Ladies and gentlemen, thank you for standing by, and welcome to the 10x Genomics first-quarter 2020 earnings conference call [Operator instructions]I'll now turn the conference over to Carrie Mendivil with Investor Relations. You may begin.

Thank you. Earlier today, 10x Genomics released financial results for the first quarter ended March 31, 2020. If you have not received this news release or if you'd 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 investors tab of the company's website, 10x genomics.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 and 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 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 Carrie. Good afternoon and thank you for joining our call to review our first-quarter 2020 results. I hope you and your families are healthy and managing the COVID-19 pandemic as well as possible. Before we go into the details of the quarter, I want to start by thanking our employees for their amazing dedication, flexibility and drive over the past several months.This has been a very intense period, but it just truly brought out the best in each of our team members. I also want to take a moment to acknowledge the work being done by our customers and the collective research community around the world, who are working relentlessly to understand COVID-19 and develop cures for the virus. While we have not seen a pandemic like this in our lifetime, we have also never seen the global scientific community focused with so much intensity on a single goal. As soon as the pandemic started spreading around the world, we moved quickly to place instruments and provide reagents to our customers working on COVID-19 research.Many of these customers require special accommodations to put instruments in biosafety level three labs. Our products are being used in multiple ways to accelerate the fight against the pandemic. Fundamentally, they enable researchers to see biology at very high resolution and scale. And because of that, they allow our customers to make discoveries to understand the virus and the underlying biology of the disease and to help develop therapies and vaccines.There have already been dozens of reference from scientists and clinicians around the world using 10x for COVID-19 research. Large-scale single cell analysis have allowed our customers to establish which cells and tissues get infected by the virus, when and where. A number of our customers have been using the Immune Profiling solution to…

Thank you Serge. Total revenue for the three months ended March 31, 2020, was $71.9 million compared to $53.6 million for the prior-year period, representing a 34% increase. Consumables revenue was $61.4 million which increased 34% over the prior-year period. Instrument revenue was $9.1 million which increased 33% over the prior-year period.Service revenue was $1.3 million which increased 52% over the prior-year period. COVID-19 impacted our business in different ways. Consumable revenue was unfavorably impacted due to many customer labs being closed. Instrument revenue was favorably impacted as we saw increased instrument revenue -- increased demand for our instruments.Service revenue was not materially impacted. North America revenue for the first quarter was $39.7 million, representing 39% growth over the prior-year period. EMEA revenue for the first quarter was $13.2 million, representing 7% growth over the prior-year period. APAC revenue for the first quarter was $19 million, representing 48% growth over the prior-year period. By the third week in January, we saw impact in China as customer labs began to close due to COVID-19. As the quarter progressed and the virus spread outside of China, we began to see an impact on customers in North America and EMEA. In the last two weeks of the quarter, labs in China began to reopen, and we saw a reasonable recovery with ending revenue close to our expectations. Thus, the net impact to our Q1 revenue was driven by customer lab closures in North America and EMEA.Gross profit for the first quarter of 2020 was $56.8 million compared to a gross profit of $39.6 million for the prior-year period. Gross margin for the first quarter was 79% compared to 74% for the first quarter of 2019. The gross margin increase was driven primarily by lower accrued royalties related to ongoing litigation. Total operating expenses…

Thanks, Justin. Before closing, I want to extend my sincerest thanks to everyone at 10x for all of your efforts and for all the amazing work you have done. I'm incredibly proud to be part of this team. Across every part of the company, we have faced all the recent challenges with resolve, creativity and passion. Our mission to master biology and advance human health is more important now than it has ever been. I'm confident that the future holds an even greater appreciation and appetite for scientific discovery. And with that, we will now open it up for questions.

[Operator Instructions] And your first question comes from Tycho Peterson with JPMorgan.

Serge, since you flagged some of the COVID-related research that's ongoing, can you just talk a little bit about how you're thinking about revenue tailwinds there? I know you mentioned it drove increased demand for instruments. So can you talk a little bit about how you're thinking about that opportunity? And how much will it be split between discovery and translational work?

So in terms of the tailwinds for COVID, so clearly, there was some in Q1, and there's definitely some growing in Q2. I would caution, though, on the scale -- given the scale of our business, it's too early to say that it's going to be a significant part relative to the rest of our business. The impact has been much more in terms of lab closures and the headwinds so far.

And from a funding perspective, any views on what the catch-up in the back half of the year might look like and thoughts on whether we might get something more meaningful out of the NIH?

I'll let Brad answer.

Yes. Tycho, this is Brad. We've already seen some incremental funding that's been released by the NIH, and some of that has already made its way into labs, and studies are underway. But there's a tremendous amount of work contemplated around the world, certainly, places like Sanger have applied for grants to do sort of very large studies. And we're also seeing local consortia regionally around North America that are coming together, sometimes even almost rival labs, but to work together. And a lot of this is related to access to samples. And unfortunately, the truth of the pandemic is there's samples everywhere.

Two other quick ones, and then I'll hop off. Chromium Connect, just can you give us an update? I think when we talked back in the last quarter, you'd said maybe 50 systems in the first year would be great. Obviously, the dynamics have changed. But just curious how you're thinking about pharma traction for Chromium Connect.

Tycho, I'll take this as well. It's actually been very strong. I mean, obviously, we did begin shipping and installing in March. That was obviously kind of rough because a lot of institutions are limiting access even before they closed, limiting access from people on the outside. But overall, we continue to see really good demand. We've built a pretty good book of demand that's consistent with what we expected. And I would feel that here in the next few weeks, when some of the labs start opening up, we'll be able to commence onboarding customers.

And then last one, I'm just wondering, Serge, as we kind of think about the current environment and more focus on surveillance going forward, has any of this changed your view on the clinical opportunity and steps you may need to take to open that up over time?

I don't think there's a material change in how we view our clinical opportunity. Certainly, what we've signaled in the previous earnings call and the kind of the conversation we had throughout the quarter is we do have -- we have seen more interest from translational researchers and from medical centers and also from biopharma customers. So that is all pointing toward that sort of clinical translational vector. And we still feel the same, if anything, stronger than before.I wouldn't necessarily -- with COVID, I think with COVID kind of appearing, there's more -- I think there's going to be more focus on infectious disease type of research and infectious disease types of applications. I'm not sure if that necessarily breaks more toward the sort of clinical applications relative to baseline research, but it's all kind of pointing to greater like fundamental investment that we see in biology and genomics, in particular.

Okay. Thank you.

And our next question comes from Derik De Bruin with Bank of America.

So if I missed it, my apologies, but what was your exit rate of revenue decline exiting the second quarter? And is that a good proxy for how to sort of think about Q2?

Derik, I think if we were to look at the revenue rate decline overall, overall, there was a decline, but it really was broken out regionally with different impacts for each region. So we saw an acceleration in China as the labs in China opened back up again. And we saw a slowdown in AMR and EMEA as those labs began to close. We gave the metric that, overall, we estimate that about 75% of our customer labs are currently closed.And so that's probably as best a proxy as any as far as how to think about the weighting while they all are closed.

Great. Yeah, I mean that's actually where I was going to go next, if that was the best proxy in that one. But talking about the acceleration in China, was that instrument pull-throughs or was that just labs coming back and resuming normal purchases, consumable demand? Something about that characteristic of you basically ended up, you said flattish on your China quarter.

Derik, this is Brad. Actually, there were a lot of orders around COVID-related research. So we -- right at the end of the quarter, we had a lot of labs that through the month of -- the early part of March, were sort of contemplating some of these bigger studies. And we saw those orders come in and in some cases, we're able to fulfill them, but most of that was spilled into the second quarter.

Got it. And going back on the -- obviously, your gross margins are going to take a hit because of lower volume in the second quarter. Any degree of -- any commentary on the gross margin impact for Q2?

Yes, this is Justin. I'll take that one. I think the biggest impact to gross margin over the rest of this year is going to be the continued transition into the Next GEM products. There are going to be some headwinds just due to perhaps a lower volume on the same fixed base cost.But we expect that the benefit from the Next GEM transition will continue to offset that.

Great. Thank you.

And your next question comes from Doug Schenkel with Cowen.

Actually, maybe just a follow-up on that last one on gross margin. I'm going to do a couple of cleanups and then ask a Visium question, but starting on gross margin. The Q1 gross margin was actually pretty impressive, given adverse mix and probably some drop in utilization rates at the end of the quarter. I'm curious where you think gross margin would have been if it hadn't been for the pandemic? And presumably, it looks like you could have got into the 80s. Is that right? And if so, is that kind of the new normal factoring in Next GEM and moving past some royalties once we get to the other side of the pandemic?

I think that's hard to say for Q1. There wasn't -- due to the volume that we manufactured overall and shipped overall, I wouldn't say that there was that great of an impact to Q1 margins due to the pandemic. If you look at the new products that we've introduced, the Chromium Connect and Visium products and also the manufacturing that we're standing up in Singapore, those are all going to be headwinds to the current gross margin.In fact, we're expecting some period costs to start hitting this quarter as we ramp up Singapore. And then as Visium and Connect become a larger part of the overall revenue, that will also become a bigger factor. So I think it's difficult to forecast how all that's going to settle out and what the new norm would be. But I don't expect it to be a drastic change from where we've been moving this quarter and last quarter.

And then I guess another one, maybe just taking a different approach. In your prepared remarks, you noted that 75% of customers shut down at the bottom. Some of these folks are coming back, but others aren't necessarily behaving as normal, given all that's going on. COVID is a little bit of a tailwind, but it's only a small tailwind, and China's getting back to normal. But I think it's only about 12% of sales. So is there any reason -- I hear you that you're not guiding, and we understand why. But is there any reason to not assume that total revenue for Q2 is 50% to 75% below trend, just applying what you said was going on at the end of Q1 and apply that both to consumables and instruments, given that if labs are closed, they can't use the juice? And given your commentary on instruments being pulled forward into Q1, is there anything I said that isn't logical there?

Look, I would say that the single biggest variable that we're seeing is again lab closures. That's essentially the one variable that determines, certainly, the consumable pull through. The effects of instruments may be to a slightly smaller effect, but those as well. So I'll let Brad answer that.

Yes. So Doug, the other thing is then the amount of lab openings, and we've contemplated that quite a bit. Now obviously, when labs open, there is some period of time as we're experiencing about our own R&D, where people are using maybe shifts, different cohorts at different times. So that's going to take a while. And then there's a lot of other services that support the labs, and they all have to be brought up, animal tax facilities, shipping and receiving. So the whole thing for us is how the recovery looks and how quickly it goes. And we're going to assume it's going to be some sort of a lag period of time -- or lag period for labs to get anywhere close to their original capacity. We do believe though in our discussions with our customers that we're right at the top of the list of what they want to start working with.

Okay. That's super helpful. And last one on Visium. You noted that over 400 labs have now adopted the platform or really put themselves in a place to use the consumables with no upfront cost. This is double where you were at the last update only a few months ago. Any interesting observation on who's adopting and for what applications? Is it mostly existing versus new customers? And from a competitive standpoint, are you starting to run into situations where you are running into head to heads and winning those at this point?

So the pattern kind of -- Doug, yes, it's a good question. So the pattern is fairly similar to what we have seen before, what we communicated a few months ago, in that most of the customers are still our existing customers. But there's a fraction, say, 15% to 20%, that's new. And that has been fairly consistent.The range of applications is pretty wide. There's -- as before, there is a particular focus on oncology, immuno-oncology and neuroscience. Those are some of the big pulls, but it spans the gamut to like some very exciting things, including in fact, COVID-19 as well. So it's pretty much across the board.And I think, again, like we said before, there's a greater interest from a translational and clinical side of the world in Visium relative to what we had seen previously with single cell, in Chromium. So -- and in fact, we established, I'll let Brad comment on, we established, since last call, a clinical/translational network, which has been to help the translational and clinical customers get onboarded. That has been growing quite well.To turn to your competition question, I think it's still -- I don't think the landscape has changed much really. I think there's certainly more awareness, I would say, of both platforms out there in the marketplace. As far as we know, we haven't lost any sale head-to-head, and there are so many customers that have both platforms out there.

Just to add -- no, I'll just maybe add a little bit more to that. As far as the competitive landscape, I mean, we've announced a number of enhancements to the Visium line. There's another platform on the market that's announcing a lot of enhancements there. We're kind of -- we're getting to the point where we're going to meet more often. Right now, we have not lost a sale. We don't expect to lose a sale. But we're very keenly aware right now that both platforms have kind of merged.There's also been new platforms like [Recore]. We look at that as very complementary. Not sure exactly when that will be commercialized. But again, there's a tremendous amount of interest in spatial.And just to touch on this clinical/translational network, that was massively oversubscribed. We had to actually -- in fact, we had a limited number of spots that we could take. But it really is consistent with pulling spatial into the clinic. It was actually quite surprising.

And our next question comes from Patrick Donnelly with Citi.

Maybe one for Brad. I know you talked about some potential lag on labs purchasing when they come back. What have your conversations been around the health of budgets overall? Do you feel that instrument purchases mostly are just being pushed out and are going to be realized in the relative near term once these labs reopen kind of find their footing? Or do you think there's this level of uncertainty, this cloud of uncertainty that is going to linger for a longer period, even once people are back in the lab?

In general, people are positive. The NIH budget for 2021 is sort of preannounced, and it's strong. I think people have budgets. They're saving money, and saving research dollars doesn't make a lot of sense if you're a customer.So I think there's a strong demand. And to get back in, I think everybody, it's different. I mean institutions are -- sort of have different approaches to how they're going to bring this up and running or bring -- get the labs up and running. As far as instruments, I think they will not be impacted that much, I think to the extent they're delayed.So I think those would come back online first. But there's a certain amount of business that's just unrecoverable because there's a certain amount of time that we weren't in there. And there's -- I don't expect a huge bolus of experiments to be done right away. I think it's going to be a gradual build to get back to capacity.

Okay. And then maybe one for Justin on the expenses side. You guys are obviously planning on ramping those quite a bit higher this year before the pandemic. How would it change your opex plans for the year? Have you paused any hiring you were planning on doing? Just wondering on the balance between controlling costs in the current environment and then being well positioned to capture growth when things normalize obviously a big opportunity for you guys.So how do you balance those two?

Yeah. It's a good question, Patrick. The focus for us has been finding the right balance on navigating through this temporary situation, while still ensuring that we're building the business for growth for the longer term. And so we have gone back and we've looked at all of the costs for what we have planned out for the rest of this year, most primarily due to additional head count in R&D and the commercial side.And we've just tried to be smart about prioritizing those hires as best we can as to not impact the product time lines or put any of our revenue plans at risk. And so I think when we started this year, we had a pretty ambitious hiring plan overall. And it's still quite ambitious, but we have pushed out a small number of head count in the future quarters, where we can defer a decision that doesn't have an immediate impact today.

Okay. And then maybe I'll ask one more, framing it a different way. I know it has been asked a couple of times. But in terms of even the customer closures, I know you guys have talked about the 75% number.Any way to frame that, how that's trended, whether it's end of March through April into almost mid-May here? Has that number changed materially? I'm just trying to figure out, some companies have given kind of a week-to-week look. Anything you can help us with over the past month and a half as this has developed, that would be helpful. Thank you.

All right. So this is Brad. We -- beyond China which we've already discussed, in the first week of March, we saw it starting primarily in the Northwest, the Seattle, the Fred Hutch, the Washington, the Allen Brain, all announced some level of lab closures. And in a span of the next seven days, that basically swept across the country.And in some cases, they were measured. They were given six days, seven days to shut down. In some cases, it was literally less than three days. And in the Bay Area, around where we are, it was essentially immediately.It was a 24-hour, and the labs were shut down immediately. That -- those closures continued up through sort of the, say, first week in April. And then there was this lull period. And I'll tell you it's scary.But then by the second week in April going into the third week, we started seeing a lot more activity. We saw people getting used to the fact that this was the new normal. And then as we've gotten into sort of the second week in May now, we're actually now seeing labs that have opened primarily in the Midwest, Texas, Southeast. And much, much more activity as people are now contemplating openings toward the end of May and into early June.

And your next question comes from David Westenberg with Guggenheim Securities.

So we do have to try to model this the best we can. So I do want to continue with that point on the 75% that was just asked as well. Is there any kind of events that maybe we could track? I mean is schools reopening in the fall something that we maybe can look at as indicators that labs are opening and just trying to get a sense of the timing going forward? And I get you've already been asked this five times, but just events that might trigger re-openings?

Yes. So Dave, I'm going to make you -- if we have the crystal ball about when the things were going to be open around the world, I think we could be in different lines of work. So in terms of like your question as far as like schools reopening so much, I mean one thing I would kind of distinguish is that yes, if schools reopen completely, then I think that it follows that labs will be opened widely and completely. But I would say that even if schools don't reopen, the research work can continue to keep going.So, the post-grads and the grads are sort of they operate independent of the sort of the other population of the university of the students, the undergrads. And the research environment tends to be pretty competitive. So our view is that as some scientists start getting back to work, others will feel increased pressure to figure out how to start getting their experiments going as well. It's hard to put a pin into it, like precisely when different labs are going to be opening up. But the level of uncertainty is in order of one or two quarters as we look out.

Yes. This is Brad. I'll just add. I'm sorry. Just to add a little bit to that, the competitive nature of science is sometimes looked in. And we even have our customers calling and asking, who else is opening up, when are they going to open up? Not that we share that information. But yes, we're right on that precipice right now where labs are beginning to open. And I think it's going to drive a lot of the momentum of other labs to open. And again, some parts of the world are certainly less impacted than others. So we'll see. But I think over the next three or four weeks, it will be more clear.

Actually. So then I just want to continue with one of Tycho's questions about use in infectious disease. I know that early generation droplet-based TCR technologies, for example, can be used in low viral load situation. So as we're thinking about infectious disease, I mean, is this -- maybe can be used on an R&D front to find out why certain technologies could not handle viral loads? I'm just kind of getting a sense of how it could be used maybe more in an infectious disease environment?

Yes. So, I mean there's a huge range of applications for sure. I mean I would say -- I would downplay maybe the testing element of it, but every other element of trying to understand what is happening with the biology, why some patients get mild symptoms while others have severe acute symptoms, how the -- sort of what is the actual biology of inflection, how the vaccines create an immunogenic response in patients. All of that really should be done and requires our products. I don't think there's any other way to gain the same clarity of view of what's happening in any given patient.So I think from that perspective -- and that is the full suite. Certainly, our new profiling solution is incredibly powerful. We're seeing that in many different research projects. But the gene expression, the epigenetics and also now spatial products can play a part as well. So again, I'll drive just kind of comprehensive understanding of what's going on with the biology of the disease and what's going with the biology of any individual patients as well.

Great. And I'll just ask one last one. Can you remind us again on the expiration of the juice? And I'm just kind of thinking about if labs are open for extended period of time, I mean, they would probably be empty in terms of consumables, assuming that your – six months maybe is the expiration date on your consumables. And just how do we think about that?

Yes, I think you're right on spot there. It's at three to six months. The nature, very few of our customers actually essentially stock the products. So these are out in the labs. We've already contemplated this and already working to anticipate customers' need where there could be potential reagents that are out of date and how we'll deal with that. So we thought about that quite a bit and actually trying to map out and certainly be there when the start-up happens if we got to get product to them.

Okay. And there are no further questions. I will now turn the conference over to the company's CEO for closing remarks.

Well, stay safe, and thank you for joining us, everyone.

Good bye. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.