Hello, everyone. Welcome to the 10x Genomics Second Quarter 2023 Earnings Conference Call. I will now hand the call over to your host, Cassie Corneau. Cassie, please go ahead. .

Thank you and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the second quarter ended June 30, 2023. 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. [Operator Instructions].

With that, I will now turn the call over to Serge. .

Thanks, Cassie, and good afternoon, everyone. On today's call, I will start with an overview of our strong second quarter performance in both single cell and spatial. Next, I will share an update on our progress and momentum in each of our three platforms, highlighted by our customers’' tremendous enthusiasm for and rapid adoption of Xenium.

I will then turn the call over to Justin for a more detailed look at our financials, business trends and outlook for the rest of the year..

We delivered a strong second quarter, with revenue growing 28% year-over-year to $147 million. Our results were driven by growth across our single cell and spatial portfolios, led by solid performance and execution in the Americas and EMEA and strong demand for instruments across all three platforms.

This was partially offset by continued headwinds in China, as Justin will discuss..

The clear highlight this quarter is our momentum in spatial biology. In Q2, we leveraged our manufacturing scale and expertise to quickly ramp Xenium shipments, yet even so, orders outpaced shipments.

Not only is Xenium increasingly recognized as the best performing platform for In Situ analysis, but we have also continued to see strong demand for our Visium suite of spatial discovery tools..

The velocity of our world-class innovation engine, backed by our broad commercial and manufacturing scale. We continue to work to improve efficiency and drive operational excellence throughout the company so we can maximize and deliver on all of the incredible opportunities ahead..

Now, let me share more about each platform, starting with Chromium, the unambiguous leader in single cell analysis..

In Q2, driven by strong performance in the Americas and EMEA, Chromium consumables once again delivered double-digit year-over-year growth, despite ongoing challenges in China. The performance, scalability and ease of use of our broad consumables portfolio is an important differentiator that continues to resonate with researchers and drive demand..

In particular, we're seeing momentum continue to build for Chromium Flex. We're now one year into this launch, and it's clear we’re still just getting started. The increasing traction and enthusiasm from our customers further strengthens my conviction that Flex has the potential to be transformative to the Chromium franchise over the long term..

Looking ahead, we expect to launch our Feature Barcode application for Flex later this quarter. This new assay will enable researchers to simultaneously profile gene expression and cell surface proteins on a cell-by-cell basis across multiplexed samples and millions of cells.

This is part of our long-term plan to broaden the menu of applications within the Flex portfolio by enabling more samples, more scale and more analytes..

As we expand the capabilities available on Flex and more customers see the power and performance of this assay, we expect it will keep driving placements of Chromium X Series instruments. We're seeing strong demand for the X Series, as placements increased sequentially and are up robustly year-to-date.

We're pleased with the continued traction we’re seeing for the X Series across a broad range of researchers, whether they are new to 10x, first-time instrument owners or existing Chromium Controller users upgrading to this powerful tool for single cell analysis..

We believe the positive momentum we’re seeing for our Chromium instruments and consumables reinforces the long runway we have ahead, both within our initial home court of cellular atlassing and beyond. We have established strong beachheads in translational and biopharma applications, but it’s still very early relative to the expected large potential.

Two recent papers highlighted the power of our single cell portfolio in translational research, revealing particularly inspiring insights into the future of cancer care. In Nature Medicine, researchers published a new gene signature, uncovered with 10x tools, that could help determine the persistence of CAR-T cell therapy.

And a study in the journal Blood showed how 10x single cell analysis together with the power of AI could provide a crystal ball for predicting drug response in chronic myeloid leukemia..

It's awesome to see the continued growth of our Chromium portfolio in translational research. We believe our first-to-world single cell FFPE capabilities, exclusively on Flex, will help open up even more single cell research in translational and biopharma settings moving forward..

Now, turning to spatial, where both our Visium and Xenium platforms delivered very strong growth during the second quarter..

In Visium, we continued to see robust demand for our CytAssist instrument, which is now one year into launch. It's clear CytAssist has removed the key workflow challenges with the initial, manual Visium assays.

By giving researchers a better experience and a better workflow and better data, CytAssist is driving increased demand and spurring more routine use of the Visium platform. In fact, this quarter, sales of our CytAssist-based consumables doubled our instrument-free assays, reinforcing how CytAssist is now the preferred method for Visium research..

With CytAssist as the foundation, we continue to invest to expand the breadth of capabilities available on the Visium platform to enable more analytes and more applications. This quarter, we launched our Visium CytAssist Gene and Protein Expression Assay.

Our unique morphology-first workflow enables researchers with three analytes in one, high-plex protein, whole transcriptome RNA, and H&E staining,– all on the exact same tissue section..

In addition, our team continues to make excellent progress on Visium HD, which will be offered exclusively on CytAssist. This ambitious project has been as exciting as it has been challenging, but these are precisely the types of challenges 10x is built for. And the data is looking spectacular.

We can't wait for our customers to experience the power of unbiased whole transcriptome spatial discovery at single-cell-scale resolution. We look forward to sharing more updates on Visium HD as we get closer to launch..

Now, turning to Xenium, which we firmly believe is the best performing platform for In Situ analysis..

We have momentum with researchers, as more and more labs independently complete their own Xenium experiments and gain immediate access to powerful, high-quality data. We have momentum in manufacturing and operations, where we ramped production faster than we initially expected.

We have momentum with our commercial team, with a high velocity of orders during the quarter and a continued focus on delivering a world-class customer experience.

And, we have momentum with our product roadmap, as we've continued to expand our broad menu of targeted and custom gene panels and deployed new firmware and software updates to deliver even higher levels of sensitivity and throughput..

This incredible progress is a testament to the strength of our innovation engine, the scale and expertise of our manufacturing network, the breadth and depth of our commercial function, and the talent and dedication of our team..

With our unique combination of differentiated chemistry, high-end, sophisticated components and powerful onboard software, Xenium is a premium instrument carefully engineered to optimize performance straight out of the box and well into the future. We invested to build a best-in-class system so we could deliver best-in-class performance.

With every run, researchers are seeing directly that Xenium’s real differentiation was never in the rhetoric; it was always in the results, which they are now routinely generating in their own labs with their own precious samples..

We built Xenium to “just work” in the hands of researchers, the same as our other products. What that means is Xenium just works with very high specificity, ensuring the vast majority of signals are true biological transcripts rather than misleading noise.

In an analysis of datasets, Xenium’s False Discovery Rate was less than 1.5%, which we believe is best-in-class. This excellent performance has now been corroborated by multiple customers..

Xenium just works with high sensitivity, even on difficult tissues, enabling researchers to reliably measure their genes of interest, even when those genes are lowly expressed. We expect that sensitivity will get even more of a boost with the latest version of our onboard software, which we released last month..

Xenium just works with best-in-class throughput. Xenium enables researchers to analyze the most tissue area, in the least amount of time, using the fewest number of slides. Our recent software update builds on our already leading throughput; researchers can now run 12 1-centimeter square tissue sections in about a week.

Based on a competitor’s user guide and recommended run time, it would take 6 weeks to scan the same amount of tissue..

Xenium just works on a broad range of tissues, from mouse brain to more complex human samples, including breast, brain, colon, skin, lung, lymph node and more. Xenium also generates high-caliber results on various sample types, including Fresh Frozen, FFPE and tissue microarrays.

And, Xenium boasts an efficient and easy-to-use workflow, which we've heard some customers describe as easier than Chromium..

Xenium just works with a broad menu of fit-for-purpose and customizable gene panels to help customers answer their specific research questions. We are now shipping five pre-designed, validated panels and expect to launch three more by the end of the year.

With each of these offerings, researchers can also spike in their own custom genes to ensure they are not limited in any way by gene selection..

In addition, in Q2, we launched a fully custom gene panel to give researchers maximum flexibility. Our differentiated menu of pre-designed, partial and fully custom gene panels is increasingly validated in the field and resonating well with researchers, who appreciate the ability to study their exact genes of interest.

In fact, more than half of our panel orders to date have incorporated some level of customization..

As part of our exciting and ambitious Xenium road map, we're also planning to launch a 5,000 plex panel in mid-2024. Generally, more plex comes with more tradeoffs. As you dial up plex, you may need to dial down sensitivity, specificity and throughput. This can lead to plex quantity without data quality.

With Xenium's unique chemistry, however, we can scale to many thousands of genes and still deliver high levels of specificity, sensitivity and throughput, all of which are critical to the utility of these assays..

And, lastly, Xenium just works with its differentiated approach to software and data analysis. Xenium is the only platform to feature comprehensive primary and secondary onboard analysis in parallel with the instrument run.

This means researchers can see their results on the Xenium instrument immediately after the run is done, without requiring massive uploads, onerous downloads, time-consuming data transfers or expensive Cloud subscriptions.

Customers who want more off-instrument interpretation can easily do so using Xenium Explorer or a wide variety of open-source tools..

We built Xenium to be the best-performing system for In Situ analysis, both at launch and for the long term.

Beyond our gene panel pipeline, we are driving a robust, multi-year Xenium road map that we expect to feature in-demand applications like isoform mapping, SNV detection, xenografts, CAR-T tracking, and gene fusions among many other applications. These differentiated capabilities can be uniquely enabled by Xenium's chemistry..

All together, this remarkable combination of features is earning rave reviews from our customers; one even told us he “jumped for joy when seeing his Xenium data for the first time..

This enthusiasm from our customers along with the system's proven strength, performance and momentum in the field should reinforce the fact that 10x is leading the way in spatial biology and has been for a decade..

Through our internal investments and acquisitions of emerging companies such as Spatial Transcriptomics, ReadCoor and CartaNA, we have built incredible products, developed foundational intellectual property, and have deep experience and customer insights that have been instrumental to our technology leadership.

At 10x, we absolutely relish the opportunity to help founders and scientists take their ideas and transform them into products that can be used by researchers to fundamentally change our understanding of biology..

Our unwavering commitment is to our mission and to driving innovation to push science forward. We have invested well over $1 billion in research and development to bring new tools to researchers, and we will always strive to do what is right by our customers. That means delivering breakthrough products that perform as promised.

After all there's no cutting corners when it comes to cutting-edge technology..

We've made the necessary investments in both R&D and IP to build a premium product that delivers exceptional performance. Seeing this validated, time and again, by our customers has given us even greater confidence in the potential of this product to lead to the next revolution in the life sciences.

I firmly believe that Xenium may be one of the most transformative technologies in our industry in decades. It's up to us to lean in and capture the tremendous opportunity we have ahead.

Seizing this opportunity is our top priority, and we're going to leverage our strong foundation, broad commercial reach and solid financial profile to deliver on the full promise and potential of this technology..

Before turning the call over to Justin, I would like to give an update on our intellectual property portfolio, which is an essential part of our innovation engine. During the quarter, we achieved a significant milestone as we now have more than 2,000 patents issued or pending, including more than 70 issued and allowed in the second quarter alone.

Of these more than 350 relate to In Situ technology..

As we have said, it is our general policy not to license our patents to others, but to protect our sole right to own and practice our patents.

We will be steadfast in our focus on protecting the inventions that scientists have worked so hard to create, as our innovation is what fuels and funds the development of future 10x technologies that benefit researchers, and ultimately patients around the world..

We're executing on our mission with a solid foundation built on incredibly strong fundamentals. Our team is fully dedicated to driving growth, improving operational excellence and leveraging the unique strengths that have always set 10x apart..

With that, let me turn it over to Justin for more details on our financials. .

Thank you, Serge. I'll start by reviewing our financial results for the 3 months ended June 30, 2023. Then I'll provide an update on our outlook for 2023. Total revenue for the quarter was $146.8 million compared to $114.6 million for the prior year period, representing a 28% increase year-over-year..

Starting with consumables. Total consumables revenue was $112.5 million, an increase of 15% over the prior year period. Chromium consumables revenue was $100.8 million, up 11% year-over-year and spatial consumables revenue was $11.7 million, up 70% year-over-year..

Turning to instruments. Total instrument revenue was $31 million, an increase of 110% over the prior year period. Chromium instrument revenue was $12.9 million, down 8% year-over-year driven by lower sales of Chromium Connect, while the total number of Chromium instruments sold in the quarter increased year-over-year.

Spatial instrument revenue was $18.1 million. Our Visium CytAssist instrument launched at the end of Q2 last year and our Xenium instrument launched in Q4. So we did not have material spatial instrument revenue in Q2 of last year..

Services revenue was $3.4 million, which increased 74% over the prior year period..

Moving on to our revenue by geography. Americas revenue of $91.5 million grew 29% over the prior year period. EMEA revenue of $31.2 grew 22% over the prior year period. And revenue in APAC was $24 million, a 33% increase year-over-year..

We continued to face challenges in the APAC region, again, largely driven by China. On our last call, we had said we expected Q2 performance in China to be roughly similar to what we experienced in Q1. However, we saw further pressure in the region beyond what we had anticipated..

We are not immune to the challenging macroeconomic environment in China right now, and believe this impacted demand and exacerbated the dynamics we've been seeing with inventory levels. We continue to focus on driving demand with our end customers in this market while working with our distributor partners as they manage inventory..

Turning to the rest of the income statement. Gross profit for the second quarter of 2023 was $99.6 million compared to a gross profit of $86.9 million for the prior year period. Gross margin for the second quarter was 68% compared to 76% for the second quarter of 2022.

The decline in gross margin was driven primarily by the strength we saw in Xenium placements this quarter.

As I shared on our last earnings call, in the early quarters of Xenium adoption, we expect overall company gross margin to trend lower as more instruments are sold, given that the Xenium instrument carries a significantly lower margin than our other instruments.

As customers ramp up their Xenium utilization, the Xenium consumables, which have a gross margin comparable to our existing products will become a larger portion of the revenue and increase our overall margin over time..

Total operating expenses for the second quarter of 2023 were $163 million compared to $150 million for the second quarter last year. R&D expenses were $71.5 million compared to $70.7 million for the second quarter of 2022. SG&A expenses were $91.5 million compared to $79.3 million for the second quarter of 2022.

The increases in R&D and SG&A expenses during the quarter were primarily due to increased personnel-related costs and operational expansion..

Operating loss for the second quarter of 2023 was $63.4 million compared to a loss of $63.1 million for the second quarter of 2022. This includes $45.7 million of stock-based compensation compared to $36.3 million for the corresponding prior year period..

Net loss for the period was $62.4 million compared to a net loss of $64.5 million for the second quarter of 2022. We ended the quarter with $391.4 million in cash and cash equivalents and marketable securities, net of restricted cash..

Turning to our outlook for 2023. We are raising our guidance and now expect full year revenue to be in the range of $600 million to $620 million, representing growth of 16% to 20% over full year 2022. Our updated guidance reflects our second quarter performance as well as continued Xenium momentum with better visibility into our operational ramp.

This is offset by the weakness we've seen in APAC, primarily driven by China, and reflects the continued challenges in APAC, we expect for the rest of the year..

Our drive towards becoming free cash flow positive has instilled a cost discipline that has helped us effectively manage our headcount and other spending across the organization..

I have mentioned before that one of the biggest factors in becoming free cash flow positive would be the slope of our Xenium ramp. To support a steeper adoption curve, we will need increased operational capacity, inventory builds, installation capacity, service and support..

This quarter continues to add to the early enthusiasm and demand that we are seeing for Xenium. It deepens our conviction in the long-term potential for spatial biology.

We are leaning in even further to this opportunity and believe such investments will be foundational to our long-term growth, but they will come with near-term impacts to our gross margin and cash flow objectives..

As it relates to other items impacting our free cash flow, we still expect a significant reduction in capital expenditures in the back half of this year. When looking out over the next 12 months, we are anticipating about $35 million to $40 million of total capital expenditures.

About 1/3 of this relates to the final payments for our new operations facility in Pleasanton, which we expect to transact in Q3..

While we see a path to becoming free cash flow positive by year-end, we believe that now is the time to prioritize the investments in driving Xenium adoption. We will continue to focus on disciplined spending and managing our strong cash balance..

At this point, I'll turn it back to Serge. .

Thanks, Justin. Before we open it up for Q&A, I want to take a moment to thank our team. At 10x, we're continuing to push the bounds of what's possible, which is both exceptionally challenging and profoundly rewarding.

It's been especially energizing for us to see the incredible customer enthusiasm and momentum for Xenium, which will usher in a new era of genetic analysis. I personally believe this technology has the potential to be as big as anything in the history of the life sciences..

While it's still very early, we're starting to see a broader understanding and appreciation of the power and potential of spatial biology and single cell more generally to revolutionize human health.

In fact, Eric Topol, a highly regarded physician-scientist and author of several best-selling books on the future of medicine, recently described spatial biology as the hardest field in life science for making new discoveries about human health and disease..

Testimonials like these validate once again our conviction in the endpoint. In the not-so-distant future, we expect just about all tissue samples will need to be analyzed at single cell resolution, large scale and with spatial context. We believe we have the best products and technologies to achieve this vision.

And as a result, we are uniquely positioned to bring the future forward. We're bringing the whole-of-company effort to ensure we get absolutely everything out of the incredible opportunity we have ahead..

With that, we will now open it up for questions.

Operator?.

[Operator Instructions] With that said, we'll go ahead and get started with Patrick Donnelly from Citi. .

Serge, maybe one on Xenium, as that adoption continues to pick up, can you just talk about what you're seeing in the market in terms of feedback when you get competitive wins? Is it a focus on the specs being superior? Is the market just big and early enough that it's less of that head-to-head competition in terms of sales? And then any color, I think you mentioned orders outpace sales a bit.

But any color on order growth or trends there would certainly be appreciated?.

Patrick, thanks for the question. So no, I mean, the market is definitely competitive. And like we said before, up until recently, there was generally kind of confusion out there in terms of what to expect. There's a lot of aspirational claims that were put out there..

And the change in the dynamic over this quarter and the last 2 quarters, I would say, is around the fact that people can now see for themselves which systems work and how well they work. And in particular, the reviews that are coming back on Xenium are incredibly positive.

The quality of the data we talked about it, and I talked about those in my remarks, we've made our own analysis of the sensitivity of specificity of the data quality and that being now confirmed in the field and that's resonating really strongly and the word is spreading..

It's also the fact that people are actually able to get their runs in very quickly, get the data off the instrument. In fact, we hear like an example of a customer who doesn't run finishes on a Saturday or a Sunday, and then on a Tuesday, he is actually presenting that data at a conference..

It's a remarkable kind of turnaround and I've -- it's hard for me to think about technology that has that kind of a ready uptake. And that's what's really, really resonating. And the word is spreading now among customers. So I think that's by far the sort of the primary dynamic..

The fact that Xenium works out of the gate and the data is really, really high-quality resonating all kinds of products that we're hearing from the field. So this is -- it's early deals, but it's clearly all the signs are showing that there's a huge potential and a huge sort of momentum and excitement that's building. .

Okay. That's helpful. And then probably one for Justin just on China. Not surprising here, maybe a little bit of further pressure in the region.

Can you just talk about, I guess, what you guys are seeing there? I know you talked a little bit about the end customers, you guys go through the distributors, service providers, maybe you're not quite as close to the end customer.

But I guess what are you hearing? And then as you adjusted the guide, I think you said a little bit of headwind from China maybe Xenium moving up.

Can you just talk about what the moving pieces were in that $10 million bond?.

Yes. Sure, Patrick. So first, I'll start with China. China definitely underperformed relative to our expectations for this quarter. And the macro environment there, is really challenging right now. And overall, the demand has been soft in that region..

And we also believe that this environment exacerbated what we've already been seeing with the inventory dynamics that we spoke about earlier. And so we don't expect the situation there to improve for at least the next couple of quarters. And going to the guidance, this is incorporated in our updated guidance range.

Despite the issues that we saw in APAC, primarily driven by China, AMR and EMEA have been strong. And so when you look at our updated guidance range, we're assuming that AMR and EMEA, Chromium will end the year somewhere in the mid-teens year-over-year percent growth.

And then as pressure in APAC continues, we expect really the average of Q3 and Q4 in APAC to be roughly flat to what we saw in Q2 with a little bit of a decline in Q3..

And then just overall, looking at worldwide, spatial is maintaining the strength that we saw in Xenium this quarter. We also had a really strong quarter for CytAssist as well. But at some point, I would expect that the demand for CytAssist to come down a little bit, just like we have a bolus of demand at any kind of new product launch.

And so, the combination of those things is roughly holding spatial flat at a worldwide level from now through the end of -- from Q2 through Q3 and Q4. .

Next up, we have Dan Arias from Stifel. .

Maybe just to follow-up Patrick there on Xenium. Serge, can you comment on your own manufacturing capabilities? I mean it sounds like you're pushing hard to ramp and expand what you can do there pretty quickly.

When do you envision being at the point where production shouldn't be considered a constraint on placement?.

Yes. So yes, we have been investing in operations like we said. It's been -- initially when we came to market, we were very measured in kind of our approach. We have certainly scaled up to a new level of production right now, and that's what Justin kind of was alluding to in terms of as we look toward the next couple of quarters..

Last quarter, shipments, I mean, demand outpaced shipments. So it's going to be a sort of a dynamic thing. We're still -- we're working to scale up especially to prepare for next year and beyond. .

Okay.

And then maybe on the Flex kits, can you just talk about the extent to which you're seeing that product have the ability to sort of change the economics of single cell work, maybe in a positive way, just in the sense that you could open up the scope and drive some elasticity there or in a negative way just in the sense that until a customer scales the size of the experiment, maybe the revenue per sample is lower than it was seems like it should be -- so the puts and the takes on Flex and just the economics of single cell work would be really helpful.

.

Yes. So Flex has definitely been scaling up in terms of adoption. It's still a relatively minor component of the overall single cell portfolio.

We're seeing -- certainly, we're seeing examples of projects that are emerging, that are incremental to what was possible before precisely for the reason you mentioned and that you get to a lower price per sample..

People are certainly putting sort of the dots together and organizing these projects. It has an incremental effect. It does also have an effect where for people, if they are limited in samples, then they could end up spending less money for running the same type of study.

And then there's also studies where people are limited by budget and they simply run more samples..

We are -- if you look at -- on a -- in terms of the reaction number basis, Flex is contributing in a substantial way to increasing numbers of reactions that you -- that people are running in total. It is like you're alluding to, it's not necessarily going to be manifesting itself on the top line.

In fact, it's going to create a little bit of top line pressure while that's happening initially. But we think that overall, that portends -- this dynamic portends great possibilities for the future as people expand the kinds of studies they can do as they can drive towards lower price per sample with larger and larger studies. .

Next up, we have Dan Brennan from TD Cowen. .

This is Kyle on for Dan. I just had one on CytAssist here.

Can you just -- can you provide any color on how CytAssist placements have sort of trended relative to last few quarters?.

Kyle, this is Justin. I can give you some broad strokes there. So Q3 and Q4 of last year, demand was really strong for CytAssist. We shipped a few -- a small number at the end of Q2, but Q3 was really the launch quarter -- the launch quarter for it. We had a drop in Q1, slight drop.

And right now, in Q2, we're up very close to where we were in Q3 and Q4 of last year and incremental over Q1. .

Got it.

And so with all these CytAssist placements, how should we sort of think about busy pull-through going forward? Has this driven a lot of demand for Visium projects?.

Yes. When we look at the numbers, we certainly see like a substantial bifurcation, the labs that have CytAssist run more Visium consumables at the ones that do not.

Now there's an open question still that we are looking at, there's a selection effect, labs that are going to be running more consumables will -- are more likely to buy a CytAssist instrument..

So we're still watching how that's going to sort of play out numbers-wise. But qualitatively, it's not biggest that CytAssist makes it much easier, much more amenable for people to run Visium and generally great data. We're hearing great feedback and lots of interest. And it's a very fundamentally enabling instrument.

So we feel optimistic about this potential to drive more. .

Next up, we have Kyle Mikson from Canaccord. .

One on the chroming business that grew 7% year-over-year on EP comp in the first half. I know there was the China headwinds and the placement mix consisted of less connects in the quarter. But you originally guided to that low teens growth for the business. I know that's now updated.

It sounds like what you just said, Justin, but I guess I'm just wondering like what factors are going to occur in the second half to get you to that low teen as well or whatever it is now.

And if there's any like nonmacro-related deterioration in demand for the products? And maybe if you just talk about it by region, it could be kind of helpful just to give a comment in that area. .

Yes. Sure, Kyle. So first off, overall, when we initiated our guidance at the beginning of the year, we talked about low to mid-teens Chromium growth at the worldwide level. We talked about the impacts that we're seeing in APAC, primarily driven by China.

When we incorporate that along with AMR and EMEA being on track to what we expected they would be at the beginning of the year. You're right, we do end up year-to-date in the high single digits. But when we look at how we expect to end the year, we expect that AMR and EMEA both will be in the mid-teens plus.

And that's what's being worked into our overall guidance range. AMR and EMEA on track or a little more and building in the weakness that we saw in APAC driven by China carryforward. .

Next up, we have Morgan Stanley. .

So juggling a few earnings calls here, so apologies if you touched on this, Serge, but can you give us some color on what you're seeing in the In Situ market right now in terms of pricing.

How aggressive are you prepared to be there to lock in customers into your ecosystem?.

And as you think about sort of consumable pull-through starting to ramp on some of those initial placements.

Any anecdotal evidence or bookends you can share?.

Tejas, yes, there's a lot going on, on in situ for sure. So our Northstar, our focus is on the customer, right? And there's -- when it comes to pricing, certainly, we're trying to accommodate what trends will accommodate people right now and especially when it's a competitive dynamic and make sure they make the right choice here..

And as far as -- but the thing that I said earlier and the thing that we're coming back to is the fact that the system performs incredibly well, generates the best data in the market because it's corroborated by other customers. It works really well..

And kind of to your question, it works well in the field and we're seeing that some of the early customers are able to run through quite a few samples very quickly. Now those early customers will tend to be most ready to adopt those technologies. So we're anticipating that later cohorts will take some more time to onboard and ramp up.

But there's a lot of really positive early signs in terms of the potential and how many samples these systems will be pulling through. .

Got it. Okay. That's helpful. And then a quick follow-up for me on the Flex side of things, Serge.

Where are customers today in the adoption phase for Flex? What percent of those early adopters have completed that initial pilot and evaluation trials that have now switched over?.

And then a broader sort of big picture question as well.

As you think about sort of differentiated innovation and to the degree to which it sort of confers you -- macro insulation, how are you thinking about that in the context of your guide?.

So in terms of -- let me answer the Flex question, Tejas. So the way that -- so Flex has been getting general adoption. It has been scaling up kind of across our customer base. And I wouldn't even say necessarily is just sort of the early adopters or others to some extent, is bringing some translational customers.

We certainly have some -- like some of our core customers moving on to Flex..

In a lot of cases, it's less about switching over people from -- certainly from their existing workflows or existing studies, but more in terms of incremental studies or incremental projects.

When they have a new project, they are now starting more and more conceptualized in terms of Flex because Flex is enabling them to -- it relieves a lot of the logistical challenges that people have faced and because of the multiplexing ability allows them to reach a substantially lower price per example and thus imagine larger studies..

And so it's been on a good trajectory. It's still a relatively small fraction of the overall Chromium franchise, but it's on a good trajectory, especially as we look at the potential to expand the single cell market over time. I think we're seeing good signs. .

Got it.

Justin, any perspectives on the guide?.

Tejas, so all of our products, our view of them are built into our guide. We still have a decent range on our guidance heading into the back half of the year. And so those different scenarios are built in. .

Next up, we have Mike Ryskin from Bank of America. .

Great. I got a couple of quick ones here, hopefully. One was just starting on Xenium CytAssist, instruments versus consumables. You talked through the pacing of CytAssist, that was really helpful. We can kind of back into Xenium numbers then..

But I want to focus consumables on spatial. By our math, that's been kind of flattish, relatively flattish 4 quarters in a row on a dollars basis, more or less.

So question is, when does that start to really accumulate? And that kind of goes to the point of like as the installed base of Xenium goes higher and higher, at what point do you think that will really kick in and you'll start to see that razor-razorblade model on the special side really start to churn?.

Yes, Mike.

So as far as your first question on spatial overall, and you're asking about Visium -- Visium first?.

Both Visium and Xenium consumer. .

Yes. I think the thing that's tough is when you're looking by product at the worldwide level right now with the China and APAC impact in there. To interpret that is what it means for the platform, you might get the wrong conclusions. And so spatial has been strong in AMR and EMEA. Everything has been impacted in APAC and China..

And some additional information on CytAssist and Visium. We saw trends earlier on that CytAssist customers were tending to order and use more Visium. And I think that's a great trend. It helps address some of the workflow issues that the users had early on. And so it's really showing that, that is the future of the platform.

And the Visium and the CytAssist consumables are basically are now overtaking the legacy kind of Visium consumables. .

Okay. All right. And on the -- just I want to switch real quick to the margin side of things. I think you flagged pretty extensively to us that gross margins were going to be negatively impacted by the Xenium ramp, just given the incremental lower gross profit dollars on that instrument as you're ramping it.

Is 2Q a bottom or sort of close to the bottom there.

I guess it's hard for us to sort of back into these numbers, but is this a good place for gross margins to level out and then start to grind higher again? Or do you anticipate that going even lower 3Q, 4Q, to your point, as Xenium placements continue to ramp higher?.

Yes. So first I'll start with just looking at the year-over-year change in gross margin. And when you look at the change that we saw, I mean, that's -- when you net out smaller puts and takes, it's all primarily driven by the mix shift towards in situ.

And so then when we look into the rest of the year, the gross margin could trend lower if we were to place more Xenium instruments each quarter. But as we continue to scale our manufacturing capacity to produce more units, the cost per instrument will decline, and we should have improvements in the unit economics..

But keep in mind, when we built the Xenium instrument, we sought to optimize the performance and time to market, not cost. And so based upon the successes that we're seeing out in the field, that was the right call.

And although we do have a near-term impact to company gross margin, the focus right now isn't the margin that we're making off of each instrument. It's the consumable revenue stream that, that instrument is going to enable. So we sought to produce the best instrument in this space, and we've succeeded in the ever.

And then also keep in mind talking about unit economics that customers who purchase this instrument today, they're getting an incredible value compared to the competition. And as more customer data is generated and more feedback makes its way out into the public, this is going to help drive our long-term strategy..

But right now, what we're starting to see is this instrument is not priced at the value that it brings. And I do think that we'll have opportunities in the future to adjust that as well. .

Next up, we have John Sourbeer from UBS. .

This is Tianqi calling in John.

So just to kind of build on what Mike just asked, do you guys sort of share the kind of like target margin profile for Xenium, let's say, when the volume is high enough?.

So this is Justin. When we look at Xenium, we don't necessarily separate the instrument from the consumable. We look at the Xenium business overall and what we expect that to ramp to.

And so early on, when the mix shift is primarily more towards instruments, and we're taking time to ramp up the consumable stream you're going to see, I think, the greatest impact.

And then over time, as those consumable streams ramp up, those are going to become a larger part of the revenue overall, and they'll bring the margin up in the longer term. .

Got it. Second question is regarding the Chromium Flex, very exciting news about the Feature Barcode application.

Just -- do you see Flex and the kind of like the Feature Barcode applications accelerate the clinical adoption of the single cell in settings like diagnostics and like maybe precision medicine, how should we think about that?.

Yes. It's a good question. I mean -- and I would say, ultimately, the answer is yes, right? I think Flex overall enables the work single cell for the first time to work with the clinically relevant samples collected from tissues.

First, it enables fixation of the point of sample collection and more excitingly, enables a single cell analysis to be applied to FFPE samples, which is how most clinical samples, most tissues are stored..

And at this stage, we're still very early in terms of the single cell adoption on its way towards if you imagine the progression from basic research toward the clinic. But we're definitely seeing increasing adoption, certainly a lot of interest in translational studies..

So kind of gathering of the cohorts of patients, phenotype samples and running them on single cell to look for biomarkers. And that's kind of a prerequisite for them later thinking about clinical applications. And so it's definitely -- Flex is enabling that bridge into -- along that trajectory. .

Next up, we have Matthew Sykes from Goldman Sachs. .

This is Ivy [indiscernible] on for Matt. You mentioned you're working with distributors in China on inventory levels.

Can you talk through what that looks like? And then if you expect to see these issues continue into next year?.

This is Justin. I'll take that. And so I think you got to go back to the end of Q4 going into Q1 when we had our typical annual price increase. But this year, the price increase was more than we've had in the past.

And typically, what we see with distribution is they will buy ahead inventory at the lower price before the price increase goes into effect to the limit that they can basically hold inventory.

And I think what we saw at the beginning of this year is we started the year with higher inventory, started to have issues in China overall and the inventory didn't come down as much as the distributors thought that it would. And then we've just been trying to manage the sense..

And so the inventory levels are still high. And we're -- this is against the backdrop of the challenging macroeconomic factors that we talked about earlier. And so it does take some time for things like this to unwind because we sell to a distributor, distributor sells to service provider and then service provider sells to the end customers.

So given that dynamic, we don't expect any improvement in Q3 or Q4. We expect the average of those quarters to be roughly the same as Q2..

We are seeing some talk of activity levels improving here or there, but mostly anecdotal. And so we've really got to forecast what we can see right now, and that's still higher inventory positions and it's the backdrop of lower demand. .

Okay. Great. That's helpful.

And then have you seen any acceleration in Chromium or maybe feedback from the market post the NanoString ruling in Germany?.

I think the question is more around Xenium. And like -- the momentum in this quarter on Xenium has been very strong. I think much of that is driven by the performance of the instrument and the data that comes out of it. I would point to that as the first order and the second order variable that has driving. .

Our next participant is Mason Carrico from Stephens Inc. .

Maybe 2 quick ones for me here.

For CytAssist placements during the quarter, did you guys share the percentage or mix of placements that are going to new 10x customers or new Visium customers versus customers who are already utilizing Visium? And how does that compare to what you've seen the last few quarters?.

I don't think we've shared specific details around that, but it's a reasonably balanced mix, I would say. There is substantial number of CytAssist are going as you would expect, to current Visium customers who've been using sort of the legacy manual assays..

But also, there's a material number of customers that are new to Visium. They're buying CytAssist to get into the Vision workflow because it now is kind of opening up possibilities that weren't really open before.

And some of those substantial products have been previous 10x users of single cell, but there's also some new to 10x users entirely as well. And I think that the relative fractions have been fairly similar over the last couple of quarters. .

Got it. Okay.

And then for union placements, have you seen any bundled orders with those placements, whether CytAssist, Chromium and -- maybe any color you could give, if you have seen those in terms of the mix of instruments or the customer types driving them?.

Yes. We've certainly seen customers kind of coming in into the full 10x ecosystem. And we are certainly not adverse encouraging that. In fact, when people do want to go in and buy all 3 instruments, we give them special deals and especially those come with consumables. That happens.

And we've talked about before just how much value there is to a customer being able to use all 3 platforms to interrogate their biology..

And we're seeing that in workflows where very, very frequently people are using a Chromium experiment to map out the cells and the genes that they then want to put on custom panel for Xenium. And oftentimes, when they're running Xenium experiments on a particular tissue that they then follow up on that same section.

Put it on CytAssist and run a Visium experiment to get a more comprehensive view of the tissue. And we've talked about this before. There's a lot of science to be discovered by using all 3 platforms, and that's definitely resonating with a lot of our customers as well. .

Next up, Justin Bowers from Deutsche Bank. .

In the prepared remarks, you talked about being able to ramp production faster than you had expected in the first half. We are just hoping you could give us a little color on some of the bottlenecks you were able to work through.

And are there any sort of -- any more of those in the way as you scale production in the back half of the year? Or are you through most of that?.

And then secondarily, just maybe give us -- talk a little bit about the sort of panels on Xenium and the number of different panels and the development path and your ability to scale the custom panels after the initial request. So 2 parts. .

Yes. So I'll start with the operational capacity.

And I think if you got to go back to the beginning of the Xenium launch, where we've talked about overall, our priority is customer success and in a measured rollout initially to making sure that our earliest -- that our early customers were successful, were able to generate their own data on their instruments and then have success overall in interpreting that.

And we had success there pretty much pretty early. And so then the constraint shifted to the next thing, which was operational capacity..

And so once we got through those early placements and then we then shifted to operational capacity, it was around making sure that we had enough components, making sure that the yields were high, making sure that we had the space to do this. Our new operations facility was a big part of that.

All the QC that goes in the end and then also installation and support resources..

And so first off, kudos to our operations team for scaling up like they did over the quarter. But there's risk they encounter every day and every week that they've been solving day-to-day and day-to-week.

And so really, our goal is to make sure that we're able to successfully and consistently maintain this level of production as we head into Q3 and Q4. But then as you think about scaling up to the next level as we get ready for next year, we will need to build higher inventories with components..

There's going to be higher whip on the balance sheet. We're going to need more support personnel and installation and service personnel as well. And so over time, that bottleneck can shift from one point to the next. .

Yes. Maybe on the topic of Xenium panel. So we've got -- we've been working hard and adding more and more panels pretty much continuously. We have a number of them like human breast panel, lung, brain. There's a new panel that would come out with -- for a multi-tissue analysis and for cancer. So kind of across applications across tissues.

And importantly, we also have a fully cost option that a lot of our customers are using as well as customization on top of the standard data as well. So lots of options, and we're adding more all the time. And that's why it's really important.

It's not -- oftentimes, it is making sure that the customer is able to measure the precise deals they are interested in. And as we keep increasing our content, that just increases the power and the reach of the platform as well. .

Next up, we have Matt Larew from William Blair. .

Just one. And Justin, relates to the conversation around progress towards cash flow positivity. So you kind of alluded to some of the things that you're working on.

If I think about what you're undertaking from sort of a working capital perspective and how that might burden cash versus maybe more onetime costs related to capacity expansion and then resulting in perhaps initial underabsorption versus things that will be more sustainable, like additional people, technology, et cetera, just as we're thinking about sort of building out the model and how we get towards that cash flow positive number.

How should we be thinking about maybe those different buckets of investment areas?.

Matt, that's a very insightful question. There are different flavors of the type of impacts that we're going to see as we go up the ramp.

And so the ones that I just talked about around building up inventory and buying components in advance and stockpiling those because some of those supply chains are new and relationships are new and suppliers are new and things like that would be expected to smooth out over time as you're able to get further up the ramp and have those be more established.

So I see those maybe as things that would spike during the ramp for a few quarters and then hopefully smooth out as they become more routine..

When you think about the operational capacity. A lot of that is going to be fixed. But as you scale up the units, you're going to be able to better leverage that fixed cost. As you think about the installation and the support, those are things that are working well right now that can also become more efficient over time.

So again, as the units increase and when you look at the unit economics there. I would expect leverage there as well..

But you've got to build capacity for these things in advance of when you're going to need them. And so then when you are going up a ramp, you are going to be underutilized for some period of time because of the nature of having to build something in advance.

And so that's why I pointed that out as we head into the year for the free cash flow positive, becoming free cash flow positive is really an important goal for us, and we're continuing to work towards it..

And there is still a path for us to hit that by the end of the year. We expect to be very close to free cash flow positive.

But when you look at where we are in this ramp with it being steeper and us having the decision around accelerating the investments here in spatial and Xenium or holding to the cost line absolutely to make sure that we hit the target at the end of the year, I'm losing the constraints in a targeted way to make sure that we do what's right to support and grow the spatial opportunity and realize the full potential that we have there.

So I hope that answers your question. .

Next up, Rachel Vatnsdal from JPMorgan. .

It's Noah on for Rachel.

We've seen a lot of drugs come online in the commercial market, which has reignited interest in several disease areas, including Alzheimer's, could you give us a sense if you're seeing any of these really large drug launches to influence any earlier than clinical market-related work, Alzheimer's, maybe some big GLP-1 interest..

We've typically seen that commercial markets will influence pre-commercial markets.

So have you started to see that flow through at all in some of the work for any of your instruments?.

I think for us, we've been -- so far, our products have been focused on earlier discovery side of the world with that kind of expected progression further down the workflow at biopharmaceutical companies.

So I think like when you took a very large view, there is certainly the incentive to invest more in foundational scientific research and subsequent R&D work is increasing as there are more and bigger launches of new drugs and new modalities that come online..

And so I definitely think that there's going to be more investment for those reasons. And investment in new technologies that drive the understanding of the fundamental science allow you to see things at a much deeper level.

We are seeing certainly -- and I mentioned this in the call, the utility of these -- of our products, specifically in the cell therapy space, which is a big emerging area, but we see that also expanding across other modalities. .

And our last person up today is Kyle Mikes and Kyle, I believe I cut you off a little early on your questions. So if you'd like to form your next question, please do so now. .

No worries.

Just one for you Serge, on the 5,000 Flex panel for Xenium that's planned for mid-'24, at AGBT, that was just proof of concept, I believe, when would early access begin for that? And then would that come before Visium HD?.

Yes. We haven't given an updated time line on really either of those. It's a good question. I mean both products are incredibly exciting, and we're seeing really great internal data but we're not yet sharing the precise time lines. .

Well, thank you, everybody. That concludes today's call. Thank you for joining. You may now disconnect..