Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I'd like to welcome everyone to the 10x Genomics' Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instruction] I would now like to turn the call over to Cassie Corneau, Director of Investor Relations and Strategic Finance. You may begin.

Thank you and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the second quarter ended June 30th, 2024. If you have not received this news release or if you would 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 forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release 10x Genomics issued today and in the documents and reports filed by 10x Genomics from time to time with the Securities and Exchange Commission. 10x Genomics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. Joining the call today are Serge Saxonov, our CEO and Co-Founder, and Justin McAnear, our Chief Financial Officer. We will host a question-and-answer session after our prepared remarks. We ask analysts to please keep to one question, so that we may accommodate everyone in the queue. With that, I will now turn the call over to Serge.

Thanks, Cassie and good afternoon, everyone. During today's call, I'll start with an overview of our second quarter performance across our portfolio of single cell and spatial technologies. Then, I'll turn the call over to Justin for a more detailed look at our financials, business trends and outlook for the rest of the year. For the second quarter, total revenue grew 4% year-over-year and 9% quarter-over-quarter to $153 million, and we were free cash flow positive in the quarter. We saw a strong demand for spatial consumables this quarter and a solid sequential increase in single cell consumables. We continue to hear overwhelmingly positive feedback on GEM-X and its performance, and our customers are further along in the transition from our next-gen assays than we expected. Within spatial, we saw continued consumable growth driven by Visium HD and strong early demand for our Xenium Prime 5K product, which we launched in June. Despite the strong demand for consumables, we're increasingly experiencing headwinds from the challenging macro environment, similar to many of our peers. Our customers are under budget pressure, which has most acutely resulted in cuts to CapEx budgets and elongated purchase cycles impacting our instrument revenue this quarter. We believe these macro factors and cautious customer spending patterns are likely to persist, putting particular pressure on instrument sales, especially Xenium. As we look to the rest of 2024, we're lowering our revenue guidance, which we now expect to be in the range of $640 million to $660 million. Justin will discuss this in greater detail. Despite these near-term headwinds, we remain confident in our strength, differentiation and long-term potential. Biology needs to be analyzed at the single cell level and in spatial context. We have built leading platforms for both single cell and spatial biology. These are still nascent…

Thank you, Serge. It's been an honor to be part of the 10x team over the past six years. I'm extremely proud of how much we've accomplished and how much we have grown from a single product company to a scaled organization with three leading platforms across single cell and spatial biology. This was not an easy decision to make. I continue to have deep conviction in Serge, the team and the opportunity to accelerate the mastery of biology and advance human health. I firmly believe 10x will continue to lead and has a very bright future ahead. I'll now turn to the quarterly results. I'll start by reviewing our financial results for the three months ended June 30th, 2024 and will then provide further details on our updated outlook for 2024. All growth rates provided will be on a year-over-year basis unless otherwise noted. Total revenue for the quarter was $153 million, up 4% driven by stronger contributions from consumables, partially offset by lower instrument contributions. Looking at our revenue breakout, total consumables revenue was $123.4 million, up 10%. Spatial consumables revenue was $29.3 million, up 150%. This growth was driven primarily by continued enthusiasm for Visium HD, as well as contributions from the Xenium Prime 5K, which we started shipping at the end of Q2. Chromium consumables revenue was $94.1 million, down 7% year-over-year driven by continued customer transition to our new GEM-X products and prioritization of spatial experiments. We saw positive momentum in our Chromium consumables results this quarter. Sequentially, revenue was up 12% as customers work through the stalling and trialing due to the GEM-X introduction in Q1. This transition is ongoing. In near-term, we still expect the lower price of GEM-X to continue to drive some revenue pressure. But overtime, we believe there is elasticity…

Thanks, Justin. I'd like to wrap up by reaffirming my conviction in the strength of 10x and our leadership in single cell and spatial biology. As we navigate near-term macro pressures, deliver on our strategy and product roadmap and optimize our commercial structure, we're steadfast in our goal of driving more balanced focus, execution and growth across all three platforms. Of course, none of us will be possible without our amazing team at 10x. Thank you for your commitment to drive, especially in times of change. I truly appreciate how you all rally together and stay focused on delivering for our customers and advancing our mission. With that, we will now open it up for questions. Operator?

[Operator Instructions] Your first question comes from the line of Dan Arias with Stifel. Your line is open.

Good afternoon guys. Thanks for the questions. Serge or Justin, can you maybe, just add some color to the forecast on the second half of the year? I don't think people are surprised by the guide coming in, but you beat our number on chromium. So, is the new range entirely due to Xenium and Chromium instrumentation? And then what's the new outlook for single cell and spatial that's implied here? And if I could sneak a second one in Serge, where do you think the breakdown is coming in the forecasting? I know you don't have all the full answers here. But you've made changes internally when it comes to leadership. You've given the sales force better tools to work with. So, where do you think you're getting tripped up by, what's taking place when it comes to projecting what customers are going to do here?

Hey, Dan. Thanks for the question. I'll start with your first part around the range. So, when looking at our updated guidance range 650 at the midpoint. As we mentioned on the call, the update is coming from two buckets. So, macroeconomic factors and the commercial restructuring. and when you're looking at macroeconomic factors, the majority of that impact is on capital expenditures, instruments. And in this case, most of it on Xenium with a smaller impact on chromium. And so, that's the majority of the update. The remainder of that update is due to less consumables. And so, with a lower amount of instruments sold, there's going to be a smaller amount of consumables that go out with those initial orders. And then also, we're giving ourselves some room for the commercial restructuring as the team settles into their new roles and responsibilities.

Yes. I mean and maybe, to touch on your second question. Dan, just like Justin said the changes in guide is mostly attributed to the changes in the macro environment, specifically focused on the instruments. And then in addition to that, the changes that we're making on the commercial side, which are going to create some temporary potential for disruption.

And just one thing that I'll add before we go to the next question is just, when we look back at how we said Q2 would end up on the last earnings call, we expected sequentially to grow mid-to-high single digits, which we grew high single digits. We expected most of that growth to be due to chromium. Chromium grew 12% sequentially. When we look at the second half of this year, the split between first half and second half at the midpoint of our range, it's about 45% of revenue in the first half about 55% in the second half. And just to your question around what's embedded in that guidance, when we look at how much of that's allocated to Q3 versus Q4, we're expecting the same seasonality that we saw last year in 2023. And we're expecting Q3 and Q4, each to have roughly the same growth rate over their corresponding period in the prior year at the top level.

And your next question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Good evening and thanks for the question here. One, on the Xenium side of things and then one, on the leadership changes, guys. So, first on Xenium, can you share some color on just ASP trends in the quarter? Any sense that you need to do deeper discounting in light of the customer CapEx sensitivities you flagged here? Or has there been any change in competitor pricing models? And then, in terms of the leadership changes here, Justin, it's been good working with you over the years. But Serge, the question for you really is do you see any evolution in your guidance philosophy under Adam? Just share some color on the degree of input he's had, if any in terms of new guide. I guess, where I'm coming from is a new CFO always likes to preserve the right to impair the guide he or she inherits. So, just any color around that would be great. Thank you.

Hey, Tejas. I'll start with the first part of your question on the ASP trends on instruments. I know you asked about the Xenium in particular. Over time from the very beginning, we saw the ASP and the mid-to-low 200s, and we hit the low 200s mid part of last year. And that has been steadily coming up into the first part of this year. And so, it has been relatively stable as of the last couple of quarters and no major changes in the ASP. When you're looking at Chromium, no major changes in the ASP between, at the X level or the IX level. But we have seen a shift, where there's more waiting towards the IX, where as before, it was roughly 50/50. But in this CapEx constrained environment, more customers are opting for the IX. And so, that does impact basically the weighted ASP between those two instruments.

And maybe, to touch on your question around Xenium, the sort of competitive environment around Xenium. There's not really been, I would say, a material change relative to the previous quarter on that front. the big change is really around the budget through the constraints of our customers and their decision-making there. And certainly something that we're looking at to make sure we're able to work with them in this sort of new environment. As far as the guide is concerned, look our philosophy is largely the same. We look at sort of the balance of different factors, the upsides and the downsides and give the best view, we currently have on the rest of the year.

And your next question comes from the line of Doug Schenkel with Wolfe Research. Your line is open.

Hi. This is Madeline Mollman on for Doug. I just wanted to ask if you could quantify the impact of the GEM-X transition in the quarter. I think, you mentioned Chromium consumables are pretty strong. And then, what are you thinking about GEM-X for the rest of the year and into 2025? How should we be thinking about sort of the continued impact there?

Yes. Thanks for the question. As far as the GEM-X impact in Q2, I would say that Q2 played out relatively, like we had laid out on our last call. When we talked about how we thought Q2 would end up, we included the impacts of the trialing and installing due to the GEM-X transition. Now a few things, we are a little bit further ahead on the GEM-X transition than we expected to be at this point, and we're also appreciating that there is a little bit of a longer tail towards this transition as well. And so, one thing that we're contemplating is those customers, who plan to continue using NextGen, how we can help them transition to GEM-X sooner.

And your next question comes from the line of Rachel Vatnsdal with JPMorgan. Your line is open.

Hello. This is Marta Zaremba on for Rachel. Thank you for taking the question. I just wanted to double-click on the helium placement expectations for the rest of the year. You mentioned that's part of the reason for the guide cut. So, how should we think about the CDM placements for the rest of the year? And then, how are you thinking in terms of whether or not the impact is mostly due to macro or perhaps more of the competition? Thank you.

Yes. So, Xenium instrument placements are being impacted by macro right now. We're seeing customers' CapEx budgets getting cut. We're seeing more scrutiny on CapEx purchases, and this is resulting in, I said opportunities moving out, due to elongated sales cycles, or some opportunities dropping out with budget cuts. I'd say, it's more of an elongated sales cycle. one thing when we look at the funnel for Q3 and Q4. We are still seeing a large amount of opportunities in the funnel for the second part of the year. On our last call, when we talked about the range that we would expect for each quarter this year, we expected it to be between 50 to 75. Right now, when we look at Q2 came up, a little bit short of that. And when we talk about how we're thinking about Q3 and Q4, assumed at the midpoint of our guidance range, is an average of about 50 instruments a quarter between those two quarters, with a little bit less in Q3 and more in Q4.

And maybe, just to comment again, on the Xenium competition part of the question. No, we're not seeing a change in dynamic. The reduction in the Xenium number is purely should be ascribed to the changing macroeconomic environment. We track the opportunities in the fall pretty closely.

And your next question comes from the line of Dan Brennan with TD Cowen. Your line is open.

Hey. good afternoon, guys. This is, Kyle on for Dan. I had a quick one on Visium HD. You talked about Visium HD being pretty strong and the uptake from customers being strong. Can you speak to any impact, the Visium HD has had on customer usage of Visium or even Xenium? Thank you.

So, yes, a good question. In terms of the impact on standard Visium, the impact has actually been somewhat less than we expected. The standard Visium is still continuing to have gotten a demand from customers. I mean, both for existing projects, for ongoing projects, and then to some extent new projects as well. So, we're pleased with that dynamic HD has been to a large extent incremental. And then, yes, I mean, we also have the great performance in Xenium consumables and 5K, especially despite the fact that there's definitely some dynamic, where customers are trying to choose between those products and evaluating kind of which way to go. So overall, it has been a good quarter for spatial consumables kind of across the board, I would say.

And your next question comes from the line of Patrick Donnelly with Citi. Your line is open.

Hi. This is Brendon [ph] on for Patrick. I was wondering if you can give an update on like the path towards profitability and cash flow positive, especially with this new commercial restructuring.

Yes. Great question. So, when we look back at Q2, we were cash flow positive this quarter. We were free cash flow positive this quarter. Going back to Q1, if you exclude the one time, or the payment that we made for the technology acquisition related to Visium HD would have been both cash flow and -- or would have been free cash flow positive as well, and then we hit that in Q4. So, there's been a great trend here over the last few quarters. When we talk about the rest of the year, we say that we've got a great setup to drive cash flow positivity for the rest of the year. And so, what that implies is that there's some optionality in there. I know we do reserve the right to make the targeted investments that we need to do that we think that's best for the longer-term health of the business. And just understand too that at this stage, our goal is not to accumulate cash, but it's to reinvest the cash that we generate back into the business. So, there could be swings from quarter to quarter as you're really trying to stay, roughly even to slightly positive and invest, all that you can back in. But the most important thing to realize is that, we do have full optionality for how we control this, and how we think about this longer term.

Yes. And on the point around commercial restructuring, so to a large extent this restructuring constitutes a redeployment of resources, where in many cases before we had kind of overlay functions and now, we are redeploying those functions to be to have explicit ownership of accounts and customers. We are setting it up, so that we're going to be making more of incremental investments in our commercial organization, but it's; to a large extent, again it's more about the redeployment, rather than increase. But it does -- the new structure does set us up to scale really efficiently going forward and drive growth, while maintaining a good cost structure.

And your next question comes from the line of Kyle Mikson with Canaccord. Your line is open.

Yes. Hey, guys. Thanks for the questions. I'll just start by saying like good luck, Justin, for working with you these past few years and good to see Adam come on board. We know him well. It's a good addition to the team. Two questions. The first is on Xenium. Why is that one being impacted so much by the macro environment relative, just compared to Chromium? I guess is that just due to the higher price point? And last quarter, you guys mentioned single cell mind shares being taken over by Spatial. Is that still happening? Second question is on the commercial organization. Why is such a dramatic change here, I guess? Does that mean you weren't able to correct the factors that were nearing growth in recent years? And then after a few changes, like since 2022, why are you confident that this change is now going to make you ready to finally kind of reaccelerate the company? Thanks.

Hey, Kyle. This is Justin. I'll start. So, first off, thank you. It's been great working with you as well. As far as your question around Xenium, yes. It's the highest price instrument. It's quite a bit more than the other instruments that we sell and it's a big investment for customers. And so, that has been the one that has been most impacted. But Visium and Chromium and CytAssist and the Chromium X and iX, some impact there, but not to the degree that we're seeing with Xenium.

Yes. And then the question, Kyle. So, the commercial restructuring and why now, what's important to appreciate is that we have gained a lot of learning over the past two plus years in terms of trying different approaches and kind of adjusting our incentive structure, creating some amount of specialization. And one of the things became clear to us is that without a holistic restructuring, you're always going to be dealing with tradeoffs and with compromises as you're trying to optimize for one thing or another. And so, we step back kind of reevaluating from both in light of all those learnings from first principles be given, where portfolio is, given where our imperatives are for strategic growth going forward and rearchitected kind of the sales organization with those principles and those learnings in mind. And we feel really good about where things are landing and kind of a much cleaner now set of roles and responsibilities that we'll have in our sales team, and also a much more manageable territories and much more clear sort of specialization and an expertise that we can now deploy and it sets us up really well for scaling going forward.

And the next question comes from the line of Dan Leonard with UBS. Your line is open.

Great. Thank you for taking the question. This is Lu [ph] on for Dan. I think, we wanted to touch a little bit on the instrument witnesses that you mentioned. Can you describe the trends within the -- like academic markets and then a pharma market? Do you see any differences? And then, also with all the commercial changes right now, any specific strategies that can help to convert the funnel opportunities to orders? Thank you.

Yes. So, I mean as far as sort of the end markets, academia versus biopharma, we have actually seen sort of challenges to both, especially when you look with an AMR in Americas, but really quite like across the globe as well. Different dynamics, for sure, but both happen to be challenged right now. There's definitely a lot of sort of news and pressure on academic budgets with NIH and so on. So, we're following that. But yes, of course, kind of across the board. As far as the question around sort of conversion of opportunities and kind of moving those through the funnel, yes. Again, that's big part of what we're doing here is creating a specialized sales force specifically for Xenium instruments with its own management structure and specialized CapEx sales executives. And we do think that that's going to help both in terms of opportunity creation and converting opportunities into sales.

And your next question comes from the line of Michael Ryskin with Bank of America. Your line is open.

Great. Thanks for taking the question, guys. Just one for me. About a month ago, there was a deal announced in the space of a small private single cell vendor by a major global sequencing company. A lot of speculation debate on where that's going to go over time. but there's some expectation of possibly some sort of combination offering or maybe just some a more streamlined go-to-market strategy. Realize it's still early, but just curious if you're hearing anything from your customers about what that could do for the competitive landscape and how you think Chromium is positioned if that was to happen? Any response you might take? Thanks.

Yes. Look Mike, we always known, we got strong conviction, we operate in very attractive spaces, very attractive markets. And to some extent the entry by a large sequencing company into the space demonstrates and validates that conviction. Our strategy has always contemplated, so the entry of new companies into this space. And what we have put together as far as product development strategy, as far as commercialization strategy is meant to both drive growth in these markets and also prevent or counter the entry by new companies. Fundamentally, I think it's well acknowledged that we have the best products, great performance, great workflows, the widest breadth of applications. We also have a really strong road map, going forward to both lower the cost and drive greater access, which again, is sort of the dual purposes of driving increasing market adoption and also countering any potential new entrants. And it's also important to appreciate that we have a great commercial team on both in terms of customer support and sales that really understands these applications and customers. And these are open times fairly entering at experiment that our team helps our customers with. And you take all of these factors together, we feel good about our position. And again, I want to reemphasize, we've always contemplated in our strategy, the entry of new players into the space and we're fully prepared to answer as necessary, but ultimately drive market expansion and greater customer success.

And your next question comes from the line of Subbu Nambi with Guggenheim Securities. Your line is open.

Hi. This is Ricky [ph] on for Subbu at Guggenheim. Thanks for taking our questions. You reported China revenue that looks like it grew about 7.7% year-over-year, whereas a lot of peers have reported struggling in China this quarter. Could you provide some color on what you saw in China for the quarter and what drove the strength? Was it all consumables or was it some instruments? And then similarly, in EMEA, the revenue there also looks like it grew almost 20%. Could you speak to what drove the strength there as well and if that's sustainable growth through the rest of the year? Thank you.

Yes. I mean, so maybe, to touch on China first. Certainly, China was a big, big problem for us in the past several years. It is a very challenging environment there. It was very hard to have any visibility. And certainly, the market dynamics were very hard to understand and to address. We have been doing a lot of work, since last year really to get closer to our customers to restructure some of our distributor relationships, our service provider relationships, so getting much better visibility. And some of that is -- I think is improving performance. Some of it there's also just the underlying demand dynamics that have been going somewhat more in our favor recently.

And your next question comes from the line of Matt Sykes with Goldman Sachs. Your line is open.

Good afternoon. Thanks for taking my questions. And Justin, congrats on the new opportunity. It's been great working with you. Just two quick ones for me. What is your level of confidence in sort of the rebasing of chromium consumable growth given the sequential improvement you saw this quarter? And how much of an offset will the GEM-X pricing, I think, Justin you mentioned that, will be to this growth over the course of this year into next? And then secondly, just the reduction in Xenium placement growth, how should we think about Xenium consumable growth as a result of that? And can increased utilization of the existing installed base offset the lower growth in the installed base over the course of this year? Thanks.

Thanks, Matt. All great questions. I think when we're looking at Chromium, when we went back to the dynamics in, basically going back to the end of the year when we initiated guidance and we talked about how what we expected for the impacts of the transition. I think those drivers largely played out like we had expected, although probably bigger in magnitude when we talked about Q2 on the last call, as Q2 played out. I think it -- again, it's the same drivers on the chromium consumables like we saw a great sequential rebound on chromium, both on instruments and consumables growing 12% sequentially from Q1 to Q2 and obviously 12% overall. And so, then when you look on the year-on-year compares for Chromium, we were down quite a bit in Q1 year-over-year and Q2, that was halved embedded into our guidance range when we get into Q3. We expect to get pretty close to flat year-over-year, if not roughly flat. And we do expect an increase for Chromium in Q4 year-over-year. And so, obviously, when you put all that together and you look at the full year, year-over-year compare, just because of the downside that we had in the decreases that we had in Q1 and Q2 still going to have a decrease for the year. But this is going to hit instruments harder than consumables. and I do think that the instruments there's other factors that play there in the macro environment as well. But I think what gives us confidence is, we're seeing the dynamics play out at the customer level like we had expected. And that update is or that is incorporated into our guidance, update for Xenium. Great question on the Xenium pull-through. We have been seeing decent growth in spatial consumables. With…

And your next question comes from the line of Matt Larew with William Blair. Your line is open.

Hi. Good afternoon. So, last quarter, you obviously was in the context of pricing for Chromium, talked about longer-term goal of $100 per sample. You've talked about GEM-X being one step on that journey and the belief that when you reached an appropriate pricing level, there'd be significant elasticity and demand there. So, just kind of curious, where you view the progress that you've made over the last few months. How much of the continued journey is one, reliant on additional technology advancements and product enhancements versus perhaps commercial or strategic decisions on your part?

Yes. So, we do believe strong as I mentioned earlier in my prepared remarks and I've been saying for a while that there's strong elasticity of demand in the marketplace. With GEM-X, we actually reduced the price per sample by about 10% relative to previous Next-GEM architecture. and also, it decreased the price per cell by a significant amount, because it has twice as much throughput. So, the price per cell went down by more than a factor of two. We are seeing customers appreciating that for sure, and quite a few running kind of larger numbers of cells to, as a result of that. The first order effect on this tends to be more they either spend the same budget as they would have otherwise, just kind of running more or to some extent, some of them also just taking the lower price and running the same number of those samples or cells. But in the long run, we do believe and we see some evidence of that from our Flex products that the lower prices will ultimately drive to much more demand and market expansion. Again, GEM-X and our Flex launches are sort of steps along that journey. Again, the initial signs are still too early to be pointing to kind of massive changes. but we're feeling good about where things are headed. And going forward, we do expect product configurations that will lean further into the elasticity of demand here. We have plans to address the different cost bottlenecks that our customers are facing, whether it's on a per-experiment basis, per-sample basis and per-cell basis. And we'll be rolling those out in due time. And we also do -- are cognizant of putting more commercial focus on these efforts to as we go forward. And a part of the goal of our restructuring is to enable that as well.

And your next question comes from the line of Luke Sergott with Barclays. Your line is open.

Great. Thanks, guys. I just kind of want to go back to the Xenium conversation about the consumables and pull-through. So, talk about what happened in the quarter from a pull-through perspective. Are you seeing any air pocket there waiting for the 5K? With the strength in the Visium in the quarter, does that mean that the Xenium pull through is really stepped down? Just kind as we're thinking about going forward here, what that progression will look like?

Well, so look as I mentioned before, I think we actually had strong demand from kind of both sides of the spatial business of both in Visium and Xenium. There was definitely anticipation of the 5K that was causing some amount of pausing with customers earlier. But like we said, the actual ultimate orders were really healthy once we start shipping the product in June. So, yes. So, I think the underlying dynamics are strong, sort of on both sides that grows to both franchises. And Luca, just to add to that like when you're talking instruments looking at CytAssist versus any of like CytAssist. Although there has been a slight impact to that, it's been pretty solid quarter to quarter. And so, bigger impact on Xenium instruments. But I do think in this environment with CapEx pressures, some customers looks like are opting to try out, CytAssist and Visium before jumping to Xenium. because we are seeing less of an impact there and then just hearing some of that anecdotally as well.

And that is all of our questions for today. And this does conclude today's conference call. You may now disconnect.