Ladies and gentlemen, thank you for standing by and welcome to the 10x Genomics Fourth Quarter Earnings Conference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker, Ms. Kerry Manville [ph] with Investor Relations. Please go ahead.

Thank you. Earlier today 10x Genomics released financial results for the quarter and year ended December 31, 2019. If you have not received the news release or if you'd like to be added to the company's distribution list, please send an e-mail to investors@10xgenomics.com. An archived webcast of this call will be available on the investor tab of the company's website 10xgenomics.com for at least the next 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 and 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.With that, I'd like to turn the call over to Serge Saxonov, the company's Co-Founder and Chief Executive Officer. Serge?

Thanks, Kerry, and thank you everyone for joining us this afternoon. I'm pleased to welcome you to 10x Genomics earning call to review our fourth quarter and year-end 2019 results. Joining me today is Justin McAnear our Chief Financial Officer. Brad Crutchfield, our Chief Commercial Officer, will join us for Q&A.On today's call, I will provide an update on our commercial execution, talk about our investments to drive future growth and we'll walk through some of the new capabilities in our pipeline. Then I will turn the call over to Justin for a more detailed look at our financials and outlook for 2020. 2019 was a big year for 10x. Our revenues continued to grow and we ended the year with $245.9 million in total revenue, up 68% over 2018. During the year, we also continued to see a large and rapidly growing body of scientific publications coming out of our customers' labs. The number of publications more than doubled during 2019 and there are now over 700 papers where our customers have made fundamental scientific discoveries using our products.And even more exciting than the number of publications has been the breadth of areas where we have seen our customers do their work and a tremendous number of applications where our products are being used. During the year, we have seen major discoveries in Alzheimer's, important studies of autoimmune diseases, fundamental breakthroughs in many types of cancers, fascinating work on age-related diseases. And while there are many great studies to choose from, I wanted to highlight the paper from last quarter that demonstrated a strikingly powerful approach to antibody discovery.Researchers out of Vanderbilt University use our immune profiling solution to screen vast numbers of B cells from HIV-infected patients to quickly find HIV and influenza-specific antibodies, while gaining an exquisite…

Thank you, Serge. Total revenue for the three months ended December 31, 2019 was $75.3 million compared to $50.6 million for the prior year period, representing a 49% increase. Similar to prior years, our revenue in 2019, was more heavily weighted to the back half of the year, particularly Q4 due to the budgetary cycles of our customer base.Consumables revenue was $64.7 million, which increased 69% over the prior year period. Instrument revenue was $9.4 million, which decreased 18% over the prior year period. Service revenue was $1.1 million, which increased 51% over the prior year period. The decrease in instrument revenue was driven primarily by the consolidation of our instrument product line into one full featured lower-priced instrument in early 2019.North America revenue for the fourth quarter was $42.5 million, representing 51% growth over the prior year period. EMEA revenue for the fourth quarter was $21.4 million, representing 54% growth over the prior year period. APAC revenue for the fourth quarter was $11.5 million, representing 35% growth over the prior year period.Gross profit for the fourth quarter of 2019 was $58.7 million compared to a gross profit of $35.7 million for the prior year period. Gross margin for the fourth quarter was 78% compared to 71% for the fourth quarter of 2018. The gross margin increase was driven primarily by lower accrued royalties related to ongoing litigation.Total operating expenses for the fourth quarter of 2019 were $66.8 million, a decrease of 40% from $110.6 million for the fourth quarter of 2018. The fourth quarter of 2018 included $40.1 million of in-process R&D, as well as an incremental $30.4 million in accrued contingent liabilities related to ongoing litigation.R&D expenses for the fourth quarter of 2019 were $27.9 million, compared to $13.1 million for the fourth quarter of 2018, excluding in-process…

Thanks, Justin. I'm very proud of our team for such an incredible year. During 2019 we successfully navigated a number of major transitions, including rebuilding completely new product architecture with Next GEM and taking the company public in the third quarter, all while successfully launching our second platform technology with Visium and delivering exceptional revenue growth. With these transitions largely behind us, we look forward to continuing our rapid pace of innovation in 2020, which is truly what is at the core of our vision at 10x.The capabilities I outlined earlier are just a glimpse of what is ahead. This is the century of biology. Our goal is to build technologies to measure every aspect of biology and make these technologies available to everyone whether for academic research for development of new medicines or for treating patients. Our vision is that in the end given any biological sample, you should be able to measure every analyzer relevance at the right resolution with all the necessary contracts, because that is how we will achieve understanding, that's how we will arrive at yours.With that we will now open it up to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan. Please go ahead.

Hi. This is Elena [ph] on for Tycho. Thanks for taking our questions. In terms of this quarter, the beat relative to our model primarily came from services revenues while instrument sales came in a bit shy. Just wondering whether we should be modeling the business a bit differently going forward in light of the Visium launch and higher throughput Chromium Connect rollout this year?And just wondering, if you can parse out the assumptions underpinning your 2020 guidance across instruments, consumables and services segment sales, and in particular are you anticipating continued double-digit declines in instrument sales for the full year as a result of these dynamics.

So, this is Justin. There was a lot there. I guess let's go back to the beginning and start with the beat compared to the consensus. The beat was primarily due to increased revenue coming from consumables. That was the largest contributor overall.As far as how you should model this going forward as I mentioned we've taken market conditions, our assessment of demand, timing of new products and our own ability to deliver into account when developing the guidance model. We would expect the instrument placements to increase year-over-year and we would expect similar consumable pull-through to how we've been guiding you and other analysts all along, which is around 100 -- around or just above $150,000 on an annual basis. Can you please repeat the other part of your question?

How we should be thinking about the guidance framework?

I think I just answered that.

Yeah. So, yeah, that's helpful. And then I was just wondering around 15% of your business comes from Asia. So just wondering whether you're seeing any disruptions from the coronavirus outbreak and how we can dimension the risk for your business in particular for 1Q? Also wondering if you're embedding any conservatism into your 2020 guide?

So, let's take the coronavirus question first. So we've been assessing the impact of that on both our expected sales and the supply chain. We're going to continue to monitor the situation, but we do see some potential impact for Q1 with up to about 5% of our expected revenue at risk. We've accounted for this within the range of our annual guidance estimate. And turning to the supply chain, we're not yet aware of any impact to the supply chain. But some impact could be possible if the virus were to spread and impact our operations in Singapore.

Okay. That's helpful color. And then lastly on Chromium Connect, I was wondering whether you have started to rollout to early sites? And if so what the feedback has been so far? Can you also give us an early read of the funnel of preorders and what proportion are from biopharma customers?And lastly wondering whether capital expenditure has come up as a barrier to broader adoption during your discussions? Or are clients comfortable with justifying the capital expenditure with higher levels of pull-through?

This is Brad. I'll take that question. We plan to begin delivering Chromium Connect in the next few weeks. The early demand has been heavily skewed to pharma but several large genome centers have also purchased or placed an order for the instrument. In terms of funnel, we're really not going to disclose that but we have seen good demand. The list price for the instrument is $260,000. That's well within the capital constraints of virtually any customer who would be contemplating higher throughput single cell experiments.

Okay, thank you.

Thank you. Our next question comes from Derik De Bruin with Bank of America.

Hey, guys. This is Mike Ryskin on for Derik. Thanks for taking the question. First congrats on the quarter. But I want to follow-up on some of the moving pieces you talked about in both in 4Q and for the forward-looking guide. Not sure if you're going to be able to disclose this but at least directionally maybe you could talk to the magnitude of the Visium contribution in 4Q? And then also when we think about how that should scale over the course of 2020, I mean, is this to the point where by the end of 2020 it's going to be on its own sort of a meaningful number? I know when you talked about the 2019 numbers. Like for example the 158,000 pull-through you mentioned that Visium was included in that. So just wondering how that number is going to ramp and how the contribution could grow over the next year?

Hey, Mike, this is Justin. I'll take that. So as far as Visium being included in our pull through we made the decision to combine that metric because basically from a business perspective, we expect that our sales of Visium would go primarily to existing customers. As far as how we can think about the contributions of Visium in the future, it's pretty early in the life cycle now, very early in fact. While initial orders have exceeded our internal expectations, we're starting to see reorders come through now. But it's going to be some time before we have a firm handle on how to model and project Visium. What it really depends upon is the success of our customers as reflected in their publications.

Okay. That's helpful. That actually knocks out one of my follow-up questions in terms of the type of orders. You also mentioned that you had really positive uptick in the first couple of months. Could you talk a little bit about your manufacturing supply, making sure you have capacity for Visium? And then also for Chromium going forward in the next couple of years? And then I've got one last one follow-up after that.

Yes. So with the transition to Next GEM, just talking about products broadly overall, the amount of SKUs that we've had to manage internally is basically doubled when we released that product line. So it has been challenging for us to manage it but the operations and manufacturing and logistics teams have done a great job managing that. As we mentioned before, we are going to continue to expand our manufacturing operations in Singapore now later on domestically. And that's to add capacity and also for risk mitigation to provide a redundant source for mostly our entire product line. For the near term, at least from what we can see, we don't see any major risk to either our supply chain or manufacturing capacity. In fact because of the seasonality of our business we really plan to build-out at a much higher capacity than we need from quarter-to-quarter.

Okay. Thanks. One last one if I could. I really appreciate the color you provided Serge on some of the new capabilities you're working on. I'm just curious for any of those, are they built into the guidance assumptions for 2020, or and also if you could provide any even directional comments on expectation of timing? Is this next 6 months, 12 months, three to five years, just to sort of gauge. And then, yes, sort of when do you think they'll start showing up in the numbers?

So I'll start the -- I mean the products are contemplated fully within the guidance that Justin gave. In terms of more detail around timing, these are not like far out capabilities. The specifics of understanding -- we'll be sharing next week at AGBT.

Okay, great. Thanks. I’ll get back in the queue.

Thank you. Our next question comes from Doug Schenkel with Cowen.

Hi there. This is Adam Wieschhaus on for Doug. Thanks for taking my question. There was a strong placement quarter in the year with also a strong close on the pull-through side of things. How should we think about the near-term balance of instrument placement growth with pull-through growth? In other words, continue to decentralize our product within an institution, which would drive new placements but also likely pressure instrument pull-through. Should we therefore expect that instrument placement growth will outpace pull-through growth at least for the next few years considering there remains ample opportunity to penetrate deeper within many institutions?

Well, so it's a really good question. And it's going to be – there's multiple dynamics embedded in our market adoption. We are going to be pushing forward completing more instruments. It's certainly a core part of our strategy. At the same time, we will also work on increasing usage of pull-through. A lot of our – both in terms of just helping our customers ramp-up and releasing new applications and new products. We know that kind of historically, when we look at the different cohorts, people who have had instruments for longest used being used the most and they keep ramping. And the next kind of high usage cohort is the next – the next set of customers, who go on to this system. And so it kind of – there's multiple dynamics going on under the average pull-through and we're going to be pressing all the levers going forward.

Okay. I appreciate the color. You announced that Visium had stronger-than-expected uptake in a translational setting and your upcoming targeted-sequencing application FFPE compatibility which is expected in the near-term could have roles in the translational workflows as well. So, maybe a question for Brad, how do you view the near-term opportunity in the translational setting versus your core academic customers from a commercial standpoint?

That's a really good question. And it's again, one we thought would be further out. But again, with the new capabilities that have been announced. And just in general, there's been such a pull in the marketplace. We're definitely seeing the sort of translational networks. And we're in the process of enabling those. And we'll talk a little bit more about that next AGBT, because again this is somewhat of a new customer segment for us or a different call point, but we're preparing to sort of be proactive in that area as well.

Okay. Thanks. And just one last one for me. The strong gross margins in the quarter were attributed to some progress with the Next GEM conversions. Maybe I missed it, but are you still targeting the year-end of 2020 for all customers to be converted or is it possible to get a progressing there?

Yeah. So we're still targeting by year-end having all customers converted. In fact, we let our customers know that that's what we're targeting. We started shipping Next GEM at the end of Q2 of 2019 beginning of Q3 and so really, we look at it as a six-quarter transition with a basically a linear progression adoption of Next GEM over that six quarters.

Great. Thank you.

Thank you. Our next question comes from Luke Sergott with Evercore.

Hey, guys. How are you doing? Just wanted to follow-up on that last question on the translation we all on Visium, we expected the discovery side to be the near-term opportunity and it's turning out that it's kind of – the translationals coming sooner. Just are you seeing any competitive win rates versus the genomics? And then, was it more of a decision to get into this market? Was it more of a pull from the customer side? Or was it just you guys saw this opportunity and decided to go for it?

Luke, this is Brad. I'll take that. We really haven't had any direct competitive situations. Obviously, with genomics, we have actually – we know that we have customers that are using both, so we haven't looked at that as strictly a competitive situation. And to your second question, we were absolutely being pulled into by people that are looking at clinical studies and validation studies. So this was – this is something that again the majority of our customers initially where people that have used our single cell products. But again, as we pointed out, we were somewhat surprised that so quickly, we'd be asked to support these other kinds of applications.

Okay. And are you seeing differences in pull-through between the translational and discovery customers?

It's way too early at this stage.

It's too early to – okay. That's fair. The commentary Serge on expanding outside the 10,000 cell experiments going up to 1 million, 10 million it's kind of like when the genome analyzer and the HISeq and the X10. What do – how should we think about that in terms of pull-through? I mean, I'm sure it's not linear compared to the exponential ramp of sales event per experiment?

Well, I think we will be talking about again the details of this – this roadmap and what it means for our customers next week the AGBT and there's multiple moving pieces under it in terms of applications and capabilities. We are, as I said earlier, we are looking to expand the market in the usage of course, all the different vectors. The cell scale is one of those but there's others that we're also working on.

Okay. And lastly the supply chain and the ERP changes, is there any additional incremental cost outside of – outside of the traditional model that we've discussed earlier?

This is Justin. I'll take that. Nothing outside of what we've talked about before. There are some costs we have with the IT implementation and the ramping of the same port plan. But nothing new past those two things.

Nothing now. Okay. All right. Thanks, guys.

Thank you. Our next question will come from Patrick Donnelly with Citi.

Thanks, guys. Maybe just one for Serge. Justin mentioned some increased spend this year not surprising given the breadth of opportunities you guys have. Can you just talk about where the R&D priorities are? How focused you guys are on a few different big projects versus kind of spreading it out over a bunch of different opportunities?

Well, so we – I mean being focused is one of our core principles here. Having said that, yes we I mean, as I mentioned, we do have a diversity of opportunities. We're investing both on the Chromium side and on the Visium side and both in near term and the long term. So it's a balance. I wouldn't say there's any particular thing that we're investing well above everything else. It's a balance and we drive to stay focused while at the same time making sure that we have a good span of opportunities.

Okay. And then Justin maybe one for you just on the gross margins. Can you just help us on the cadence through the year? I know you have some puts and takes with Next GEM obviously, being a positive things like the Singapore ramp maybe a little bit of an offset on the build-out there. Can you just help us think about kind of the ramp throughout the year in 2020?

Sure. The biggest driver of gross margin is going to be the transition over to Next GEM. And we talked about that progressing over the six quarters on a linear progression. I would expect that the transition in Next GEM would probably be a little bit slower in Q1 but then would accelerate more in Q2 and Q3 to finish out the year. So that's the biggest basically positive factor for gross margin this year.There are some headwinds around Singapore manufacturing that's going to impact gross margin in Q2, Q3 as we're ramping up the facilities there and also our spend on the ERP project that we expect to go live here in the latter part of this year.And then also some of our new product introductions that have lower gross margins than existing products. For example, Chromium Connect there is higher gross profit per instrument but lower gross margins just due to the cost and selling price. And then also Visium has a slightly lower gross margin than our current product lineup.

Okay. That's helpful. And then maybe one just on Visium. Definitely encouraging to hear kind of that 200 lab number, I didn't hear, is it still tracking around kind of 20% of customers are new to 10x? And if so what's the feedback then kind of what's drawing these customers in? Are the early customers kind of similar to those early adopters you saw in single cell as well?

This is Brad. I'll take that. Yes initially we do have that roughly 20% of customers are new to 10x. But even within the core customers what we've really been excited about is the – their ability to work with tissue. I mean these customers traditionally don't come from tissue as a starting material and we put a lot of effort in and training, training videos.We have a tissue optimization kit. And what's been amazing is how successful they've been. We actually encourage customers to send in their optimization slides or at least a picture that will help them choose the best conditions. And it's just been remarkable. So what's happened is that – because we have a one-day workflow, so we're ready for a sequencer at the end of the first day. And so we're seeing more and more customers reorder, which certainly reflected in the fact that they're seeing success.

That’s helpful. Thanks, guys.

Thank you. And we do have a follow-up question from Derik De Bruin with Bank of America.

Hi, It's Mike, again. I just want to squeeze a follow in. Thanks. Following up on some of the operating expense comments you made. As we think about SG&A going forward with some of the new products you highlight and some of the move into a little bit more of a translational setting and move into some of the pathology customers, do you anticipate having to expand sales force more than you would have otherwise, sort of is there any incremental spend as we go forward to support some of the new product launches? Or how does that fit into the model?

This is Brad. I'll take that. We factored all of the products into our sort of growth plans in terms of the operating expenses growing up the sales organization. I mean clearly as we get further down the road, we might very well start looking at a more specialized targeted for us as we move more towards the pathologist. But right now in terms of 2020, I think we're well covered and are not planning anything incremental at this stage.

This is Justin. Just to add to that you asked about some of the OpEx trends. Just due to our ongoing litigation there are some legal expenses that will hit in different parts throughout the year. So for example, we just won a case with the ITC and there's a success fee that's associated with that. And you could see payments like that spread out throughout the year.

Okay. That's helpful. And it's actually Justin that's the perfect bridge. One last one I want to squeeze in, was if you could provide some update on some of the ongoing litigation. There were some rulings in December, you had the news that hit just a couple of days ago with the ITC about the DDC products. Anything you could say across the board there sort of just to make sure we're not missing anything?

So this is Serge. So I'll take that. I mean -- so the rulings that have come out over the last few months have been largely in line with what we have been communicating and what we have been expecting. The ITC ruling back in December in our defensive case explicitly once again confirmed that Next GEM does not infringe.Those down and also have an added additional exclusion for our existing customers to using some of the applications. The ruling that just came out a few days ago was where the ITC Commission, the International Trade Commission founded by our single cell products infringed on three of our patents. And so ITC is in order.So I mean we see that things kind of unfolding as roughly as we expected. As I mentioned earlier, we are a pioneer in single cell genomics. And we're pleased that the board recognize our core patents were valid and were infringed. And as I said we have -- at this point we have over 700 patents issued or pending and that is a big source of growing competitive advantage for us.

Great. Thanks, looking forward to your team.

Thank you.

Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Serge Saxonov for any closing remarks.

Well thank you everyone and have a good evening.

And ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.