Q2 2023 10x Genomics Inc Earnings Call
Yeah.
Hello, everyone welcome to the 10 X sooner.
Genomics second quarter 2023 earnings conference call I will now hand, the call over to your host Cathy Cornell.
Please go ahead.
Thank you and good afternoon, everyone.
Earlier today <unk> genomics released financial results for the second quarter ended June 32023, if you have not received this news release or if you would like to be added to the Companys distribution list. Please send an email to investors at Tenex genomics dotcom and.
An archived webcast of this call will be available on the investor tab of the Companys website panics genomics dot 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 10 extra nomex issued today and in the documents and reports filed by <unk> genomics from time to time with the Securities and Exchange Commission.
Connection IMAX 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, our third stack that up our CEO and co founder and Justin Macken here, 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 and one follow up so that we may accommodate everyone in the queue.
With that I will now turn the call over to search.
Okay.
Thanks, Kathy 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 Xinyu.
I will then turn the call over to Justin for a more detailed look at our financials business trends and the outlook for the rest of the year.
Yeah.
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.
Okay.
A clear highlight this quarter is our momentum in spatial biology in Q2, we leveraged our manufacturing scale and expertise to quickly ramp <unk> shipments yet even so orders outpaced shipments not only xinyu increasingly recognized as the best performing platform for in situ analysis.
We have also continued to see strong demand for our <unk> suite of space will discovery tools.
This quarter's results reinforce the strength they have always differentiated us the velocity of our world class innovation engine backed by our broad commercial and manufacturing scale.
We'll 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.
Ambiguous 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, but 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.
The increasing traction and enthusiasm from our customers further strengthens my conviction that <unk> has the potential to be transformative to the corona 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 self surface proteins on a cell by cell basis across multiplex 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.
Okay.
As we expand the capabilities available in 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 is 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 there are new to Tenex 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 homecourt of cellular <unk> 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 Tenex tools that could help determine the persistence of car T cell therapy.
And Ah study in the journal blood showed how tenant single cell analysis to deal with the power of AI could provide the 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 the world single cell <unk> capabilities exclusively on flex will help open up even more single cell research and translational and biopharma settings going forward.
Okay.
Now turning to spatial where both our visual mazaedium platforms delivered very strong growth during the second quarter.
In <unk>, we continue to see robust demand for our <unk> instrument, which is now one year into launch.
It is clear our Cytosorb has removed the key workflow challenges with the initial manual visiting assays.
But giving researchers a better experience and a better workflow and better data fed assist is driving increased demand and spring more routine use of the vision platform.
In fact, this quarter, our sales of our Cytosorb based consumables doubled our instrument free assays reinforcing how cytosorb is now the preferred method for <unk> research.
Uh huh.
Okay.
With <unk> as the foundation, we continue to invest to expand the breadth of capabilities available on the <unk> platform to enable more analytes and more obligations.
This quarter, we launched our <unk> gene and protein expression assay.
Our unique morphology first workflow enables researchers with three annualized in one high plex protein whole transcriptome, RNA and <unk> staining.
All on the exact same tissue section.
In addition, our team continues to make excellent progress on the <unk> HD.
Which will be offered exclusively onsite assist.
This ambitious project has been as exciting as it has been challenging.
But these are precisely the types of challenges <unk> 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 <unk> as we get closer to launch.
Now turning to <unk>, which we firmly believe is the best performing platform for in situ analysis.
While this quarter's results demonstrate is the momentum we have as we bring the whole of company effort to capturing the full of the <unk> opportunity.
We have momentum with researchers as more and more labs independently complete their own <unk> experiments and gain immediate access to powerful high quality data.
We have momentum in manufacturing and operations, where we ran production faster than we initially expected.
We have momentum with our commercial team with a high velocity of orders during the quarter and our continued focus on delivering a world class customer experience.
And we have momentum with our product roadmap as we've continued to expand our broadening of targeted them 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.
Okay.
With our unique combination of differentiated chemistry.
High end sophisticated components.
And powerful onboard software Xinyuan is it 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 it could deliver a best in class performance.
With every run researchers are seeing directly the xinyuan real differentiation was never in the rhetoric. It was always in the result.
Which they are now routinely generating in their own labs with their own precious samples.
We built <unk> to just work in the hands of researches the same as our other products.
That means is leaning just works with very high specificity, ensuring the vast majority of signals a true biological transcripts, rather misleading noise.
And our analysis datasets Xinyu full discovery rate was less than one 5%, which we believe is best in class.
Excellent performance has not been core operated by multiple customers.
Zooming just works with high sensitivity, even on difficult issues, enabling researchers to reliably measure their genes of interest even when those genes are lowly expressed.
We expect the sensitivity will get even more of a boost with the latest version of our onboard software, which were released last month.
<unk> just works with best in class throughput Xinyuan.
<unk> 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, one centimeter square tissue sections in about a week based on our competitors' user guides and recommended wrong time, it would take six weeks to scan the same amount of tissue.
<unk> just works on a broad range of tissues for miles brand to more complex human samples, including breast brain colon skin lung lymph node and more <unk>.
<unk> also generates high caliber results on various sample types, including fresh frozen FSP and tissue micro arrays.
And Xinyu bus and this efficient easy to use workflow, which we've heard some customers described is easier than chromium.
Liam 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 redesigned validated panels and expect to launch three more by the end of the year.
With each of these offerings researchers and also spike in their own custom genes to ensure there arent 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 full accustomed gene panels is increasingly validated in the field and resonating well with researchers who appreciate the ability to study of their exact genes of interest in fact more than half of our panel orders to date have incorporated some level of customization.
Okay.
As part of our exciting and ambitious zoom roadmap. We're also planning to launch a 5000 plex panel in mid 2024.
Generally more plex comes with more tradeoffs.
As your dialogue Plex, you may need to dial down sensitivity specificity and throughput.
This can lead to flex quantity without data quality.
<unk> 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, Z names just works with its differentiated approach to software and data analysis.
<unk> 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 Xinyu instrument immediately after the run is done without requiring massive uploads onerous downloads time consuming data transfers.
Our expansive cloud subscriptions.
Customers, who want more of instruments interpretation can easily do so using zoom explorer or a wide variety of open source tools.
We built <unk> to be the best performing system for in situ analysis, both at launch and for the long term.
Beyond our gene panel pipeline, we're driving a robust multiyear Zealand roadmap that we expect to feature in demand applications like Isa form mapping SMB detection xenograft car T tracking and gene fusions among many other applications.
These differentiated capabilities can be uniquely enabled by <unk> chemistry.
Altogether. This remarkable combination of features as earning rave reviews from our customers.
One even told US he jumped for joy when <unk> data for the first time.
This enthusiasm from our customers along with the systems proven strength performance and momentum in the field should reinforce the fact that <unk> 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 transcriptome ex <unk> and Cortina, we have built incredible products developed foundational intellectual property and have deep experience with customer insights that have been instrumental to our technology leadership.
<unk>, we absolutely relish the opportunity to help founders and scientists.
Their ideas and transform them into products that can be used by researchers to fundamentally change on our understanding of biology.
Okay.
Our unwavering commitment is to our mission and to driving innovation to push science forward. We're.
We have invested well over $1 billion in research and development to bring new tools for researchers and we will always strive to do what is right by our customers.
That means delivering breakthrough products that performed as promised.
After all there is no cutting corners, when it comes to cutting edge technology.
Okay.
We've made the necessary investments in both R&D and IP to build a premium product that delivers exceptional performance.
Seeing this validated.
<unk> and again by our customers have given us even greater confidence in the potential of this product to lead the next evolution in our life Sciences.
I firmly believe that <unk> 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 and broad commercial reach and solid financial profile to deliver on the full promise and potential of this technology.
Yeah.
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 2000 patents issued or pending including more than 70 issued and allowed in the second quarter alone.
These more than 350 related 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 patterns.
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 Tenex technologies that benefit researchers and ultimately patients around the world.
Okay.
We're executing on our mission with a solid foundation built an incredibly strong fundamentals.
Our team is fully dedicated to driving growth improving operational excellence and leveraging the unique strengths that have always set <unk> apart.
With that let me turn it over to Justin for more details on our financials.
Thank you Serge.
Start by reviewing our financial results for the three months ended June 32023, 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 $108 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.
Colombia 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 or <unk> side assist instrument launched at the end of Q2 last year and our zinnia instrument launched in Q4. So we did not have material special instrument revenue in Q2 of last year.
Services revenue was $3 4 million, which increased 74% over the prior year period.
Moving onto our revenue by geography, Americas revenue of $91 $5 million grew 29% over the prior year period EMEA.
EMEA revenue of $31 2 million grew 22% over the prior year period and revenue in APAC was $24 million.
At 33% increase year over year.
We continue 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 macro economic 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.
<unk> 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 <unk> placements this quarter.
As I shared on our last earnings call in the early quarters of <unk> adoption and we expect overall company gross margin to trend lower as more instruments are sold given that the <unk> instrument carries a significantly lower margin than our other instruments.
As customers ramp up Theres, veniam utilization, <unk> 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 in 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 xenia 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 head count and other spending across the organization.
I had mentioned before that one of the biggest factors in becoming free cash flow positive would be the slope of <unk> ramp.
To support a steeper adoption curve, we will need to increased operational capacity inventory builds installation capacity service and support.
This quarter continues to add to the early enthusiasm and demand that we're seeing proscenium.
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 one third 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 <unk> adoption.
We will continue to focus on disciplined spending and managing our strong cash balance.
At this point I'll turn it back to search.
Thanks, Justin before we open it up for Q&A I want to take a moment to thank our team at <unk>, we continue to push the bounds of whats possible, which is both exceptionally challenging and profoundly rewarding.
Specialty energizing for us to see the incredible customer enthusiasm and momentum for <unk>, which will usher in a new era of genetic analysis.
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 highly regarded physician scientist in order of several best selling books on the future of Medicine recently described spatial biology.
<unk>.
The hottest field in life science for making new discoveries about human health and disease.
Does someone else 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 low spatial context.
We believe we have the best products and technologies to achieve this vision.
And as a result, we're 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.
Thank you so much ladies and gentlemen, we are now going to move into the Q&A session of today's call. If you haven't done so already please hit star one on your telephone touchpad and that will put you in our Q4 for questions.
With that said I will go ahead and get started with Patrick Donnelly from Citi.
Go ahead, Patrick Hey, guys, great. Thanks for taking the questions guys.
Serge maybe one on Veniam.
Adoption continues to pick up can you just talk about what youre seeing in the market in terms of feedback when you get competitive wins is it a focus on the specs being superior as the market is 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 outpaced 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.
Like we said before up until recently there was generally does compete confusion out there in terms of what to expect there was a lot of aspirational claims that were put out there and the change in the dynamic this quarter in the last two quarters I would say is around the fact that people can now see it for themselves.
Which systems work and how well they work and in particular the reviews are coming back on <unk> incredibly positive.
Relative to the data we talked about it I talked about those in my preliminary remarks, we made our own analysis of sensitivity and specificity of the data quality or not being now come from in the field and is resonating really strongly and the world is also the fact that people are actually able to get the Robinson very quickly to get them all.
And the fact, we here in <unk>.
Apple the customer who doesn't run finishes on a.
Saturday or Sunday, and then on a Tuesday is actually presenting that data at a conference.
It's a remarkable turnaround in <unk>.
It's hard for me to think of a technology that has that kind.
Nova already update and Thats whats really really resonating in the water spreading now among customers. So I think that's by far the so the primary dynamic aside.
The <unk> warrants.
Works out of the gate and the data is really really high quality resonating.
All kinds of players that we're hearing from the field.
Yes.
It's early days, but its clearly all the signs are showing that there is a huge potential and huge sort of momentum and excitement is building.
Okay. That's helpful and then probably one for Justin just on China.
Surprising to hear maybe open up 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 customer as you guys go through the distributor service providers, maybe 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.
Xenia moving out can you just talk about what.
The moving pieces were in that $10 million bump. Thank you guys.
Yes, sure Patrick so.
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 in that region.
And we also believe that this environment exacerbated what we've already been seeing with 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 go into the guidance. This is incorporated.
Our updated guidance range.
Despite the issues that we saw in APAC, primarily driven by China <unk>.
EMEA have been strong and so when you look at our updated guidance range, we're assuming that.
Amen.
<unk>.
We will end the year somewhere in the mid teens year over year percent growth.
And then there is pressure on APAC continues.
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.
Then just overall looking at worlds.
Worldwide spatial.
Maintaining the strength that we saw in ASEAN.
This quarter, we also had a really strong quarter for cytosorb as well, but at some point.
I would expect that the demand.
First site assessed.
To come down a little bit.
We have a bolus of demand at any kind of new new product launch and so.
The combination of those things is roughly holding special flat.
Worldwide level from now through the end of day from Q2 through Q3 and Q4.
Okay. That's very helpful. Thanks, Justin search.
Okay.
Thank you next we have Dan Arias from Stifel.
Dan go ahead.
Thanks for the questions, maybe just a follow up Patrick there on Veniam search can you comment on your own manufacturing capabilities I mean, it sounds like youre pushing hard to ramp in <unk>.
Expand what you can do there pretty quickly when do you envision being at the point, where production shouldnt be considered a constraint on placements.
Yeah.
Yes.
We have been investing in operations like we've said it's been initially when we came to market. We were very measured and kind of our approach. We have certainly scaled up to a new level of production right now and Thats, what just in kind of was alluding to in terms of as we look towards and Thats.
Next couple of quarters.
Last last quarter shipments a day.
Now I'll say outpaced shipments.
So it's going to be sort of a dynamic thing we're still we're working towards.
The scale of those special to prepare for.
For <unk> and beyond.
Okay, and then maybe on the flex kits can you just talk about <unk>.
<unk>.
To which youre seeing that products have the ability to sort of change the economics of single cell work.
And 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 in fact, it seems like it should be so the puts and takes on flex and just the economics of single cell work would be really helpful.
Yeah, So plus has definitely been scaling up.
In terms of adoption is still.
Relatively minor component of the overall single cell portfolio. We're seeing certainly we're seeing examples of projects that are that are emerging that are incremental.
As possible before precisely for the reason you mentioned and that you get to a lower price.
Just first on both people are certainly putting sort of the das together in organizing these projects.
As an incremental effect. It does also have an effect where.
For people so they are limited in samples.
They could end up spending less money running the same type of study and then there is also a studies where people are limited by budget and they simply run more more samples. We are if you look at the curve in.
In terms of the reaction number.
Basis floods is.
<unk> is contributing.
In a substantial way to increasing numbers of reactions.
Sure.
People are running in total.
It is like you are alluding to it's not necessarily going to be manifesting itself on the top line.
It's got great that a little bit of.
Of topline pressure, while that's happening initially, but we think that overall that portends.
As dynamic markdowns.
Great.
Possibilities for the future.
<unk> will expand.
The the the kinds of studies they can do as they can drive towards lower priced lower price per sample.
Larger larger studies.
Okay. Okay.
Okay.
Thank you Dan.
Next up we have Dan Brennan from TV Cohen.
Go ahead Dan.
Hey, good afternoon. This is Kyle on for Dan. Thanks for taking the questions I just had one on site assist here can you just can you provide any color on how <unk> placements have sort of trended relative to last few quarters.
Hey, Kyle this is Justin.
I can give you some broad strokes there so Q3 and Q4 of last year demand was really strong for Cytosorb. We shipped a few small number at the end of Q2, but Q3 was really.
The last quarter the launch quarter for it.
We had a drop in Q1.
Slight drop.
Right now in Q2.
Very close to where we were in.
Q3, and Q4 of last year and incremental over Q1.
Got it and so with all these places placements how should we sort of think about it.
<unk> culture going forward, and that's driven a lot of demand for <unk>.
<unk>.
Yes, when we look at the numbers, we certainly see.
Substantial bifurcation of the labs that have Cytosis, Ron more vision consumables as the ones that do not.
No. There is an open question still that we are looking at that.
The selection of labs that are going to be running more consumables will are more likely to buy the cytosis instrument. So were still watching how that's going to sort of play out numbers was but qualitatively. It's unambiguous that cytosorb makes it much easier much.
Much more amenable for people to run.
<unk>.
And generate great data, we're hearing great feedback.
And lots of interest in it.
Debase fundamentally enabling instrument, so we feel optimistic about its potential to drive more.
Got it thank you.
Next up we have Kyle <unk> from Canaccord.
Go ahead, Kyle Yeah, Hey, guys. Thanks, Hey, guys. Thanks for taking the questions. One on the chromium business that grew 7% year over year on an easy comp in the first half I know there was the China headwinds in the placement mix consisted of less connects in the quarter.
But you originally guided to that low teens growth for the business I know thats not update 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 teens level or whatever it is now and if there's any like non macro related deterioration in demand for the sickle cell products and maybe if you just talk about it by region. It could be kind of helpful. Just to get more confident in that era.
Yes.
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 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.
<unk> being on track to what we expected they would be at the beginning of the year. You are right. We do 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.
Us.
And Thats whats being worked into our overall guidance range.
In EMEA on track or a little more and.
Building in the weakness that we saw in APAC driven by China Carryforward.
Okay.
Okay.
Next up we have Morgan Stanley go ahead.
Hey, guys good evening. Thanks.
Thanks for the time so juggling.
Juggling a few earnings calls here. So apologies if you touched on this but can you give us some color on what youre 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.
Hey, Tejas.
Yes.
Yes, there's a lot going on in the in situ.
Sure. So our Northstar our focuses on the customer right and.
There is.
When it comes to pricing certainly we are trying to accommodate what trying to accommodate diebold right now and especially when it's on a competitive dynamic.
Make sure they didn't make the right choice.
Here in.
As far as but.
I think that I said earlier the thing that we're coming back to the fact that the system performs incredibly well generate so the best data and the market because it is like are operated by other customers. It works really well and kind of ability to your question.
<unk>.
It works well in the field and two.
We are seeing that some of the early customers are able to run through quite a few samples.
Very quickly now.
Those early customers will them to be.
I'm not ready to adopt those technologies are anticipated later cohorts will will take some more time to onboard.
And ramp up but theres a lot of really positive early signs in terms of the potential of and how many samples of these systems will be flowing through.
Got it Okay. That's helpful and then.
Follow up for me on the flex side of things where customers today and in the adoption phase for flex what percent of those early adopters have completed that initial pilot in evaluation trials 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 come towards you macro installation how are you thinking about that in the context of your guide.
So in terms of let me answer the flex question. So.
The way that.
<unk> has been getting general adoption has been scaling up kind of across our customer base.
And.
I wouldn't even say Miss a sale is just sort of the early adopters or something.
To some extent is bringing some translational customers. We're certainly have some like some of our core customers.
Moving onto flex.
In a lot of cases, it's less about switching all of our people.
Paul from certainly from their existing workflows or existing studies, but more in terms of assortment in terms of incremental.
Our study is an incremental projects when they have a new project.
They are now starting more and more conceptualized in terms of flex. It goes floods 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 to reach a substantially lower price per sample and us imagine larger.
Larger studies.
So so.
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 in the specialist they look at the potential to expand the single cell market over time, I think we're seeing good signs.
Okay.
Got it just isn't any perspectives on the guide.
Yeah.
Hey, Josh so all of our <unk>.
All of our products our view of them are built into our guide.
We still have.
Decent range on our guidance heading into the back half of the year and so.
Those different scenarios in Belgium.
Fair enough. Thank you.
Next up we have Mike <unk> from Bank of America.
Go ahead, Mike Great. Thanks, Hey, guys. Thanks for taking the question.
I got a couple of quick ones here hopefully.
One was starting on <unk>.
<unk> site assist instruments versus consumables, you talked through the pacing of site assist that was really helpful. We can kind of back into the <unk> numbers then.
But I want to focus on the consumables on spatial.
By our math, that's been kind of flattish relatively flattish four quarters in a row on a dollars basis.
More or less so.
<unk>.
When does that start to really accumulate.
And that kind of goes to the point of 1000 installed base of CDM goes higher and higher at what point do you think that will really kick in and Youll start to see that razor razorblade model on the spatial side really start to churn.
Yes, so as far as your first question on space, So overall and Youre asking about museum.
This is <unk>.
Both both visits and engineered consumed I think.
That stuff is when youre looking by product at the worldwide level right now with the China and APAC impact in there.
To interpret that as what it means for the platform you might get the wrong you might get the wrong conclusions and spatial has been <unk>.
Strong.
<unk> in EMEA.
Everything has been impacted in APAC.
China.
And some additional information on site Assistant Museum.
We saw trends earlier on.
Cytosorb customers were attending the order and use more of iridium.
And.
I think that's a great. That's a great trend helps address some other workflow issues that users had early on and so it's really showing that that that is the future of the platform and the vision and the Cytosorb is consumables.
Basically are now overtaking.
Legacy kind of assume consumables.
Okay Alright.
Just wanted to ask real quick to the margin side of things.
Flagged pretty extensively to us.
Gross margins are going to be negatively impacted by the scheme ramps just given.
Incrementally lower.
Gross profit dollars on that instrument as you're ramping it.
<unk>.
<unk> 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 <unk>.
To your point as <unk> placements continue to ramp higher.
Yeah. 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.
All primarily driven by the mixed shift towards in situ and so then when we look when.
When we look into the rest of the year.
Most margin could trend lower.
If we were to place more ziemian.
Instruments each quarter.
But as we continue to scale, our manufacturing capacity to produce more units.
The cost per install will decline we should have improvements.
And the unit economics, but keep in mind, when we built the Xenia 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 that was the right call and although we do have a near term impact to.
Company gross margin.
Our focus right now isn't the margin that were making off of each instrument. It's the.
Consumable revenue stream that that instrument is going to enable so we start to produce the best instrument in this space and we've succeeded in that endeavor and then also keep in mind talking about unit economics.
Customers, who purchased this instrument today, they're getting an incredible value compared to the competition and is 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 as 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.
Thank you Sir thanks, guys.
Okay.
Yes.
Next up we have John <unk> from UBS.
John .
Hello, Thanks for taking the question. This is <unk>, calling in for John So just to kind of build on what Mike just asked so do you guys ever shared a kind of like target margin profile for.
<unk> four <unk>, let's say.
Volume.
Is high enough.
Okay. So this is Justin when when we look at <unk> we.
We don't necessarily separate the instrument from the consumable we look at the <unk> business overall, and what we expect that to ramp too and so early on when the mix shift is primarily more towards instruments and were taking time to ramp up the consumable stream youre going to see I think the greatest 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 will bring the margin up in the longer term.
Got it. Thank you second question is regarding the.
Chromium flags.
Citing news about the future of barcode application.
Did you see flags and the kind of like the <unk>.
Future barcode applications.
Accelerating the clinical adoption of <unk>.
The single cell.
In settings, like diagnostics, and and like maybe precision medicine, how should we think about that thank you.
Yeah, It's a good question.
I'd say ultimately the answer is yes right.
Flex overall enables the work single cell for the first time to work with clinically relevant samples collected from tissues.
First it enables fixation on the point of sample collection.
More excitingly enables.
Single cell analysis again.
B E 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 the do you imagine the progression from basic research toward the clinic, but we definitely seeing increasing adoption that's around a lot of interest in translational studies, so that I'm gathering of the cohorts of patients phenotype samples and running them on single cell too.
<unk> to look for Biomarkers and that kind of a prerequisite for them later thinking Bob clinical applications and so it is definitely floods is enabling that bridge.
And two.
Along that trajectory.
Thank you congrats on a quarter.
Next we have Matthew <unk> from Goldman Sachs. Matthew go ahead.
Hi, This is Oscar on for Matt.
You mentioned youre 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.
Hi, This is Justin I'll take that and so.
Thank you got to go back to the end of Q4 going into Q1, when we had our typical annual price increase that this year. The price increase was more than we've had in the past.
Typically what we see with distributors is they will buy they will buy AD inventory at at the lower priced 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 as we started the year with with higher inventory.
<unk> 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 this manage the sense and so the inventory levels are still high.
This is against the backdrop of the challenging macroeconomic factors in.
And that we talked about earlier.
So it does take some time for things like this to unwind because we sell through a distributor distributor ourselves to service provider and then service provider sales to the end customer 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.
So we've really got a forecast of what we can what we can see right now and thats still higher inventory positions amidst 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 nano strang ruling in Germany.
I think your question is more around Xenia.
Uh huh.
And.
The momentum in this quarter on <unk> 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 is the first Florida and a second order variable.
Got it.
Yeah.
Great. Thank you.
Yeah.
Next.
Participant is basically carrico from Stephens, Inc.
Go ahead Jason.
Hey, guys.
Maybe two quick ones from me here for <unk> placements during the quarter did you guys share the percentage of your mix of placements that are going to new <unk> X customers in new Jersey and customers versus customers, who are already utilizing busy and how does that compare to what you've seen the last few quarters.
I don't think we share the specific specific details around that but it's a reasonably balanced mix I would say there is a.
Substantial number of Cytosorb are going as you would expect to current <unk> customers.
Who will be using sort of the legacy manual assays.
But also there is a material number of customers that are new to resume their buying side assist to get into the visual workflow because it now has kind of opening up.
Possibilities that weren't really open before.
And several of those substantial approach and there have been previous tenants users a single cell, but there's also some new tenants.
Users entirely as well and I think that the.
The relative fractures have been fairly similar over the last couple of quarters.
Got it Okay and then for.
Unit placements that have you seen any bundled orders with those placements, whether cytosorb chromium and maybe any color you could give us you have seen those in terms of the mix of instruments through the customer types driving them.
Yes, we've certainly seen customers kind.
Kind of coming in into the <unk> ecosystem, and we are certainly not averse encouraging us in fact when people do want to go in and buy all three instruments, we give them.
Special deals and special that those costs will come with our consumables that happens and we've talked about before just how much value there is no customer.
Being able to use all three platforms to interrogate our biology, and we're seeing that in workflows, where.
Hey, Ray.
Frequently people are using the chromium experiment to map out the cells and the Gms that they've been wanted to put on a constant battle for <unk> and oftentimes when theyre running zemin Xu Unum experiments on a particular tissue that they then follow up on that.
<unk> section put it on site assistant runner.
As an experiment to get a more comprehensive view of the tissue.
And we've talked about this before there is a lot of science to be discovered by using all three platforms definitely resonating with a lot of our customers as well.
Understood. Thanks.
Yeah.
Next up we have Justin Bowers from Deutsche Bank go ahead Justin.
Hi, good afternoon, everyone.
Prepared remarks, you talked about.
Being able to ramp production faster than you expected.
In the first half.
Hoping you could give us a little color on some of the bottlenecks you are able to work through.
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.
<unk>.
And then secondarily, just maybe give us talk a little bit about.
Sort of the panels on GBM.
Number of different panels, and the development path and your ability to scale the custom panels. After the initial request.
So two parts.
Yes, so I'll start with the with the operational capacity and I.
I think you've got to go back to the beginning of Athenian launch, where we've talked about over overall, our first priority is customer success and having a measured rollout initially to making sure that our earliest theyre early customers were successful.
We're 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.
So then the constraint shifted to the next thing which was operational capacity and so once we once we.
Once we got through those early placements and then we shift then shifted the 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.
Theres risks encounter every day and every week that they've been solving day to day and and data we can so.
Really are.
Our goal is to make sure that we're able to success.
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 theres going to be higher with 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 from one point to the next.
Okay.
Yes, maybe on the topic of genome panel. So we've had we've been working hard on adding more and more panels pretty much continuously.
We have a number of them like.
Human breast lung brand there is a new panel of would come out with the four multi tissue analysis where mall.
For cancer, so kind of of course obligations across tissues.
And importantly, we also have a fully cost of options that a lot of our customers are.
We are using as well as customization on double standards battles as well so lots of options and we're adding more all the time and that's why it's really important that it's not oftentimes. It is making sure that the customer is able to measure the precise gene theyre 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.
Matt.
Hey, good afternoon.
Just just one and yes.
Yes, just as it relates to the conversation around.
Progress towards cash flow positivity.
So you kind of alluded to some of the things that we're working on.
About.
Youre undertaking from sort of a working capital perspective, how that Mike Burton cash versus maybe more onetime costs related to capacity expansion and then resulting perhaps initial under absorption.
Purses things there will be more sustainable like additional people technology.
Et cetera.
Just as we're thinking about sort of building out the model on how we get towards that cash a positive number how should we be thinking about those different buckets of investment areas.
Matt that's a very insightful question. There are there are different there are different flavors of the types of impacts that we're going to see as we as we go up the ramp and so.
One is that I, just talked about around building up inventory and buying components and advance and stockpiling those because some of those supply chains are new and relationships are new and suppliers anew 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 things that would spike.
During the ramp for a few quarters and then.
Hopefully smooth out as they become more.
More routine when you think about the.
Operational capacity a lot of that is a lot of that is going to be fixed.
But as you scale up the units.
Going to be able to better leverage that fixed cost as you think about installation and support those are things that are working well right now that can also become more efficient over time. So again as the unit increase and when you look at the unit economics, there I would expect leverage there as well, but <unk> got one.
Build you got to build capacity for these things in advance of when youre going to need them.
So then when you are going up the ramp you are going to be.
Underutilized for some period of time, because because of the nature of having to build something in advance and so.
That's why.
Pointed that out as we head into the year for that free cash flow.
Positive.
Becoming free cash flow positive is really an important goal for us.
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 <unk> and <unk>.
Or.
Holding to the cost line absolutely.
To make sure that we hit the target at the end of the year.
Im loosening the constraints in a targeted way to make sure that we do what's right to support and grow the special opportunity and realize the full potential that we have there.
So hope that answers your question.
Next up we have Rachael install from J P. Morgan.
Go ahead Rachel.
Hey, Thanks for taking my question, it's now on for Rachel.
We've seen a lot of drugs come online.
If a market, which has reignited interest in several areas, including all timers could.
Could you give us a sense if youre seeing any of the.
It really large drug launches to influence any.
Earlier than clinical market related work Alzheimers, maybe some mixed <unk> one interest we've typically seen that commercial markets will influence pre commercial markets. So you're starting to see that flow through at all in some of the work for any of your instruments.
Okay.
I think for us.
We've been so far a product have been focused on earlier discovery side of the world.
Hum.
The currently expected progression further down the.
The workflow at a farmer.
Biopharmaceutical companies.
So I think when he took a very large view theres certainly.
The the incentive to invest more in foundational scientific research and subsequent R&D Award is increasing as there are more and bigger launches of new drugs and new modalities that come online.
And so.
I definitely think that theres going to be more investment for those reasons and the investment in new technologies that drive the understanding the fundamental science allow you to see things.
On a much deeper level.
We are seeing certainly and I mentioned this in our call.
Utility of these of our products specifically in the cell therapy space, which is a big big margin area, where we see that also expanding across other modalities.
Okay.
And our last person up today's call, Mike and Kyle I believe I cut you off a little earlier in your question. So if you'd like to form. Your next question. Please do so now.
Yes, no worries thanks, guys for squeezing me back in just one for you surge almost 5000 flex panel proscenium. That's planned for mid 'twenty for LGBT. If that was just proof of concept I believe one with early access begins to that and then would that come before visiting each day.
Yes, we havent given an updated timeline on.
Unreal either of those.
Good question I mean, both products are incredibly exciting and we're seeing really great internal data.
But we were not yet sharing the precise timeline.
Well. Thank you everybody that concludes today's call. Thank you for joining you may now disconnect.
Yeah.
Okay.
Okay.
Yeah.