Ladies and gentlemen, thank you for standing by, and welcome to the 10x Genomics Second Quarter 2020 Earnings Conference. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Eric Jaschke, Director of Investor Relations and Strategic Finance. Please go ahead.

Thank you. Earlier today, 10x Genomics released financial results for the second quarter ended June 30, 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 Investor tab of the company's website, 10xgenomics.com, for at least 45 days following this call. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on these 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 and/or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Joining the call today are Serge Saxonov, our CEO and Co-Founder; and Justin McAnear, our Chief Financial Officer. In addition, Brad Crutchfield, our Chief Commercial Officer will be available for Q&A. With that, I'd like to turn the call over to Serge.

Thanks, Eric. Good afternoon and thank you for joining our call to review our second quarter 2020 results. I hope you and your families are staying healthy and safe. I'd like to start-off call today by again thanking the amazing team at 10x for their unwavering dedication and incredible execution during this quarter, despite all the challenges they've had to face. I'm always proud of our team and culture, but it's been a special inspiring to see the ability that everyone has shown to adapt and succeed in the face of new obstacles. This perseverance has been critical to ensure that we continue to execute on our plans and take advantage of the opportunities ahead. As expected, the impact of COVID-19 created a challenging environment in the second quarter. Our revenues were down 23% year-over-year at $42.9 million. This decline was a direct result of widespread customer lab closures due to the pandemic. We started the quarter with only 25% of our customer labs open and we exited the quarter with nearly 60% open. So most of them have been operating at a much reduced capacity. We anticipate that lab closures will continue to impact our business until our customers are fully operational. That said, once we will past the short-term disruption, I'm more confident than ever in our mission and in our business. It is clear that the current events have reinforced the importance of mastering biology, and not just among researchers but among the broader public as well. As just one example, to finalize the proposed increase for next year's NIH budget will be one of the largest in decades. In many ways, the COVID pandemic is likely to become catalyzing event for accelerating the century of biology. On today's call, I will start with a review of…

Thank you, Serge. Total revenue for the three months ended June 30, 2020 was $42.9 million, compared to $55.8 million for the prior year period, representing a 23% decrease year-over-year. Consumables revenue was $34.2 million, which decreased 27% over the prior year period. Instrument revenue was $7.3 million, which decreased 12% over the prior year period. Service revenue was $1.5 million, which increased 48% over the prior year period. Consumable revenue was impacted this quarter due to lab closures having a direct impact on the ability of researchers to performance experiments using our products. Instrument revenue was also impacted this quarter, due to lower ASPs primarily related to the strategic discounting of COVID-related placements. Service revenue was not materially impacted. North America revenue for the second quarter was $20.3 which decreased 39% over the prior year period. EMEA revenue for the second quarter was $11.7 million, which decreased 4% over the prior year period. APAC revenue for the second quarter was $10.9 million, which increased 3% over the prior year period. The decline in revenue this quarter was the direct result of widespread customer lab closures. We started the second quarter with about 25% of customer labs open. In mid-June as conditions began to improve we saw a modest acceleration in U.S. lab openings, which continued through the final two weeks of the quarter. By quarter end, we estimated that approximately 60% of our accounts in aggregate were open for general research with a majority of those operating at a much reduced capacity. Labs within the U.S. were closed throughout most of the quarter with a modest acceleration in openings beginning in mid-June and continuing through the final two weeks of the quarter. Labs in EMEA began to reopen slightly ahead of those in North America [indiscernible] placidity in mid-June.…

Thanks, Justin. Before closing, I want to again thank everyone at 10x for all of your efforts this past quarter. It's been amazing to see how well you have executed and I could not be more proud to be part of the team. Despite the potential for near-term volatility, we're as confident as ever about the long-term opportunities ahead for 10x and we're committed to making the necessary investments to capitalize on these opportunities. This is the future of biology and we're just getting started. With that, we will now open it up for questions.

[Operator instructions]. Your first question is from the line of Tycho Peterson with JPMorgan. Your line is now open.

Serge, maybe I'll start with the Clinical Translational Research Network. Can you maybe just help us think about that in context, the 45 biopharma customers, how material that could be in terms of the volume and volume ramping utilization levels and will this also drive Chromium Connect placements as well? Thanks.

I would say it's not -- as far as revenue impact in the near-term, I think I was caution against putting too much weight. In the long-run certainly we see that as one of the accelerants for the clinical and yes the pharma markets as well. Similarly, the Connect front as well. Again, these are the steps we're putting in place and investments we are making for market development that should bear fruit in the next year and beyond.

And then on the COVID dynamic, are you able to put any metrics around, just size of the opportunity. And should we mainly think about it as impacting the Immune Profiling v2 product that you have added, is that the main driver?

To the Immune Profiling product, certainly COVID has a significant tailwind for that product, but it's going to have -- certainly have its applications well beyond just COVID, cancer or like say immunotherapy, immuno-oncology. So those are big drivers for that product as well. As far as the COVID tailwinds are concerned, they are definitely there. They're substantial. But they're -- I would say relatively speaking the tailwind comparison to the headwind as far as operating through the lab closures.

Okay. And then just two housekeeping ones to quite hop off. On Visium, you didn't give an updated number of labs. You did that the last two quarters. Are you able to talk on how many customer sites are using Visium? And then secondly, on FFPE, I'm just curious, is that still on deck for early next year? Thanks.

So, in terms of customers for Visium, the number of the sites is over 600. So, we've added a substantial number last -- over the course of last quarter. And as far as the FFPE for Visium is concerned that would be -- that is still in plan for first half of next year.

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

I realized that there's a ton of moving parts and variables, but I'm just sort of wondering if you can give us a sense of what the difference was in demand in the -- basically what I'm saying is, if 60% of your labs were open at the end of the quarter, that started in sort of mid quarter. I'm just sort of thinking was like, what sort of the revenue contribution in the last two weeks to get a sense. I'm just trying to get a sense that so I can try to model forward -- on a forward basis?

Hey, Derik. This is Justin. I'll take that. Typically, we do see a higher concentration of revenue in a normal quarter, particularly in the last few weeks. In Q2, we did see more weighting, particularly in the last two weeks of June than we normally see. And I do think that, that was related to a number of customers that were shut down for the majority of the quarter, that opened up around the same time. So we did see a spike during those last couple of weeks. I think it remains to be seen what that would look like steady state as the customers then moved to be out of sync with one another.

And I guess, we heard some other companies have mentioned about people worried about not getting their hands on supplies going forward, and any sense of stocking or people buying ahead of when they think things are going to open up in that sense?

No, we didn't see any indications of any kind of pull forward or buy ahead from customers.

Got it. I mean, obviously, you're very heavily in that U.S. academic markets. And I guess, can you give us some flavor on what you're hearing from your customers on their lab openings? I mean, how many -- in any sense of a flavor for how may you think that -- are their labs half staffed, fully operational? I mean do you have a sense of sort of the mix. I know you said that most of are still at reduced capacity, but can you give us some flavor on that? And it does it have any rhyme or reason in terms of the size of the institution, the types of institutions. And then just in terms of, a little bit more flavor on what you're sort of seeing in that critical segment of the market?

Hey Derik, this is Brad, I'll take that. It's really a mixed bag. I mean, assuming that customers are having the same problem that everybody else has, dealing with childcare and other disruptions, obviously, the local situations are changing. This is obviously when we were on the call last quarter or early this quarter, I guess it was the last quarter, we would have seen -- we thought that is the South was opening up really fast, and we found that was portend to the future but the coasts were much slower in opening up and even now institutions are all trying to figure out how to get as many people in the lab through different shifts and they’re just playing distancing. And that certainly impacts the capacity of it.

Got it. And I guess, if I missed it in your remarks, my apologies, but did you give a number for how many Chromium Connect you placed?

No, we are splitting the Connect from the regular Chromium Controller at this time, and we'll update you in total -- the total installed base at our annual.

One final question before my competitors kill me. The ramp in the Visium, are you seeing people reordering? Is it mostly new people? I guess can you give us some flavor on how does experiments are ramping and how people are ordering, is it new customers, is it reorders, is it people expanding experiments if they try it. Just some flavor on the ramp?

Derik, this is Brad. Yes, we definitely have seen good reorder rates, people are using it, starting to adopt it, expanding the size of their experiments, number of samples, things like that. Obviously, again, the second quarter -- and the limited access to the lab didn't help. But overall what again, I think we continue to be impressed by the wide range of use cases and how those are moving to publications. And really looking forward to the publications that we see already coming out in bio archive but ultimately, once it will come out throughout this year we will really expand the whole horizon for you.

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

My first one is one, which I think I know the answer to, but I want to ask it anyway. When we look at the pace of operational investment and your commentary on the outlook for continued investment in growth initiatives, I just want to make sure that we should view that as really a sign of confidence that first, year you're seeing robust demand, albeit somewhat deferred for your products? And that, along those lines on your confidence that the likely duration of deferrals doesn't warrant any real material slowdown in the pace of investing in long term growth opportunities?

Absolutely. Yes. I mean, we obviously have to look at a lot of leading indicators looking at demand as I commented in my opening remarks, looking at the long-term demand and how sort of the shape of what customers are thinking about for the future and where the technology is kind of further evolving. So, that’s we feel very positively about, and yes, this is a near term disruption, but at the same time, we feel pretty confident that there’s much -- after the pandemic there is a really, really strong business for us on the other side.

Okay. Makes sense. And you talked a little bit about what's going on in the end markets. I guess, just from a promotional standpoint and how you're prioritizing things. As biopharma labs in general seem to reopen a bit more quickly than some of the academic research centers. Were you able to make I guess kind of commercial lemonade out of lemons in a way and really just kind of pivot and maybe be a bit more aggressive in going after some of those pharma commercial accounts that may have been a bit harder to penetrate and prioritize historically?

Doug, this is Brad. The one thing with biopharma, the perception is, it really depends on the size. The larger biopharmas were all much closer to academic institutions, as far as their opening, had much more issues with their employee programs to get people in the lab. But obviously the smaller and small biotechs were able to move fairly quickly to reopen. So, that's kind of a difference there. I think overall, we have been focusing on pharma and even obviously through now pandemic and there's a number of programs we think ultimately moving part of bringing -- extending beyond discovery into some of the more operational or validation platforms. So, that we continue to make progress on. And then over time, I think in general, we were able to pivot very quickly and keep the customer engagement. But I will say by the end of the quarter, all the other companies came in and then we were all just poising our customers with Zoom calls. So ultimately there was a balance across that. But in general, we have looked at this time as an opportunity to make some lemonade, no matter how tough it is.

Okay. Thanks for that, Brad. And one last one, you talked about focusing on Zoom and of course there is Zoom fatigue, separate from that, in diagnostics you hear about more virtual and more e-detailing. In research tools, there's increased focus on what companies can do to basically enable their lab customers to get back to work if they're not in the lab. It's tough to do, but keeping in mind, many of your users don't actually have a Chromium physically in their own lab and Visium of course is a consumable solution without a captive instrument for spatial profiling. I'm wondering if those attributes -- and by sensing the fact that an investment in your technology really has a lower cost of entry has helped better position you for adoption and utilization as folks figure out how to really operate in this environment, and it's clear it's going to last a little bit longer than we all have hoped.

Yes, those are really good questions, I think the most important thing is, is the idea of a fast start. And that's kind of what you described as benefit for our business, both in terms of being able to get the capital to buy it. So, obviously, that helps with the Chromium and certainly Visium is very easy, in essence, because there's no capital. So, a key point to our success is the fast start and that's when we go to our support organization in our ability both Visium and Chromium to successfully onboard customers, and we will do that with a lot of digital tools that we already have in place, not expecting the fact that would be our only asset. So, that start has allowed us to get even customers with a Visium who got into their lives at the end of the quarter, again, didn't have any capital investment and we were able, to through our support organization to get them up and running and doing experiment and getting data. The other thing I'll point out and you kind of touched on this is that we have -- there's a lot of capacity for our instruments so we have a lot of people who use our instruments, the so called halo users which ultimately become useful as opportunities for us to sell a Chromium instrument to. Well in a world right now where there's a lot of controls about buildings and what floors you can go on and all that is we're starting to see a lot more interest and helping us drive fast placements as well.

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

Maybe just another way to ask Derik's question, getting to kind of the pace of recovery. And so when you think about those 60% of the labs that were -- that are now open, how has the capacity -- I know you talked about reduced capacity, but the last they were open before, the 20%, that you guys talked about before, has their capacity increased? Are you seeing that kind of cap out at like 60% and then as the other labs come on, they're at 20% going up to 60%?

I will take this one. It's interesting, because it's all over the map. We have examples in Germany where you have institutions that are almost fully operational at this point. And then we have most of the big U.S. labs that customers even go to the coast, are operating, probably around 50% capacity. And again, I just always warn that opening, close capacity is a good number. And we certainly literally watch that on a weekly basis. But remember, in some cases, even labs that are open maybe only 20% will be consuming a lot of our product because it's really at that front end of the experiment sort of sharp end of the experiment I’d like to say. And then you have institutions like the [broads] that largely shift initially to doing COVID testing, because there was such a demand for testing and have now pivoted almost exclusively to research on the biology of COVID. So, when labs shift like that, that introduces some delay, because they're building entirely new workflows and access to the biology, and then obviously they’re [taking] in the capacity to run our products. So there's really a mixed bag on this one. I don't know, I have to give you more resolution on that, but that's kind of how we look at it.

And then I guess, just a follow on to that. And so I mean you guys are continuing this toward basis of new product introductions. Can you just talk about the demand as these new labs open, is it for all these new products, like are you getting everybody to -- just follow along with Doug with the flavor and -- I mean with the lemonade here, like what is your appetite by putting out all these new press releases on these new products and then there's a risk that they're not going to use some of the legacy products, which is not just in the full value of that?

So, this is still the workforce that’s driving so much insight in biology, our original sort of blockbuster, the [indiscernible] expression which we brought successful versions of that product that increased capacity. So that really what we are leading with and even when we look at multi-omic products that are combining measurements, I mean, those are also pivoted on the [indiscernible] expressions. So again, I wouldn't think that anything we do moves away from that. It just kind of enhances it. But, I think the real thing is when we bring out these products again it’s consistent with our execution in then we’ve for the last several years have laid out a road map to credit our R&D team and our operational team have been executing on that and as Serge pointed out, it’s very difficult time. So, yes, I mean, I think …

Okay. And then lastly, I guess just on margin cadence, should we expect a similar type of offset to the royalties continue to roll off from the continual build outs and capacity expansion?

Yes. For the next-gen transition, I've talked before about how that's basically a linear progression over six quarters starting in mid-2019. We're basically executing along that schedule, maybe slightly ahead of it on a percent basis, where we would expect to be just straight-lined it. And I would expect that we would continue with the same pace through the end of the year.

Your next question comes from the line of Patrick Donnelly of Citi. Your line is now open.

Great. Thanks. I appreciate the color on the lab openings through June, obviously, a few questions on that. Any insight you guys can provide, obviously it's been another month and a half since then we've seen the cases in the U.S. pickup obviously. Any framework you can provide just around kind of the last month and a half, things have gotten a little worse here in the U.S. in terms of openings, and whatever it may be on the lab side?

Patrick. This is Justin. I'll take that. 60% of the labs were open at the end of Q2, but as Brad said, most were operating at a reduced capacity, some at a much reduced capacity. And there was a pretty wide range of variability amongst those labs. We haven't necessarily seen things get worse since then. Overall, if I was to get some color on how Q3 is shaping up, I would say that our revenue is tracking pretty similar to where we were a year ago.

Okay. Now, that's really helpful, Justin. Thanks for that. And then I guess on the COVID market, how aggressively are you guys going after that? It sounds like you've discounted some instruments to get placements out there. Can you just expand a bit on the demand you're seeing there any way to size the opportunity, potential tailwinds from some of that research?

This is Bard. So, I think in the end as far as SARS-CoV-2 is going to be effectively a model for how people are studying the immune system, because there's so much data around the outcomes, and how the immune system responded to the virus and then in some case over responded. In a sense, we see a lot of interest to use this wealth of data and patient outcomes. And I’ve said this before we continue to push on that and market around that. And it's not just the Immune Profiling product. It's all our products are studying the biology. And I think over time, you're going to see more and more studies that are looking at [time core] studies on multiple tissues. Because it turns out, they're all related and they're all communicating. And so I think this is -- as Serge pointed out at the beginning, since the pandemic has created incredible value cadence for the study and understanding mastery of biology. I think specifically SARS itself will be I mean great case study.

Maybe just one last one, might be for Serge or Justin. Just on the IP side, maybe just an update there. Obviously we saw some news last week. Can you just run us through, I guess, what do you guys thought about that and what's left outstanding, any timing expectations in the near-term, in terms of material updates on that side?

So, in terms of -- I will take that, it’s Serge. So there was a decision, kind of thinking about the major decisions that could be happening. There was a field in the original Delaware case, where the -- I came down last week or the week before, looking on precisely this, it can be legacy products, nine of them next gen products and so kind of a [backward looking] case. One of the two -- of the three, two of them were return on engagement, responsible return -- to be return. And to the extent the damages that's already been accounted for in our financials. So, decision still has to -- there's still more mechanics to be worked out in the final decision that's coming in sort of coming months. And so after that decision, I think nothing else major to update on the legal side.

Your next question comes from the line of Dan Arias of Stifel. Your line is now open.

Maybe just a couple of follow ups on the ones that have been asked. Starting with delivering a point a bit on the current environment. Are you able Serge or Brad to sort of contrast the percentage of labs that were open that 60% or so with the percentage of labs that are open and accessible in terms of just being able to install and train? I guess how meaningful is that difference if we're just sort of taking orders, but then thinking about new customers and new installation, maybe in the back half of the year?

Yes, I'll just step into that one. It is interesting because -- for the most part as labs open for their own work. They're closed to any outside visitors, and that remains almost universal. We've seen a little bit of change in Europe, but in some cases we have had -- we have gone on site in the U.S. to do installations on the Chromium Connect. But in general, I -- we kind of disconnect from there because again, we're -- from a sales standpoint, we're operating from the view that this is all done virtually. And we've kind of settled into that load and assuming we're going to be in that mode for a while, but our ability to onboard customers, we have not seen any limitations in that, beyond -- I'm sure [RSAS] and some of our customers would like to meet each other face-to-face. Other than that is in the personal side of it we've been able to effectively onboard new customers.

Okay. And then just maybe on the clinical translation network, in ballpark figures, do you have the percentage of those labs that are Visium users today? And then I'm curious, just thinking about the pricing scheme that's associated with that program, which I believe corporates a little bit of discounting. Would that discounting be expected to be at a level that could be at all meaningful to gross margins?

So, the vast majority of the CTRNs were new customers. These were new applications. They might've been customers sort of early adopters, but generally were new customers and that's kind of -- that was the pool in why we decided to run into that marketplace. I don't believe because some of the testing we do is a limited number of samples. So, I don't believe that, this would have a material impact on the gross margin of the company.

And I would just add to that, just overall Visium product does have a lower gross margin than some of other products. So that does increase materially as a percent of overall revenue. There is going to be some impacts from that, but there's positive impacts to margin over the same time period as well.

Okay. Justin since you chimed in, maybe I'll just finish with one for you there. Can I just sort of expand on the thought that you had to Patrick's question by asking if there's any reason why just given, if you're tracking to flattish in 3Q you can't be up year-over-year in 4Q?

Yes. I said, as far as Q3 goes, like I said to Patrick, it does look like we are shaping up to be -- at least from the few weeks we can see from this quarter that we're on pace to be pretty similar to Q3 of last year. And so, if the positive trend continues and more customers not only open up, but open up to fuller capacity overall and also open up to outside visits, that would obviously be a positive driver of revenue overall. But there's also the risk that things can turn the other way, which we haven't seen to-date, but there is that risk and things could turn down as well. So, it all hinges upon the openings and how they're going to progress between now and the end of the year.

The last question comes from the line of David Westenberg of Guggenheim Securities. Your line is now open.

Hi. Thanks for taking the question. I'm sorry if I ask to repeat my phone, I'm in a storm and my phone dropped several times during the call. So, my first question is on the NIH dollars, they don't tend to go away right now. We're looking at mid $40 billion-ish budget this year, probably increasing at historic kind of numbers here. So, can you give us a flavor in terms of your customers accessing those funds? I mean maybe put it into three can here. I mean, number one, do you think that there could be any kind of demand destruction because of inability to access that fund? Number two, maybe a parallel shift in that demand. So, maybe equal part that you would get in 2020 you get in ‘22 -- '21, '22 or do you think there might even be some catch up in terms of those dollars as we see that increase in NIH and your customers access those funds?

Well, there’s a lot questions. So, the demand -- what was the first question?

Basically I'm asking on your customers accessing NIH dollars and how they're going to be able to access that NIH dollars and whether or not we're going to see either A, any kind of demand destruction; B, just a pure shift in demand -- parallel shift in demand; or C, whether we see those dollars in a kind of a pent-up demand fashion as we look at 2021. Basically what I'm asking is, there's definitely excitement in the research market with post-COVID. If we're looking at 10x prior to COVID versus 10x now, in 2022, I mean, I could almost even see a kind of a scenario where you would see there's more NIH dollars, you have an NIH backdrop, there's excitement in Genomics and it's really obvious that your customers need to know what's going on with the immune system post-COVID?

Yes. So, the demand destruction, and that's a new term. I know, I've heard other companies use this. I mean, obviously, there's -- we can't make-up for lost time, there'll be some ability to continue to make-up for experiments as samples are weighted, there are challenges as key institutions and the core facilities are busy, there is again pent-up demand, some of it’s COVID related. The other thing to note, is when you think of the NIH, remember, obviously, you know you've studied it a lot. There's really two parts to it. There's an extramural and the intramural. The intramural budgets are still subject to the current fiscal year, and those moneys still have to be spent. And we had some question early, I guess on the last call, of wondering whether the NIH would lack or change that, they decided not to do that. So, we are seeing that gear up for the end of the quarter or might be end of Q3 of course. As far as going forward, I see a lot of parallel -- and opportunities to enhance our business as I pointed out earlier, research, that is going to get done because of COVID and there is a wealth of information. And, again, the last part, I can see there was -- would there be a massive ketchup, but I don't see that happening because a lot of that's just related to the biology and samples and so I don't see that as a meaningful source of growth.

And then just a second one on Visium. I talked to a service provider who said they would recommend 85% of their single cell work, also have a component [Technical Difficulty]

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