yes, so that's as far as we can say at this stage on this question.

And then --

Just to add to that, all the instruments that we're currently shipping today do not -- that they run Next GEM exclusively, so there's no royalty, no variability test for those. And so really, you're talking about just the transition of consumables, which, yes, end of 2020 is still what we expect. And I mean, if you were to make an assumption, I would probably basically make a straight line assumption from mid-year to then.

All right. That's helpful. And then on the Visium launch, as you ramp up over the course of the fourth quarter and then through next year, how do you think about the impact that's going to have on the utilization number you highlighted for the Chromium? I mean, I think of it that, for the most part, at least in the beginning, the product is going to go through your existing customers that are running some of your other applications. I realize they're obviously not interchangeable. But just in terms of a funds perspective on how people spend their -- the money to allocate it toward some of these more innovative research projects, do you anticipate that the spend on Visium will be purely additive? Or do you anticipate some sort of cannibalization in the model?

Okay. And this is Brad. Derik, I'll take that. First off, the Visium product doesn't actually run on the chromium. So that's really not dependent on that. What we've seen so far is about 20% of the customers for our Visium product are new to 10x. So that's interesting. We expect that percentage to grow overtime. I would say through the balance of 2020 and probably into 2021, this would be clearly additive. I don't see it as cannibalizing at all. At some point, as datasets get developed over time and as we improve all of our products, there might be some customers that preferentially would go toward a spatial context versus associated context. But in the near future, I don't see any cannibalization.

Thanks. And one last one for me. On the -- in your prepared remarks, Serge, you talked about the increased R&D spend. Anything you can point to there? I mean, there's a healthy amount of R&D already in the model. Are you thinking of, is this sort of incremental tweaks to the product and to the workflow? Or is there some new applications, technology, or potentially even another box you're thinking of?

So we are investing -- I mean, it's a very good point, Mike. Yes, we're investing pretty heavily, and we're seeing across the board in R&D. It does include existing products and existing applications, but we're also looking at things that are much further out, and so across the full spectrum of solutions for our customers and beyond.

Thanks.

Your next question comes from the line of Doug Schenkel of Cowen and Company. Your line is open.

This is Adam Wieschhaus on for Doug. Thanks for taking the question. You know the ITC case has been delayed further until December 10, which follows a series of earlier delays. Is there anything to read into the fact that this case has been delayed five or so times now? Can you give us your updated thoughts on how you're thinking about the likely outcomes and if a potential negative impact is less as time goes on?

Thanks, Adam. Good question, and the answer is we don't really know, and we can't really speculate what it means. It's now the seventh time I believe that's gotten delayed. So it could be anything. Fundamentally, though, as we said before, during a roadshow beyond that, we are well set up, so that sort of regardless the outcome of the company is fine. We built out our U.S. manufacturing capacity, and it's all in good shape. So kind of regardless of what happens there, we're in good shape.

And Serge, you noted in your prepared remarks, the Chromium pull-through is averaged around $103,000 per system. How should we think about the potential for upside from that number based on what that level of pull-through implies for the current utilization and the expectation for additional application to come out the instrument?

Well, so at a high level, I would say there's multiple -- it's an average, and averages kind of secure multiple dynamics that are going on underneath. And one of the things we've seen consistently is that our existing customers keep increasing the usage of the systems. New customers take some time to ramp up, and we've placed a lot of instruments out there in the field over the last year and really the last couple of years. And so that naturally brings the average up. Of course, we put out new applications, those push the average up. There's also a new geography component where the Americas tend to be the highest pull-through rate and Asia Pacific tends to be lower. And so to the extent that we have more sales going in APAC, that's also going to bring the average down somewhat. So there's multiple factors like this that kind of come together that feed into average.

Okay. Maybe one last one for Justin. The midpoint of Q4 implies a pretty big step-up sequentially. Can you provide any more color on how you arrived at that guidance range? Are you contemplating both placement and pull-through sequential increases like we've seen in previous years?

Yes. Thanks, Adam. We believe our guidance is pretty balanced. We factor in both the market opportunity and our ability to execute. We look at the install base. We have a pretty good read on our sales pipeline as far as how many instruments we're going to place for this year. And then just seasonally, the fourth quarter of the year is typically our biggest year due to the budgetary cycles of our customers ending at that point. So we feel good about the range that we provided, and we feel that it presents a balanced view of all these different dynamics.

Great. Thank you.

Your next question comes from the line of Luke Sergott of Evercore ISI. Your line is open.

Just kind of want to dig in a little bit on the placements and what you're seeing there from the clinical or regular academic setting?

So generally, maybe I'll give a kind of an overview and then maybe Brad can add a few remarks. But overall, the demand seems fair -- like robust and the placements keep going at a nice clip. We -- as in prior quarters, our -- we -- the placements are concentrated in academia. We have placements outside in the pharma-biotech sector as well, not really in the clinic, that's not where we're focused. So I would say -- yes, I mean I don't say -- we have relative to the product where we might have had a pull-in of a few instruments because of the sort of the litigation events that happened last quarter.

Luke, this is Brad. Maybe to add a little bit of color to that, we saw really strong instrument placements and demand in Asia. That's been ramping up. They're kind of early in the cycle for us. We've had a team there for about 18 months, and that's really starting to pay off, particularly in China. In China, we do see a lot more applications and -- but I would say, translational research or clinical research. So we see that receiving more. And I would just echo Serge across the rest of the geographies, there's that combination of new to 10x people that are adopting single cell for the first time or people that are -- have been using it, as we would call it halo user and buy their own instrument. And that's really kind of playing out the pattern that's somewhat predictable for us.

Okay, that's helpful. And then, I guess, if you guys disclosed any of the multi-unit placements that you've had out there?

No, no, we haven't. And then we certainly have a range of multiple institutions having multiples and some institutions that have smaller ones.

Yes. Okay, great. Thanks.

Thanks, Luke.

That brings us to the end of the Q&A session. I will now turn the call over to Serge Saxonov for closing remarks.

Well, thanks, everyone, and have a great evening.

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