10x Genomics, Inc. (TXG) Q4 2019 Earnings Report, Transcript and Summary

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 understanding of their specificities. We expect that this approach will become an integral tool for antibody discovery and for vaccine development across a wide range of therapeutic areas. This kind of work by our customers demonstrates why we believe this is the century of biology. It shows how new technologies, new tools and new understanding will lead to cures. These studies will be performing into the work with 10x and was a huge motivator for the team.Now turning to commercial execution. Our products are organized around two core platforms: Chromium and Visium. The Chromium platform enables single cell analysis. With Chromium our customers are able to see what is happening in their samples at the right level of resolution, the single cell resolution. The Visium platform enables spatial analysis. With Visium, our customers are able to see where it is all happening, how cells and molecules arranged with respect to each other in tissues. We began taking preorders for Visium in September and started shipments at the end of November. And remember that unlike Chromium, Visium does not require an instrument, which we believe will accelerate adoption of this platform.We're very excited about this product and its potential. Even though it is early days, the interest we're seeing from new customers have exceeded our initial expectations. In fact as of the year-end Visium was already being used by more than 200 labs. While we're excited by this early interest, the trajectory of Visium adoption will be a function of how our customers use these products and of their demonstrated success.So far with Visium, we have seen interest across many different research areas. While our initial focus has been on discovery, Visium in particular has seen more interest among translational applications most notably in oncology and in Alzheimer's.Our customers are using Visium to study disease in patient samples, look for biomarkers and predict responses to therapy. The first product launch on the Visium platform at the end of last year was for measuring Gene Expression, but this is just the first product. We have many more in the works to enable new obligations to measure additional biological analytes and to make improvements to the underlying platform.Now looking at our Chromium platform, the transition to Next GEM architecture continues to progress well. At this point all Chromium instruments that we sell operate exclusively with our Next GEM solutions. We have been careful not to disrupt existing studies of our customers using our legacy GEM products and expect the transition to be complete by the end of the year.Across our two core platforms; Chromium and Visium our customers averaged a pull-through of over $150,000 of annual consumable revenue in 2019. And as of year-end we have sold a cumulative 1,666 Chromium instruments around the world. Going forward we will invest in efforts both to increase the usage of our products for our existing customers and to increase the number of new customers.We see a tremendous road of opportunities ahead and we are focused on scaling our business for the future. One of the core pillars of our competitive advantage is our innovation engine which comprises both knowing what breakthrough products to build and the ability to build them at rapid velocity.We have identified many exciting opportunities in the near and long term that have potential for exponential impact. The biggest advantage of these opportunities we're executing on a rich product roadmap and are increasing our investment in R&D.Our team is working on a number of programs some of which I will discuss today and all of which can add substantially to our long-term growth. As the pioneer of single cell genomics, we now have over 700 patents issued or pending relating to our key innovations including foundational patents in single cell analysis, epigenomics, spatial analysis and multigenomics.We continue to invest heavily in developing and defending this patent portfolio which provides significant differentiation and production. We're also investing in our operational infrastructure to support our rapid growth. We are actively building out a new Singapore manufacturing site to support the global expansion and to ensure the continuity of our operations. We're also transitioning to a global ERP system after this year.Our commercial organization ended 2019 with over 200 employees and over 75 commission sales executives. We sold direct in North America and Europe and employ a hybrid approach in Asia Pacific with local distribution partners working together with 10x employees to develop individual markets.Our commercial infrastructure complements our innovation engine to drive rapid global adoption of our products. And through close partnership with our customers we have direct insight into their needs and their future questions. This information feeds directly into our product development pipeline. It allows us to both rapidly innovate our products to deliver an ever-improving customer experience and to identify new opportunities for future products.And now I will preview some of the capabilities we're working on starting with our Chromium platform. The single biggest request we have received from our customers is to be able to measure gene expression and epigenetics together from the same cell. With our existing capabilities, our customers have been able to read epigenetic programming across large numbers of cells. But the next challenge is directly linking the epigenetic programming to its output which is Gene Expression. And that is precisely the capability we're going to launch with our next product.For the very first time our customers will be able to read both epigenetic programming using epoxy and R&D gene expression across thousands of -- tens of thousands of cells in a single experiment.Our customers have been intently interested in this capability because it will allow them to start unlocking the rules of cellular programming and with it one of the most fundamental challenges to addressing human health and disease.The second focus of innovation for Chromium is to further broaden the reach of the platform. Since offshoring in the single cell revolution one of our core tenets is to make our products accessible to all biologists. While single cell research has been transforming the way that science is done across thousands of labs around the world, our next goal is to enable this approach for tens of thousands of new researchers who are just starting to be intrigued by this technology. And to that end, we will be launching two new capabilities to make single cell experiments less expensive and more flexible.First, we will enable targeted sequencing. This means that incentive sequencing the full transcriptome of each cell, our customers will now be able to sequence just a subset of genes. This will dramatically reduce the cost of sequencing and significantly decreased the cost of overall single cell experiments.It will also allow experiments to be more focused on specific questions opening up more validation and translational use cases. We're also launching proprietary solutions that will allow our customers to combine samples together into a single 10x lane. This will increase the number of available samples for single cell analysis and allow experiments to be scaled beyond what is currently practical.And finally, the third area of focus for Chromium is to further increase throughput of single cell experiments. The launch of this platform in 2016 allows for the first time labs to run 1,000 cell experiments routinely. Since that point, we have helped our customers scale to 10,000 cell experiments and beyond. In fact many labs are now actually running 100,000 cell experiments routinely. But biology is very complex and the way to address this complexity is through scale.We have now heard from our customers an interest in running millions of experiments. And over the next two years we will be launching multiple features capabilities and products to enable this type of scale. And in fact within the future going well beyond one million cells, we expect to develop our technology to the point where we could enable 10 million cell experiments. This will transform many of the applications where single cell analysis is currently used. This amount of scale at single cell resolution will also enable experiments across new research areas like enormous drug screens massively parallel gene and pathology [ph] analysis, large-scale cohort and population scale sites.Turning now to Visium. With the launch of Visium, we brought high throughput molecule analysis of tissues license and pathology workloads. The standard way of pathologists analyze their tissues is using IHC or immunonhistochemistry, which uses fluorescence to measure protein markers.We're now planning to launch a new capability that will allow our customers to the book the IHC and Visium gene expression from the same tissue, from the same sample at the same time. This will significantly increase the amount of information that our customers can get from their samples. But even more importantly, we'll serve as a bridge from the traditional world of pathology to the new world of rich high throughput molecular analysis that we're delivering with Visium.IHC is great for measuring one protein marker maybe two, but it can't really scale much further. To address this fundamental limitation, we're bringing our featured bar coding technology to Visium. With featured bar coding, customers will be able to measure the very high levels of protein targets using [indiscernible] antibodies. This technology can be pushed to the point where our customers could be measuring hundreds, potentially even thousands of proteins at the same time together with gene expression on the same sample. We believe this capability will be transformative to the kind of information our customers can extract from biological samples and tissues.And finally, our early focus with Visium has been grounded squarely in foundational discovery and research. That said, we have already received a great deal of interest from translational and clinical researchers. For these customers, the most important type of sample is formalin-fixed paraffin-embedded or FFP, which is the standard way that patient samples are collected and stored to human pathology.Now FFP is fine for visualizing tissues, but it is absolutely awful for the kinds of things that it does to molecules in a sample. Our current Visium product was not initially designed to be compatible with FFP. However, given the incredible amount of interest, we have now internally developed the capability for the platform to work with FFP and we will be releasing this as a product in the future.We're very excited for what is ahead. I look forward to providing more details on each of these new capabilities next week at the AGBT conference. This has been a very eventful year at 10x Genomics. I'm very proud of the progress our team has made to date.Looking ahead to 2020, we expect revenue for the full year to be in the range of $350 million to $360 million. I'm confident that we would -- we are well-positioned to continue to execute on our strategy in 2020 and well into the coming decades as we usher in the century of biology.And with that, I will now turn the call over to Justin McAnear for more detail on our financials.

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 R&D expenses related to acquisitions. The increase was primarily attributable to higher personnel, lab materials and infrastructure costs.SG&A expenses for the fourth quarter were $38.8 million compared to $26.9 million for the fourth quarter of 2018. The increase was primarily due to personnel costs, facilities driven by construction of our new global headquarters as well as higher professional services and insurance costs, associated with our status as a publicly traded company.Operating loss for the fourth quarter was $8.1 million compared to a loss of $75 million for the fourth quarter of 2018. This includes $5.1 million of stock-based compensation for the fourth quarter of 2019 compared to $1.1 million for the fourth quarter of 2018. Net loss for the period was $7.1 million compared to a net loss of $75.5 million for the fourth quarter of 2018.Turning to our full year results. Total revenue for the full year ended December 31, 2019 was $245.9 million, compared to $146.3 million for 2018, representing a 68% increase. Consumables revenue was $206.9 million, an increase of 92% over the prior year. Instrument revenue was $34.9 million, a decrease of 4% over the prior year.Service revenue was $4.1 million, an increase of 89% over the prior year. As of year-end, we have sold a cumulative total of 1,666 Chromium instruments, up 645 instruments from 1,021 instruments at the end of 2018. The decrease in instrument revenue was again driven by the consolidation of our instrument product line into one full featured lowered priced instrument in early 2019.Our average annual instrument pull-through was $158,000 for 2019, up from $148,000 for 2018. Average annual instrument pull-through is calculated from the simple average of the quarterly pull throughs and also includes Visium.North America revenue for the full year was $139.8 million, representing 64% growth over the prior year. EMEA revenue for the full year was $58 million, representing 62% growth over the prior year. APAC revenue for the full year was $48.1 million, representing 89% growth over the prior year. Gross profit for 2019 was $184.9 million compared to a gross profit of $117.7 million for 2018.Gross margin for 2019 was 75% compared to 80% for 2018. The decrease in gross margin was driven primarily by higher accrued royalties related to ongoing litigation, which impacted cost of revenue for full year 2019, whereas these accruals only impacted cost of revenue in the fourth quarter of 2018.Total operating expenses for 2019 were $215.4 million, a decrease of 6% from $228.4 million for 2018. Operating expenses for 2018 included $62.4 million of in-process R&D, as well as an incremental $29.1 million for accrued contingent liabilities. R&D expenses for 2019 were $83.1 million compared to $47.5 million for 2018, excluding in-process R&D expenses related to acquisitions.The increase was primarily attributable to higher investments in personnel, lab materials and infrastructure. SG&A expenses for 2019 were $130.8 million compared to $87.9 million for the prior year. The increase was primarily due to personnel costs with increased hiring across all SG&A functions along with increased facilities costs due to the transition to our new global headquarters.Operating loss for 2019 was $30.6 million compared to a loss of $110.8 million for 2018. This includes $13.3 million of stock-based compensation for full year 2019 as compared to $2.7 million for full year 2018. Net loss for 2019 was $31.3 million compared to a net loss of $112.5 million for 2018. We ended 2019 with $424.2 million in cash and cash equivalents.Turning to our outlook for 2020. As Serge mentioned, we expect full year revenue for 2020 to be in the range of $350 million to $360 million, representing growth of 42% to 46% over full year 2019. This outlook is based upon the latest market conditions and our best views of timing of upcoming new product launches.As in prior years, we expect revenue to be heavily weighted toward the back half of 2020 with modest sequential increases in the first half of the year. We are excited about the size and growth of opportunities in front of us in the near-term, throughout the next decade and beyond. This conviction has led us to increase our investments at this stage.We have a robust product pipeline with a multitude of new products at various stages of development. We are increasing R&D headcount and expanding our laboratory and manufacturing facilities. We continue to expand our commercial organization, increasing coverage in direct to markets to build stronger relationships with existing customers while onboarding new customers. This is in addition to developing the channels to support our global expansion.We are deliberately accelerating our investments and are focusing on our top line revenue growth. These near-term investments will help drive continued revenue growth and will deliver what we expect to be best-in-class operating margins over the long term.At this point I would like to turn the call back to Serge for closing comments.

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.