10x Genomics, Inc. (TXG) Q3 2021 Earnings Report, Transcript and Summary

Hello, and welcome to the 10x Genomics Third Quarter 2021 Earnings Call. My name is Charlie, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Eric Jaschke, Senior Director of Investor Relations and Strategic Finance to begin. Eric, please go ahead.

Thank you. Earlier today, 10x Genomics released financial results for the third quarter ended September 30, 2021. If you've 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, 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 forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release to 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. 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'll now turn the call over to Serge. Serge?

Thanks, Eric. Good afternoon, and thank you for joining us. On today's call, I will start with an overview of our performance during the third quarter. Next, I will discuss the opportunities ahead and investments we are making in our R&D pipeline, global operations infrastructure and commercial scale. Then I will hand the call over to Justin for a more detailed look at our financials, business trends and our outlook for the remainder of 2021. Revenue for the third quarter totaled $125 million, up 74% year-over-year and 8% sequentially. Our team navigated the complexities in the current operating environment to deliver strong performance and drive continuous adoption of our products. We have strong demand across our Chromium instrument portfolio, driven by an enthusiastic reception to Chromium X, which we began shipping in August. We also saw continued demand for the Chromium Controller this quarter. Following last quarter's strategic price update, this platform now provides an entry point for a broader set of researchers new to single cell. Moving to consumables. We saw increased demand across our single cell portfolio this quarter. Whether based on measuring epigenetic programming, gene expression, proteins or the adaptive immune system, single cell research is proving to be essential to truly understanding biology. Single cell methods allow the standards for growing fraction of life science research and are becoming a central element of many new brand applications. There is a normal trend of research moving beyond exploratory studies to translational or disease-oriented studies featuring our products. This further validates our expectation of the promise and potential of our solutions to advance human health. For instance, in a very recent publications and science, researchers used our single cell products to identify and characterize the immune cells within the brain. It has been previously understood that the brain was immune privileged. However, researchers discovered monocytes and B-cells originating from skull and vertebral bone marrow and that exist separately from their peripheral counterparts. These studies show that the brain has access to a distinct and specialized population of immune cells, which has profound implications for how we approach a variety of CMS-related conditions. Many single cell applications will become even more powerful with Chromium X, which enables routine million cell experiments. Since launch, many customers as far as ordering high throughput consumables while others are transitioning their standard throughput experiment with the Chromium X in the interim ahead of larger future studies. We're seeing interest in several areas, including functional genomic studies using CRISPR screens, in-depth cell aplasia and large-scale immune receptive profiling application. While it's too early, interest aside, and we look forward to the first publications featuring Chromium X in the future. Turning now to spatial. Adoption of Visium consumables remained strong this quarter and the publication cadence continues apace. There are now more than 150 preprints and publications featuring the Visium technology. Just as we saw in the early days of Chromium, these papers are validating the fundamental importance of Visium technology from uncovering true biology and are key to developing a spatial market. In a recent preprint, researchers conducted a multi-cohort study featuring a recently launched Visium process team to investigate potential genetic markers expressed in a respiratory tract, which may help predict COVID-19 outcomes. This group identified a specific gene, IFI27, which when elevated is associated with the presence of a high viral load and outperforms other non-predictors of COVID-19 severity and respiratory failure. Findings like these show the importance of Visium in disease-related research and will be important in developing new diagnostic tools in the future. With the launch of Visium FFPE, we enabled for the first time true unbiased gene expression analysis in FFPE samples. With Visium, we're bringing the world of high-content genomics and tissue-based analysis together. The additional FFPE capabilities now unlocks much more of the translational opportunity. And even as FFPE has attracted many new translational researchers to 10x, we continue to see strong interest in Visium fresh frozen within the discovery and research community. It's clear that Visium is now the established leader in spatial discovery research. Yet, this platform remains very early in its life cycle. We continue to support adoption in spatial analysis. We have hired a new team of dedicated tissue support specialists, and they're using customer feedback to optimize experimental protocols, enhance current products and develop new products. And as part of our focus on advancing the field of spatial biology and ensuring our customer success, we convened our first annual spatial symposium last month. Those events showcase how leading researchers, including members of the 10x Genomics clinical translational research networks, are harnessing the power of Spatial Transcriptomics to reveal new biological discoveries. Now before we turn to our longer term opportunity, I want to share a few thoughts on the current operating environment. We have a very collaborative relationship with our customers, and we believe this gives us a unique perspective into new trends in some of the emerging complexities we are seeing in the marketplace. While labs are largely open, many of our customers continue to navigate second order of COVID-related challenges that are affecting productivity. Some are readily apparent such as COVID-related operating protocols, supply chain constraints and labor shortages that reduce staffing levels and formal and informal training opportunities. Others are more subtle. For example, COVID has impacted the ability of the research community to connect, collaborate and conferences and share best practices. This inter connectivity helps the proliferation of new technologies, such as single cell and spatial tools. While we expect these challenges to persist into 2022, we remain confident in the strength of our market, demand for our products and the long-term opportunity we have ahead. We believe there are well over 100,000 labs globally available to 10x, and 2/3 of them could immediately leverage our existing portfolio to advance their science. To date, we have penetrated less than 10% of these labs pointing to a substantial opportunity to bring additional labs into the 10x ecosystem. Additionally, we believe there is a long runway for growth to increase usage within our existing customer base as many customers currently use our products for just a fraction of their research. Finally, our products have helped to expand the amount of funding available to researchers by increasing access to more brands and to larger brands as single cell is increasingly becoming the standard for publication. We have made great strides in realizing this opportunity. We have established a broad base of installed instruments representing a firm foundation for future growth. To date, there have been more than 3,000 publications featuring our products. In one of the central learnings from all these papers and perhaps the greatest revelation over the last several years of biological research is a pervasive cellular complexity that underlies just about every biological system. It turns out that every tissue harbors much greater diversity of cells and cell types than we have thought, all of them interacting with each other in a complex interplay of massive gene expression networks. Furthermore, the focus of my single cell research has recently moved to understanding the implications of the cellular complexity on disease and treatment. I believe the implications of this is still very much underappreciated. To understand biology and make progress in addressing disease, we need to measure biological samples with single cell context. We expect that in the future of all tissue samples, whether for basic research or for clinical diagnostics will need to be analyzed at single cell resolution and at large scale. Since the early days of 10x, this business has driven our investment priorities, beginning with our Chromium platform, which is the established leader in single cell analysis. We see similar opportunities for spatial biology. And just as with Chromium, we're making substantial investments in our Visium and forthcoming in future platforms to fulfill this potential. From the beginning, we are focused on developing a broad set of durable and differentiated capabilities that we deliver will transcend any particular product and continue to fuel our growth and success over the long term. Moving forward, we expect to accelerate our investments in 3 key areas: first, in R&D to develop more breakthrough technologies and market-leading products; second, in our global operations to deliver differentiated products, fortify our supply chain and anticipate future growth; and third, in scaling our commercial organization globally to enable our growing customer base and expansion into new customer segments. Let me provide more detail on each investment priorities, starting first with R&D. At 10x, we're intently focused on innovation. It's core to what we do. Since inception, this culture of innovation has yielded a strong cadence of technological advancement and product development, launching over 20 pioneering products and resulting in a broad intellectual property portfolio of over 1,200 patents and patent applications. This velocity of innovation, development and execution is a testament of incredible cross-functional talent we have cultivated. To date, we have deep expertise across a wide range of disciplines from biology, chemistry and micropolitics to hardware engineering, data analysis and software development. This talent is supported by a robust product development infrastructure focused on integration across these diverse disciplines. Our foundational strength was truly differentiated by 10x and this integrated core capabilities, which are essential for developing the breakthrough products and technologies in our pipeline. Looking ahead, we plan to increase our investments and build out R&D capabilities across our 3 complementary platforms. With Chromium, we have executed an ambitious product road map we have outlined over the last 2 years, and we plan additional enhancements in the future to increase access and improve visibility. This includes our new fixed RNA profiling kit for Gene Expression, which we expect to launch in early 2022. This product addresses a key request from customers and add flexibility to the Chromium workflow. By allowing researchers to fix their samples of tissue collection, our customers will be able to optimize how they progress through their experiments by aggregating samples over time or collecting samples from distributed sites. Visium is much earlier in its life cycle and we're excited about its rich product growth pipeline. Next year, we've gone through that Hi-Plex protein analysis of Visium VRR, antibody oligo technology, yielding true multiomics. We also expect to launch our site assist instrument to automate the process of applying Visium to tissues mounted on standard glass slides. This will enable researchers to access additional band FFP tissues upon our existing tissue handling protocols common in pathology cores. Lastly, with Visium HD, we will enable true single cell resolution on our Visium platform. While other high-resolution spatial analysis technologies are often limited in their ability to offer Hi-Plex measurements, Visium HD will access the entire transcriptome across the entire tissue sample at single cell resolution. We believe this product will represent the single best platform for spatial discovery and for spatial research, and we intend to bring it to market next year. Moving to the second area of focus. We're making substantial investments in our global operations to deliver differentiated products, fortify our supply chain and support the long-term growth trajectory of the business. Since the beginning, we have had the tight relationship between our operations and R&D teams. We believe this is essential to our rapid speed of innovation and ability to develop highly differentiated products. We are proactive in managing our supply chain and continually evaluating our ability to source key components. We also recognize when you invent technologies that the world has never seen before, you often have to invest novel manufacturing capabilities to go along with that. For instance, with Visium HD, we developed a new proprietary approach for manufacturing microarrays, which enables smaller features and single cell resolution on our Visium slides. We are incorporating this technology into our existing manufacturing capabilities to support Visium HD upon launch. We believe initiatives like these are essential to supporting our growth in our new product road map. Progress thus far in 2021 has been encouraging as we continue to be vigilant in light of emerging challenges in the global supply chain. We remain on track with the development of our new manufacturing and operations facility here in Pleasanton and just last month was able to visit our new state-of-the-art manufacturing commercial hub in Singapore. We expect to accelerate our investment and grow our global footprint as we move into 2022. And finally, moving to our commercial organization, we remain intensely focused on providing a superior customer experience. We have built a best-in-class commercial team and our ability to sell and support diverse high-content genomic technologies is unmatched within our industry. We plan to build on our momentum and continue to scale our organization to effectively enable and engage our customers globally. We're also adding customer support specialists with deep technical expertise in areas such as tissue analysis, automation and bioinformatics. These team members will help to ensure that our customers are successful in designing and executing their experiments as we add to our product lineup and access new customer segments. We have made great progress so far this year, and we remain on track to meet our current goals for 2021. Stepping back, we started the company with a premise that improving human health requires an exponential increase in our understanding of biology and that the main challenge to understanding biology is its enormous complexity. To address this complexity, we set out to build technologies to measure biology at the right resolution and at massive scale. We catalyze the single cell resolution, which over the last few years, revealed that cellular heterogeneity is a pervasive feature of all human tissues. We unequivocally see a future where every tissue should be analyzed with single cell from spatial context, and we're developing our 3 complementary platforms, Chromium, Visium and in situ to deliver precisely that future whether for basic science, professional research or clinical diagnostics. There is a vast set of opportunities ahead, and we will continue to develop the global scale multi-disciplinary capabilities and advance technologies needed to accelerate the mastery of biology and advance human health. With that, I will now turn the call over to Justin for more details on our financials.

Thank you, Serge. Total revenue for the 3 months ended September 30, 2021, was $125.3 million compared to $71.8 million for the prior year period, representing a 74% increase year-over-year and an 8% increase quarter-over-quarter. The current operating environment remains complex with many of our customers continuing to grapple with the ongoing effects of COVID-19, specifically the reinstatement of COVID-related operating protocols. In recent months, second-order COVID effects have emerged. These include supply constraints and critical plastics and reagents essential to our customers, and labor challenges reducing staffing levels and training for new investigators. We believe these second-order COVID effects impacted our customers' ability to efficiently perform their experiments and subsequently impacted our consumable revenue for the third quarter. We expect these impacts to persist into 2022. In spite of this challenging environment, we saw solid demand for both consumables and instruments this quarter. Consumables revenue was $106.1 million, which increased 75% over the prior year period on a continued demand for our single cell and spatial consumable products. Instrument revenue was $17.1 million, which increased 77% over the prior year period on the back of the impressive launch of the Chromium X Series instruments. Service revenue was $2.1 million, which increased 30% over the prior year period. Moving now to regional results. Revenue for the Americas was $70.2 million, increasing 66% over the prior year period. EMEA revenue for the third quarter was $25.8 million, increasing 67% over the prior year period. Finally, APAC revenue for the third quarter was $29.2 million, increasing 110% over the prior year period. Turning to the rest of the income statement. Gross profit for the third quarter was $100.8 million compared to a gross profit of $57.4 million for the prior year period. Gross margin for the third quarter was flat year-over-year at 80% as the impact of product mix was offset by a decrease in accrued royalties related to the Bio-Rad agreement in line with our expectations. Total operating expenses for the third quarter were $116.7 million, a decrease of 5% from $122.7 million for the third quarter of 2020. The decrease in operating expenses was primarily driven by lower in-process research and development expenses as compared to the third quarter of 2020, which included a $40.6 million charge resulting from the acquisition of CartaNA. This decrease in operating expenses was partially offset by increased personnel-related expenses, including stock-based compensation, increased costs related to materials, facilities and technology to support operational expansion and increased marketing expenses related to conferences and seminars. R&D expenses for the third quarter were $54.6 million compared to $30.1 million for the third quarter of 2020. The increase was driven by $15 million of increased personnel-related expenses, including stock-based compensation, a $5 million increase in expenses related to lab materials, supplies and equipment and the $2.9 million increase in expenses related to IT and facilities. SG&A expenses for the third quarter were $62.1 million compared to $51.5 million for the third quarter of 2020. The increase was driven by $15 million of increased personnel-related expenses, including stock-based compensation, $2.5 million of marketing expenses and a $2.3 million increase in expenses related to IT facilities, partially offset by a decrease of $8.9 million of outside legal expenses. Operating loss for the third quarter was $15.9 million compared to a loss of $65.3 million for the third quarter of 2020, primarily due to the impact of lower in-process research and development expense. This includes $26 million of stock-based compensation for the third quarter of 2021 compared to $13.8 million for the third quarter of 2020. Net loss for the period was $17.2 million compared to a net loss of $65.8 million for the third quarter of 2020. We ended the quarter with $600.4 million in cash and cash equivalents net of restricted cash. The decrease in cash from the prior quarter includes the impact of increased capital expenditures related to our global operational expansion and a portion of our payment to Bio-Rad as part of the settlement agreement. We expect elevated CapEx moving forward as we continue to scale our global operations. Now turning to our outlook for the remainder of 2021. We believe that we remain on track for a strong finish to the year. We now expect our full year 2021 revenue to be $490 million to $500 million, representing growth of 64% to 67% over full year 2020. Thus far in the fourth quarter, the operating environment remains complex. Our customers are continuing to experience supply constraints in critical plastics and reagents and labor challenges impacting staffing levels and training of new investigators. While we believe that these issues are ultimately temporary, it's likely they will persist into 2022. These challenges are not unique to our customers, and we are seeing additional constraints in obtaining certain key components for our products and R&D activities, such as electronic components, tips and other plastics and reagents. While we have been proactive in managing our supply chain and to date, have not experienced any material impacts, there is an increasing amount of downside risk related to the global logistics and supply chain and current supply constraints may limit our revenue upside in the near term. Despite these temporary challenges, our velocity of innovation and pipeline of new products remains unmatched, and we are continuing to invest aggressively in our commercial and operations teams. Our prospects remain strong, and we have incredible conviction in the long-term trajectory of the business. At this point, I'll turn it back to Serge.

Thanks, Justin. Before we open the line for questions, I want to thank the 10x team around the world for their drive, passion and intense focus on our mission. They're doing profoundly important work and their ongoing commitment and dedication is both impressive and inspiring. As we look ahead, the vast opportunities before us are both clear and compelling. The answer is to humanity's most pressing health challenges will be found in understanding and mastery in biology. We are early in this journey and fully expect 10x to lead the way in pushing forward to the frontiers of scientific knowledge. With that, we will now open it up for questions. Operator?

[Operator Instructions] The first question comes from Tejas Savant of Morgan Stanley.

Just one quick question for me, for you, Justin. In terms of the bump in the guide at the midpoint, I was just curious as to what's driving that? Was it an improvement month-over-month on the COVID front? Or was it more related to the consumables on some of these newer Chromiums and the workflow starting to ramp? Or is it just all instrument upside because the instrument number did come in materially higher versus our estimate?

Thank you, Tejas. There's a lot of factors to go into where we ultimately choose to guide to and where we ultimately choose to update our guide. In this case, we are placing more instruments than we had originally planned. There was a good amount of instruments that were shipped in Q2. And then we also saw following -- in Q3, strong demand for both the Chromium and -- strong demand for the launch of the Chromium X Series instruments IX and X together. So really, instruments is primarily the driver behind that.

Got it. And then a quick one on margins here and Visium as well. So first on Visium, in terms of the FFPE launch surge, can you give us some color on sort of the month-over-month momentum? Do you think there's customers who are sort of pushing out a purchase as they wait to perhaps evaluate the HD launch in early next year? And then on the margins, Justin, can you share some color on what you're baking in for inflationary pressures and some of the increases in freight costs and so on as you look to 2022?

Yes. So I'll go first. Thanks, Tejas. So on Visium FFPE, the FFPE, again we launched the current shipping at the end of Q2. And the product is following an adoption that's very typical of our products where there's initial pent-up demand, then people work through kind of get up to speed on the product and then it sort of grows from there. So it's going well. It's going according to our expectations. As far as HD and that's effect a bit on our customers, yes, there is some. People certainly kind of anticipating this arrival of Visium HD. Not sure like I wouldn't, at this stage, call it a massive effect, but it is there. It's something we're definitely hearing fairly consistently.

Tejas, as far as margins going forward, we aren't guiding anything for 2022 at this time. We are seeing pressure from suppliers on price increases. Our primary concern right now is to make sure that we have the right amount of supply secured. But depending upon how we choose to handle things on -- with pricing on our end, we'll share future information on our margin outlook going forward when we share 2022 guidance on our next call.

The next question comes from Dan Arias of Stifel.

Serge or Justin, on the operating environment, this is probably a tough question to answer, so apologies in advance, I suppose. But just given that it feels like COVID is going to be around to some degree or another for a while, and to your point, you're expecting the headwind to carry into 2022. I'm just curious to get your thoughts on the threshold that we should think about for you guys or the factors that are most important in order to sort of have COVID go from something that needs to be called out to something that's just sort of background noise again to what you have broadly across the space? Any thoughts there would be really helpful.

Yes. It's a challenging question to answer, given that it's a number of factors and they're not...

Yes.

None of them we would call out as first order effects, but they're all kind of -- it's a combination of second order effects, they're are oftentimes fairly subtle, right? I mean there's obviously kind of focus on the supply chain right now, especially availability of reagents and plastics for our customers. So that's fairly easy to track once that disappears, but that's only one of the factors. It's hard to tell -- again, it's hard to put a specific any given criteria, I think we kind of have to watch all of them together, and we anticipate that sort of little by little, things will improve at some point in the future.

Okay. Thanks for that. And then can I just ask one about maybe the ordering labs that you're seeing for the X system. Are they orders that are generally coming from the high-end users that are doing a really large experiment today? Or are you starting to see some trickle in from sort of the standard single cell crowd that are maybe buying ahead of what they need? I'm just kind of trying to understand the upselling potential that you see here in the near term.

Yes. I mean I think it's quite a bit of the latter, actually. We do see customers coming in from the top end, purchasing X with either just forcing on directly with HT kits, high throughput kits or anticipation of buying high throughput kits, but we do have a fairly diverse set of customers that are buying either some just totally new customers, just want to kind of get on board with the right technology, but also existing customers who are sort of -- once, they have budgets, they want to future proof, they anticipate wanting to do is maybe spend in the future. So definitely across the board.

The next question is from Derik De Bruin of Bank of America.

This is Mike Ryskin on for Derik. Justin, maybe one for you to start. I realize there's a lot of moving pieces in that instruments number, but any clarity you could give us on placements or ASP as it sort of came in, especially relative to 3Q -- relative to 2Q or what we saw in prior years just to help us build out the model, given all the moving pieces on ASP and the mix coming in?

So ASPs come up due to the mix. Mostly instruments that were shipped this quarter were the regular Chromium Controller, Chromium X and IX and then Chromium Connect was a smaller percent. But with the addition of the Chromium IX and the Chromium X coming into the mix, in addition to the Chromium Connect as well, we've got ASP -- the average ASP right now above roughly 60,000. And as far as parsing out those instruments individually, we'll be -- we'll share more on placements and release the actual placement number when we report year-end. But we are placing more instruments in general overall than we had originally anticipated going into this year.

Okay. That's really helpful. And then maybe another quick one on the X and IX sort of following up on Dan's question just now, I think. Anything you're seeing in terms of cannibalization or sort of how people are incorporating those instruments relative to Chromium or relative to the Connect? Just thinking about how that could translate into utilization trends down the road as the installed base gets bigger?

And so for Chromium IX and X, the primary instrument for most customers to order would be the X and the IX really provides an opportunity for them to help future-proof against the needs that they might have in the future to run high throughput. And as far as looking at usage for the X now, we can look at orders of high throughput kits and how that attachment compares to the Chromium X orders and also look at the medium throughput kits as well. And what I can share right now is that we've got some customers that are ordering high throughput that have a need for high throughput, and that's helping to drive demand for the X. And then we have other customers that have ordered a Chromium X and are using it with medium throughput and some are existing customers that are replacing their Chromium Controller with the Chromium X, getting their experiments up and running on that in anticipation of a future need for high throughput but are using medium throughput today.

The next question comes from Patrick Donnelly of Citi.

Justin, maybe another one on the kind of the go forward. Obviously, intra-quarter, you guys came out and sounded a little softer coming out of August. Clearly, things have improved quite a bit in September, October. I guess can you just talk through the moving pieces? I mean, it seems like the numbers themselves for 4Q are above expectations, your tone, and maybe suggesting that there's just mixed things. But just kind of curious how you're feeling about the environment? What the real puts and takes are? I mean, obviously, supply chain stuff and COVID seem like the biggest overhang, but it doesn't seem like an overly conservative number. So you guys must be feeling pretty good. So I just want to talk through that a little bit.

Sure. There's definitely an increased amount of risk overall in the supply chain above and beyond what we've seen in the past. And so that's a concern going forward. There's the impacts of COVID that we've talked about on basically lab efficiency of our customers. And then the second order impacts of them being able to get materials that they need to run experiments and then also having the labor available in the lab to execute running the experiments, and we've seen customers impacted by that. And so really, that's an impact on our consumable revenue overall. Now as far as instruments go, instrument budgets, capital budgets are flush right now. Demand for instruments remains strong. And looking back at Q3, we had a launch coming up for Chromium X. The month of August was lower than we expected, and we hadn't yet moved into where customers were making the decisions, the final decisions on X or not. And so we had a light month in August. And then there was upside in September, primarily driven by instrument shipments. And so that's the best that I can describe it. And then going forward, as we look at Q4, I think that we're still going to have those headwinds on consumable revenue for the reasons that I mentioned. There's the risk around the supply chain, which we are doing our best to manage that effectively and mitigate that risk. But the demand for instruments remain strong. And overall, taking all of that into account, we feel good about where we've updated our range and barring anything completely unusual, maybe a standstill in supply chain or something like that, we feel good about where we're going to land.

Okay. That's encouraging. And then maybe on the consumable side, can you just talk about kind of the pull-through ramp on new instruments? Obviously, you guys placed the bunch last quarter. Can you just talk about how long it's taking for them to kind of get up to speed, I think, just trying to figure out how dilutive they are to kind of overall number initially? And then secondarily, maybe for Brad, just would love to hear about customer tone out there, how receptive folks are to kind of getting back in the lab and get things kind of back up to full speed?

I would say in general, and from what we've seen, the ramp is taking a little bit longer for the new customers for the reasons that we've mentioned. And we also have an increasing amount of new customers that we're adding just due to the changes that we made to the Chromium -- to the regular Chromium Controller pricing and then the introduction of the X as well. So slower overall.

Yes. And then just adding on general customer sentiment, I mean I think in general, most people are getting sort of tired of operating in this environment. And -- but the other side of it is the opportunity to get back with their colleagues, to get back for us to get in front of our customers is really changing the whole tone. And it really underscores what we missed when we went to a completely virtual role. So overall, it's positive. I mean there's a lot of focus on the science. Again, a lot of the things that we've helped generate have created a lot of interest. And as Serge described, there's been some challenges in some of the subtle aspects of the ecosystem around how our products get used and how customers getting confidence and inspiration from each other, but we're weathering that. And again, but most people are careful not to assume to be too much positive because we've seen things change fairly quickly.

Maybe I can add to that because I actually happen to be to go to the field for the first time and it was really, really long time. And so a little bit of some impressions, meeting customers great, just personally, again, being able to go and see people. There's definitely like really strong fundamental enthusiasm around products, around these applications, around single cell, in general. I mean people are -- you kind of hear about people planning to scale up studies, starting new studies, new people coming into ecosystem as kind of more -- as I mentioned on the call, kind of this more research around clinical-oriented questions too. So all that just kind of feel good around the fundamentals. But then there's also kind of this overlay of all these service frictions and the lack of like the effect on the ecosystem. That's kind of a new variable that I haven't been tracking before is the fact that the way that a lot of new customers get trained on single cell is by previous by kind of established single cell users kind of getting them into lab, showing them things, training them and -- in general, that's how a lot of science gets done, right? People, colleagues talk to each other, go to conferences, labs interacting with each other. And a lot of that has been severance for the last 15 months. And so kind of figuring out the effects of that, it's a new variable, right, and it's a variable, specifically around growth of new technologies as opposed to restoration of activity, which is there. I mean the labs are back and doing all right, but it's going to be something we're going to have to watch. So there is definitely sort of this overhang of like just the environment being like research people are eager to do science, but with that sort of overlay on top of it.

The next question comes from David Westenberg of Guggenheim Securities.

I'm going to piggyback on that last one here. Can you just maybe talk about enthusiasm to maybe not shut down? And in terms of kind of the projects that there are -- or maybe I should say funding that they're accessing, I mean, are you really seeing now this post-COVID kind of research grant world and starting projects, which really kind of don't seem like they would be put on hold again in the future? Or is there still sign of some of that hesitancy left in your customers?

Yes, I'm not sure if I got enough over sample side to comment with full conviction. I mean there's some has done stuff there. I mean the first orders, people are -- first order effect, right, people are kind of eager to go forward to do science. There is an overlay. There are some amount of hesitancy. I think it's sort of probably somewhat geographically dependent. Again, you just can't -- you just have a lot more constraints right now than you did before, right? Again, whether it's supply chain or whether it's labor shortages, people who work like single cell experts, just leaving labs and not being around or whether it's not being able to communicate that when you need to coordinate sample arrival with running, with conducting experiments and analysis just that all of that being somewhat more challenging.

Yes. David, maybe I'll add just another side. I think for a while there, there was this thought of a lot of research dollars are going to be shifted to COVID-related research. And that little level of uncertainty. And I think what we've seen maybe in the last 2 quarters is the realization that a lot of those insights have already been determined. And so what we see now a lot more of customers now projecting a future where they're back to their research, they can see where their grants are. And generally, there is less money that's specifically earmarked for COVID research and back to sort of general improvement and understanding of fundamental biology, which is kind of where we come in.

Got it. That was all really helpful. Can you talk about maybe some of the sub cohorts for Chromium X? I know you've said in the past, this is the top 10% of customers that use it. But any thoughts to what sub cohorts might be like the first order? And kind of what I'm getting at is, is this really a service provider first? Or maybe is this the core lab first? I mean, is there certain geographies first? Just trying to see how that launch cycle might play out? And I'm done after that, of course.

David, well, I'll take that. Generally, we thought this would play out exactly as you described, but it's really across the board. And generally, all of our customers, pharma, academic, as I think Serge talked about in the prepared remarks, it was broadly adopted for people that absolutely thought that they needed it and they had actually experiments involved. And so we -- they bought the HD kit as well. And then we have other people that like some of the telemetry and the connectivity of it and see how they can integrate that in future uses. So overall, it's been broadly applicable, but obviously, with the sort of earmark around that HD kit to drive this full performance.

The next question comes from Dan Brennan of Cowen.

High level on spatial. Can you just walk through a little bit on the competitive environment there? Obviously, you've got one notable public company, but there's a handful of private companies as well that are coming up. So just maybe it's a fairly large market we're early, but just kind of what are you seeing there in terms of the competitive landscape and how we're faring?

Yes. So there has been -- over the course of this last year, there has definitely been an emergence of a lot of smaller companies kind of coming into the general in situ technology space. I think it's -- in situ is to be expected because the market has become -- where like big market potential has become very clear to people and -- but at the same time, all of these companies are very early both in their terms of aspirations and in terms of the practical sort of place in the market. We always take competitors seriously at the same time, recognize. Again, this is very early and then we're going to focus on our yard, which is innovation and focus on customer experience. And we're investing in our in situ platform and our spatial in the Visium platform. We feel really good about where those are going to come out and how are they going to be positioned. And that's ultimately kind of how it's going to play out for us. So I feel very good about our progress and what to expect going forward.

And then in terms of -- just wonder, I think there was a question earlier in the call, but maybe this wasn't directly addressed. But in terms of bringing the price down and expanding the TAM on kind of a single cell, just maybe can you speak to a little bit about how much of the market that opens up for you? And in terms of -- is there any -- not concerned, but the fact that you're needing to or wanting to bring down the price. Is there any negative connotation to that in terms of the opportunity set with your existing customers who have more high throughput?

Yes. So if you like to just kind of to clarify here, when people look at the pricing, the thing that's really important to customers is price of the experiment. It's the consumable price, right, that drives really a lot of the decisions for adoption. And we haven't dropped the price on our consumables, not for core reagents, the fact they can sort of drifting up. What we have done is lower the price per data point while making the experiments, especially on the highest -- kind of the high-end side of things more expensive. So that is you do spend less per sample, but you spend more in total by running more samples or running more cells, right? Those are the product configurations we have released recently. And so the idea is to still keep capturing more of the top end while being able to kind of creating a path for new people to come into the ecosystem. And for the new people coming into the ecosystem, in particular, we released a lower throughput kit to -- which is actually higher cost per data point, but lower cost per experiment. Now it is not in any way meant to or at least functional cannibalizing any of the higher end research or any of our current customer research, it's enabling either the new people to come in or more frequently for existing customers to try -- kind of try new studies before -- try new experimental protocols before applying the sort of standard kits to their studies. So I think we have and we expect to continue to sort of have or take in either two of them in that sense.

The next question comes from Matt Sykes of Goldman Sachs.

Maybe just going back to the gross margin for a second, Justin. You obviously talked about the lower crude royalties from the Bio-Rad litigation, but that was offset by the shifting product mix. Could you maybe give a little more details on the various puts and takes in that product mix shift in terms of specific products or the details you can provide?

Sure. So most of our new products, in general, have slightly lower gross margins than our existing products on the consumable side. And so for products like Visium as that becomes the overall revenue as there can be -- that can pull gross margins down a little bit. But the bigger impact is on the instrument side, where the Chromium Connect and the Chromium IX and the Chromium X all have lower gross margins and higher revenue points than the Chromium Controller. And so as those become a larger percent of our overall revenue, that's going to help drive -- or that's going to contribute towards bringing gross margins down a little bit.

Got it. Thanks for that. And then just maybe following up on one of Pat's questions earlier just about the lag from the new instruments in terms of consumables. I mean, obviously, positive commentary on instrument placements. But as we kind of think about it, including the supply chain constraints with your customers, is it fair to assume that lag might take a little bit longer because you add the new instruments ramp up plus the supply chain constraints, if we assume those persist into '22, as you said?

I think so. I think that's reasonable. I think that when you look at some of the impacts that we're seeing, what we're calling the second order COVID impacts, it's impacting growth more so than it's impacting the more stable part of the business or with the more stable part of the customer base. And so I do think that's reasonable to assume that.

The next question comes from Tycho Peterson of JPMorgan.

This is Julia on for Tycho. Apologies if any of these questions have already been asked as my line kept dropping, so you may have addressed this already. So starting on supply chain, do you guys see any impact on customers being unable to get Illumina flow cells to run their single seq experiments, just given that was a pretty high-profile development during the quarter? And how do you guys contemplate that in your 4Q guide?

So Julia, this is Justin. We did make some comments earlier around customers who were struggling to get critical reagents to perform their experiments. And so we mentioned that is part of the customer workflow that they're using, and that's been published in other sources as well. And so we've seen evidence of that, and we've read the reports on it. And so that is a headwind going in. It's something that we considered along with a lot of other factors in how we guided for the rest of this year. But I wouldn't say that that's a -- it was the only factor or the most important factor, but it was definitely one that we consider.

Got it. That's helpful. And then last quarter, I think you had 100 incremental instrument placed due to what customers perceive to be a onetime promotion. But now that the price cut on Chromium Connect is permanent, how much durable elasticity did you observe in 3Q?

Yes. So there -- when we look at the Q2 results, it was a mix between a pull forward and also just reaching new customers at a new price point. In retrospect, I think that if you're just looking at Q2, the bigger impact there was the pull forward for customers that were already basically in the purchase cycle. But in Q3, we also had strong demand at the new price point, considering that we had a pull forward of demand out of Q3 into Q2. And we also had really strong reception for the Chromium -- after the Chromium X launch as well. So just looking quarter-over-quarter revenue from instruments, it grew slightly. You could say it was just about flat. So Q3 very strong compared to a strong Q2. And then just because the revenue was flat, and the Chromium X and IX had higher price points than the Chromium Controller, it's -- you can assume that we placed less units overall from -- in Q3 compared to Q2.

There are no further questions on the lines at this time. So this concludes today's call. Thank you for joining. You may now disconnect your lines.