Q3 2023 NanoString Technologies Inc Earnings Call
Yeah.
Good afternoon, My name is Krista and I'll be your conference operator today.
At this time I would like to welcome everyone to the nano stream.
Order operating results all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. Please press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press Star one thank you.
I'll now turn the conference over to Doug Farrell Investor Relations you may begin.
Thank you operator, joining me on the call today is Brad Gray, our president and CEO as well as our CFO Tom Bailey earlier today, we released our financial results for the third quarter ended September 32023.
During this call we may make statements that are forward looking including statements about financial and operating projections future business growth trends and related factors expectations regarding future operating results future cash flows current and future instrument orders as well as our manufacturing capacity prospects for expanding and penetrating our.
Addressable markets, our strategic focus and objectives and the development status and anticipated success of recent product offerings as well as investor expectations regarding the impact of our convertible note exchange and the impact of macroeconomic factors.
We're looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected and we undertake no obligation to update these forward looking statements.
Later in the call Tom will be discussing our financial results and guidance for the balance of 2023.
Repaired as a supplement to GAAP financial measures selected non-GAAP adjusted measures the calculation of which are described in detail in our press release throughout the call all financial measures will be GAAP unless otherwise noted.
You can also find reconciliations of GAAP to non-GAAP measures as well as the description limitations and rationale for using such measures in this afternoon's press release.
The eight analysts and investors in building their models, we had posted exhibits under the financial information tab of our Investor Relations homepage that include the presentation of non-GAAP or adjusted measures either spike in financial data.
I'd also like to remind everyone that next week, we'll be participating in the Stifel Healthcare conference in New York as well as the Jefferies Healthcare conference in London, We look forward to having the opportunity to speak with many of you there now I'd like to turn the call over to Brad.
Good afternoon, and thank you for joining us today the past several months have been incredibly productive Fernando strength I'm happy to have this opportunity to expand on our strong operating results that we pre announced on October 10th and to update you on some key developments in more recent weeks.
Our Q3 revenue of more than $48 million was a record high and an increase of more than 60% over the prior year.
Reduced our cash burn by about 50% sequentially in the third quarter and the reorganization that we announced last month is expected to reduce our operating expenses by more than $15 million annually.
Our solid revenue growth and a leaner operating model. We believe we are putting the company on track to become profitable in 2025.
Just as importantly, we want with the major holders of our convertible debt to exchange approximately $216 million of our convertible notes for new senior secured notes with an extended maturity to September 2026.
Pushing the maturity to a point in time in which we expect to be profitable, which we believe will give us a broader menu of options to retire the debt. While also removing our near term financial overhang that may have kept some investors on the sidelines.
We have also strengthened our leadership team.
<unk>, we welcome Todd Garland, as our Chief commercial Officer Todd.
Joining us with 25 years of experience in life Sciences spanning the full spectrum from discovery to clinical markets Todd had been traveling in the field extensively for a couple of months now and been impressed with the passion and the talent of our commercial team.
You have some great ideas on how to continue to improve our performance and I have the utmost confidence that Todd will drive the effectiveness of our commercial organization and our future growth.
I'd now like to provide an update on our progress towards our strategic objectives for the year.
Our first objective for 2023 is to increase our penetration of the spatial biology marks.
During the third quarter spatial biology demand was healthy across both instruments and consumables. We exited Q3 with an installed base of more than 500 spatial biology systems, an increase of more than 50% over the prior year.
Our cosmetic space will molecular imager remains the primary growth driver of the business accounting for most of our space will instrument orders at the single cell resolution. The platform attracts discovery researchers who are expanding from droplet based single cell research into spatial biology.
Demand is especially strong from new to demonstrating customers, who accounted for more than 90% of <unk> orders during the third quarter.
Academic and government funded researchers continue to account for about 65% of new confidence orders with Biopharma companies and <unk>, who serve them growing to account for about 35% of new orders in the third quarter.
While ongoing litigation slowed the pace of orders in Europe strong demand in North America drove overall cosmetics moment.
Despite what we believe our competitors' efforts to misuse preliminary court rulings to create anxiety for customers and eliminate competition. We have successfully defended our sizable <unk> instrument order book to billing or retaining approximately 95% cumulative orders.
<unk> is now being used to generate approximately 20 peer reviewed publications and 25 pre prints across multiple applications.
Thomas spatial informatics platform provides telemetry that allows us to monitor customer success and we can see that researchers have collectively created more than 1000 studies across more than 100 customer sites.
We are continuing to enhance our atomics platforms features functionality and usability by listening to customers and implementing a series of software upgrades.
And we are excited about <unk> continued evolution.
One of the biggest advantages of cosmetics over competing space will imagers comes from its higher Plex, which we're convinced that the single most important product attribute for Imagers.
Scientists have a huge fear of missing out that drives them to seek the broadest content panels available.
We have seen time and again that as we add plex customer demand goes up.
This is the same characteristic we saw into next generation sequencing market as it moved from focus panels to whole genome sequencing.
Our competitors are offering targeted RNA panels of just a few hundred plex.
The cosmic <unk> 1000, flex RNA assay that we offer today provides twice the plex of competing assays and our cosmetics assay roadmap is designed to push flex to the limit.
In September we released our first public six plex dataset, which was generated from the human brain tissue.
Data set nicely demonstrates the value of maximizing flex as conflicts was able to detect over 3000 unique genes in the sample with an average over over 500 unique genes and each individual cell.
We remain on track to begin shipping our sixth flex RNA assay kits during the first quarter of 2024 and will provide customers a sneak peak of this new assay. When we began offering it via our technology access program service later this quarter.
Flex is not the only advantage of cognex relative to competitors. Cognex also provides highly accurate sell segmentation, which allows the instrument define the boundaries between cells and properly assigned the RNA and protein molecule detected to the correct cell.
Our failure to properly segment sales and a tissue call of this molecule to be assigned to the wrong cells, making the data generated useless or even worse misleading.
Next week, we'll be highlighting the cosmetics roadmap at the annual meeting of the society for neuroscience or our scientist and customers will present more than 20 studies showcasing our spatial platforms.
<unk> studies will include the new six Plex RNA datasets generated on human brain samples, while other studies will German straight the power of using both our new 1000, Plex mouse RNA panel.
And our 64 Plex Cognex now neuroscience protein panel on the same slide.
While genomics continues to account for a minority of our new spatial system orders that drives most of our spatial consumable revenue.
Our installed base of genomic systems remains highly productive generating more than 320 peer reviewed publications to date.
This body of research nearly doubled in the last 12 months showcasing many exciting applications for spatial biology.
And the investors may not appreciate the importance of proteomics applications and driving genomics utilization.
Protein applications account for about half of the genomics sample volume and half of its peer reviewed papers.
Protein applications that remains a focus for our genomics roadmap.
In September we announced a groundbreaking new assay for genomics called the Io proteome Atlas or IPA.
While many spatial biology systems provide protein applications of modest flex the genomics IPA represents something completely new.
That 570 <unk>.
IPA covers virtually every targets in oncology and immunology for which an <unk> antibody has ever been developed.
IPA offers more than five times, the space with protein content in a competing platform.
And its comprehensive coverage makes it ideal for screening clinical trial samples for new drug targets and Biomarkers.
The unveiling of IPA has already resulted in a surge of new interest NGL mix.
Last week, we highlighted the genomics IPA during the society for immunotherapy of cancer or <unk> conference.
Too early access customers presented data that they had generated with the new assay.
Researchers from the Mayo clinic demonstrated how the IPA provides a simple way to explore the long tail of potential protein biomarkers.
<unk> targets and breast cancer tissue that would have been missed in smaller panels.
Researchers from mass General hospital combined the genomics IPA with the RNA whole transcriptome Atlas and to a single multi ohmic assay that was more effective than RNA seek funding.
Binding patterns that predict drug response and pancreatic cancer.
Customer feedback on these presentations was extremely positive with many customers and all of the enormous increase in protein flex we have deliver calling it a game changer.
Many are looking forward to giving the IPA atry. After we began shipping the IPA to customers later this quarter.
Our second objective is to deliver predictable revenue growth.
So far this year, we have beat our revenue guidance in every quarter.
Q3, we exceeded the upper end of our revenue guidance by about $1 million as we successfully scaled up instrument manufacturing and continue to work through our substantial topics backlog.
The team is working hard in the fourth quarter to install as many complex systems as possible, but we still expect to carry a backlog into 2024.
We've also seen improvement in encounter instrument sales throughout the year and we're implementing initiatives to keep this foundational business a steady contributor.
In an effort to ensure investor expectations remain in line with our revenue outlook during the fourth quarter or to date narrowing our guidance range. The updated guidance reflects the impact of the preliminary injunction that prevents us from delivering cosmetics units to customers in some European countries.
The top end of the range represents healthier at year end spending by our customers while the bottom end of the range keeps revenue approximately flat from Q3 to Q4 and reflects uncertain macroeconomic factors and the potential elongation of capital equipment sales cycle.
Our third strategic objective is to demonstrate progress towards cash breakeven.
We shared with many investors during September our company operates two franchises with very different profitability profiles.
Our encounter business the leader in the mid Plex gene expression market already provides an estimated 30 plus percent EBITDA margin based on its consumable have any revenue mix and minimal R&D.
Our spatial biology franchise is rapidly growing but not yet profitable based on the instrument heavy revenue mix and ongoing investments in product innovation.
The team remains laser focused on our path to profitability during Q3.
Increased operational discipline helped cut our cash burn by about 50% sequentially.
Early last month, we reorganized our research and development and manufacturing operations, eliminating over 100 positions.
The impact of this expense reduction is not yet reflected in street models, which we believe overestimate our operating loss in the coming years.
Importantly, despite this reduction in force we remain in a position to deliver the product roadmap that we have described publicly.
To conclude my remarks, I will provide an update on our ongoing IP litigation.
In September our competitor <unk> genomics was granted a preliminary injunction and the new European Unified patent court for UPC.
That prevented us from selling our RNA detection assays for cognex across the 17 European Union countries.
Based on what is referred to as the 782 patents.
We have appealed this decision to the UPC Court of Appeals in Luxembourg, and expect this appeal will be heard in December.
The full EPC proceedings on the merits of <unk> claims are expected to take place in the second half of 2024.
On October 10, the UPC ruled in our favor and a second case related to what is referred to as the nine to APAC.
The court denied <unk> request for preliminary injunction and raise questions on both the validity and infringement of this path.
And issuing this ruling the UPC considered elements of our arguments that will not addressed by the German court.
Evaluated the same 98 patent and day, giving us another path forward in our appeal in Germany next year.
Next week, we'll be in the U S District Court in Delaware for another IP lawsuit filed against US by 10 X that alleges that genomics infringes patents that they acquired from parent company called prognosis.
The trial is expected to begin on November 13, and last for five days, we are confident in the merits of our arguments that we intend to present and on the lack of infringement as well as the invalidity of the patents asserted by 10 X. We will of course update you as soon as we know more about the outcome of those hearings.
Now I'd like Tom to take us through the details of our Q3 operating results. Thanks, Brad and thanks, all for joining us today.
For the third quarter of 2023 total revenue was $48 1 million, representing 63% year over year growth for our spatial biology business Q3 revenue was $28 9 million representing growth of more than 200% year over year.
<unk> biology instrument revenue was $21 1 billion approximately 350% year over year growth, we shipped about 90 and installed about 65 special instruments during Q3 growing our special instrument installed base to approximately 510 instruments.
As a reminder for those updating their models the number of instruments, we installed during the quarter to defer as compared to the number of instruments we ship.
Revenue recognition is based on instruments, we shipped during the quarter as opposed to installations.
Q3, spatial biology consumables revenue was $7 8 million, representing 70% year over year growth in <unk>.
Reflecting typical genomics consumables pull through Q3 seasonality and continued stocking orders cost consumables.
Q3, and counter revenue, which includes all service and other revenue was $19 $2 million, reflecting the continued stability and durability of the encounter platform.
And kind of instrument revenue was $2 5 billion consumables revenue was $10 5 million in service revenue was $6 2 million at.
At the end of Q3, our encounter installed base was approximately 1140 instruments.
Turning to margins and expenses I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock based compensation depreciation amortization and certain other items with no correlation to continuing operations. Please refer to our press release as well as the exhibits we have posted on our Investor Relations webpage for detailed information on our non-GAAP or adjusted measures are.
Baird.
Q3, adjusted gross margin was 41% impacted by revenue mix heavily weighted spatial instruments, which are currently selling at lower than planned gross margins due primarily to higher unit production costs improvement expected.
For the full year, we now expect gross margins will be the low to mid 40% range with a higher than planned instrument production cost partially offset in Q4 by the cost benefits of the reorganization announced on October 10.
Adjusted R&D expense was $13 4 million a decrease of 8% year over year with lower personnel related costs, partially offset by software development consulting costs.
We expect R&D expenses to be lower sequentially in the fourth quarter, primarily as a result of the reorganization.
Adjusted SG&A expense was $26 7 million, a decrease of 6% year over year, reflecting lower personnel costs and lower trade show and other marketing related expenses.
We expect SG&A expenses to be modestly lower in the fourth quarter as a result of the same factors Q.
Q3, adjusted EBITDA loss was $20 2 million.
Adjusted EBITDA loss is expected to decrease by about 50% or more in the fourth quarter as compared to the third quarter, driven primarily by operating expense savings from the reorganization.
Our cash cash equivalents and short term investments were approximately $97 million as of September 32023.
Turning to guidance for the fourth quarter, we expect revenue to be in the range of 47% to $52 million, representing about 45% year over year growth.
This range includes 27% to $31 million of spatial biology revenue and 20% to $21 million of encounter in service revenue.
With that Q4 range, we are updating our 2023 annual revenue guidance range to $175 million to $180 million.
Our updated annual range includes spatial biology revenue of $96 million to $100 million and any kind of revenue of $79 million to $80 million.
Given the lower expected gross margin range and the partially offsetting reduction in Q4 operating expenses. We now expect full year 2023, adjusted EBITDA loss of approximately 80% to $85 million heading.
Heading into 2024, we expect gross margins to improve driven by increasing consumable sales as a percentage of our total revenue and improved its production costs. We also expect with the reorganization that operating expenses will be sequentially lower in 2024 as compared to 2023 at least $15 million lower than with St. Pauls.
Currently reflects which should support significantly improved profitability profile in 2024 and put us on track for our first full year profitability expected in 2025, we.
We will offer more details when we provide our annual guidance for 2024 early in the new year.
Finally, I'd like to comment on the exchange. We've included for our convertible notes transaction, we consummated with two large holders representing approximately 94% of the total principal amount.
The old notes were exchanged for new senior secured notes with amounts due in September 2026, or about three years from today the.
The new notes bear interest at 695% and will occupy a senior secured position and our capital structure.
As part of this transaction, we granted 16 million common stock warrants to the noteholders, replacing about $4 5 million shares potentially issuable under the old convertible notes during.
During the first year interest may be paid in kind at our option saving the company about $15 million of cash expense as we take further steps to improve profitability in 2024, we want to thank these investors for their strong support of the company.
<unk> future is aligned with ours and we appreciate their partnership.
These new longer dated notes to provide the window needed for us to achieve profitability prior to maturity, which we believe will support improved terms and availability of any new financing required by that time.
Now I will turn the call over to Brad for closing comments.
Thanks, Tom and closing the spatial biology market is experiencing explosive growth and our innovative technologies and compelling roadmap Bruce at the forefront of this exciting field.
We're running the company in a disciplined manner and have taken a series of steps to rapidly improve the financial profile of the company.
Which may have in the past cloud industrial interest.
These steps include consistently exceeding our revenue guidance substantially reducing our cash burn adjusting our operating expenses addressing our convertible debt and seeking to achieve profitability in 2025.
With these improvements we hope investors will take a fresh look at nano spring as we refocus attention on the strong fundamentals of our business.
Now we'd like to open the lines for your questions.
If you would like to ask a question. Please press star one on your telephone keypad.
First question comes from the line of institution J P. Morgan. Please go ahead. Your line is open.
Hi, This is Martin of Xyrem on for Richard.
From Jpmorgan. Thank you for taking the questions.
I just wanted to ask quickly on the guidance so far this year consistently.
Topline by modestly lower than that 23 Guy comes from this.
During the call, but can you perhaps walk.
The updated guidance how much of the guidance earnings related personal.
And related to that.
Okay.
Yes. Thank you I would say you you highlighted the two primary reasons that we took a more cautious.
We narrowed the end of our guidance range towards the more cautious end of our previous full year range. I mean, the first fact thats changed over the course that we are now enjoined from selling our number one selling products into 17 European countries, which.
Slows down the revenue recognition of cosmetics overall.
And then second we have begun to see some elongation in the sales cycle of our higher priced equipment.
And we're hearing a number of our peer companies.
Express some caution as we head into the fourth quarter.
The cautionary notes include things such as the possibility of a government.
Shutdown in sort of caution that in emerging markets or for academic researchers as.
As well as just more cautious outlook for Biopharma companies and.
In general, though I mean, I think we feel really good about the long term fundamentals of our marketplace.
We feel that we're very fortunate to be at the forefront of this ongoing spatial biology Revolution Revolution.
In any case, our full year revenue growth is going to be outstanding.
Thank you and just a clarification are you assuming some sort of modest.
At the midpoint of the guidance.
Yes, one of the differences between the bottom and the top of the guide is at the bottom of the guide we would expect a more modest budget flush and at the top of the guide in the middle and top of the guide more.
A larger Q4 budget flush.
Great. Thank you.
Your next question comes from PV Cowen. Please go ahead your line is open.
Hey, good afternoon. This is Kyle on for Dan. Thanks for taking the questions I just had a quick one on the gross margin profile here exiting 'twenty four you said in the prepared remarks that we should see some gross margin benefit next year as consumers become a bigger portion of overall revenue how should we be thinking about that relative to.
Pre 23, where you were sort of in the low <unk> range as it possibly can get back to that range in 'twenty four.
Yes, I think both most of the street models Tyler in that range and we'll guide early in the year and get more explicit commentary, but I think with the consumables mix, improving and our production cost improving that we would hope to track back towards where the company has been historically, which is kind of in that low <unk> range for next year.
Beyond that as a good way to think about 2024 for now.
Got it. Thank you and then just on the burn and cash needs how should we be thinking about your cash position as you move closer towards profitability in 2025.
Will there need to be any reasons between now and then are you confident that you can get to that position.
So far our our objective.
Is still to get to cash breakeven or on our existing resources nothing around that.
Process or approach has changed and you could see both the actions that we've taken with the business to reduce costs. We expect will support that next year. As we mentioned we think the street models in general are about $15 million high relative to where operating expenses will be before we get started next year. In addition to that the transaction. We just did.
With the note holders offers us the opportunity to pick interest next year, which gives us a really great.
Support from the Noteholders next year as we make some additional changes to the business to get ourselves on that path to profitability as all of those factors combined together on top of what Brad mentioned is what we feel is a really robust long term opportunity for our spatial franchises and the stability of encounter.
I think put us in a really good position to get where we need to be on our existing cash resources our perspective on that is unchanged.
Got it thank you.
Your next question comes from the line of Baird. Please go ahead. Your line is open.
Hey, guys. Thanks for the question Catherine choppy here.
You mentioned expecting to carrier cause next backlog into 2024, what was the cause next backlog at the end of the third quarter and what do you expect it to be heading into next year.
Catherine. Thank you for the question, we are no longer reporting that quantity quantifying publicly our backlog on cosmic so I'm not sure I'm in a position to satisfy you on that we are I'll say in a mode of continuing to work down the backlog.
No we accumulated an enormous backlog of preorders that required some customers to wait up to a year to receive their cognex instrument that is not a situation that we want to.
To continue we are steadily working down the backlog to a situation where customers would be able to receive their instrument either during the same quarter that they order the instrument or that core subsequently.
So.
That's the trajectory we're on we will continue to carry backlog.
Into 2024, but certainly we don't want it to be backlog that would require long delays in customer receipts of instruments.
Yes.
Okay got it and then kind of topline growth.
Added underwrite your full year profitability in 25 discrete revenue outlook that you there.
And then just on the Opex side recognize your comments on on Street, probably being 15 million high but yes. Most of that leverage is going to come from R&D any sort of think you could get to.
The 2020 that profitability would be appreciated.
Sure Catherine.
We'll reserve comment on the on the revenue side until we guide in 2024, but I think we're generally comfortable with where street models are right. Now we can say that global carnivore explicitly as we get into 2024 on the Opex side most of the leverage that we're talking about in that $15 million number is out of a combination of R&D and out of operations.
Which is where most of the reorganization activity occurred so I'm thinking about updating your models. If you are taking opex down I would take I would take most of it out of R&D and then a little bit of it support set better gross margin number of it just comes out of the operation side of the business, which gets reported out of cost of goods sold.
Yeah, and then maybe just to build on Tom's answer Catherine Yes, we've always said that between 200 $300 million in revenue was where we thought our business of our type should be breaking even and I think street models on 2025 or just about the midpoint of that range right now so.
So I think it's consistent with our past commentary.
Commentary.
Okay, great. Thank you.
Your next question comes from the line of Stifel. Please go ahead. Your line is open.
Hey, guys. This is evan on for Dan Thanks for the question.
No.
I don't want to dig a little bit deeper into the previous question.
I think the backlog is something that people are going to be pretty focused on I understand maybe your peers arent, giving given too much.
Visibility into that but I think people are especially with the guide down here.
I think people are I guess, you are a little bit.
And a bit of a little bit different situation.
And so is there any kind of commentary that you can give that can give people comfort as to.
Yes.
Next year is going to shape out and like.
How youre going to exit the year.
A lot of the commentary you're a year in previous years, we had this big backlog.
We're probably going to exit the year.
Thank you said something similar to kind of where you were.
So if you really if youre starting to draw that down I think people are going to start to get a little concern as to maybe how the outlook is into next year. So maybe you can give there would be very helpful.
Thanks for the question Evan I think Tom answering Catherine's question, just a moment ago.
Without guiding 2024 said that we were comfortable with where the current street models are so hopefully that should provide some reassurance.
But most companies don't carry massive amounts of backlog around slide we have been and can continue to grow well without it certainly backlog is a good thing in the minds of investors in terms of providing predictability in revenue, but it is a bad bay in terms of the customer experience.
Because it provides long delays between when people want to get their hands on the use of technology to begin their science.
When they when they.
No.
And when they actually can so we want to always keep those things in balance.
So sorry to disappoint.
Not going to be overly quantitative on backlog most companies choose not to be in.
We will provide commentary I think about sort of the the market potential here and the ongoing growth in orders.
Which I think as you can see both across <unk> reported results and that of our primary competitor. This is this is a market of extraordinary growth.
I think we're seeing a kind of pace of total instrument placement.
That is hardly been seen in any product category in the history of our industry.
Youre seeing two companies simultaneously reporting greater than 200% year on year growth in revenue so.
And net demonstrating his neck and neck with our competitor in <unk>.
Fighting for market leadership here and I think.
That kind of leadership in our market are very strong secular growth is the primary thing that customers should be looking at to gain confidence in our outlook.
So.
I wanted to give any commentary about the backlog is there anything you guys can say about.
About orders in the quarter and how that kind of.
It was up sequentially or year over year comparison.
Maybe that would be helpful in terms of framing.
Where things are versus last quarter.
And then again im going to disappoint, you hear we're no longer and haven't been reporting while order trends in quite some time on our spatial biology business.
Yes other than to say.
We felt really good about the order trend it was robust.
And.
We're pleased with how things are going.
Alright, and I guess thats. It I appreciate the help guys.
Thanks.
Your next question comes from the line of Canaccord Genuity. Please go ahead. Your line is open.
And Catherine one loan for Carmax, Phil Thanks for the update guys. One quick question.
On a dive into the recent legal proceedings I was just curious.
Those have had a meaningful impact on conflicts placements and what the order book over the past quarter. Thanks.
I think your question was.
Most recent UPC.
Proceedings had an impact on that order book or the demand over the last quarter or so.
The answer is yes.
Yes, no yes within the European countries of course are being enjoined from selling our cosmetics instrument for RNA assays has slowed down the pace of new orders coming out of Europe for Cognex, and we've experienced a handful of order cancellations.
From customers, who had not yet received their complex instrument for RNA and of course now to do so so that has had an impact but I am pleased to say that that impact has not spilled over into other markets as I mentioned in my prepared remarks, while.
Instrument orders slowed down in Europe.
The robustness of the North American market continued to drive the overall momentum of our spatial biology franchise.
Thank you.
One other kind of build off the last question.
So just curious on how you intend to grow placements in 'twenty four I guess, just given the current macro headwinds or whatnot.
And our initiatives.
They'll be coming into play in the near future or marketing efforts or anything of that sort.
Okay.
Well as I said, maybe the answer to an earlier question, we're seeing a market that.
Spatial biology that has extraordinarily extraordinary secular growth I mean, we're in a major adoption cycle of a new form of science.
And these kind of new resolutions that are often declare nature of method of the year. They play out over seven to 10 year timeframe and we're right in the steep part of the curve of the adoption cycles are so I think the secular growth of spatial biology will be the most important driver of continued momentum in 2024.
On top of that we have a very exciting series of product launches and a roadmap to support them that we should keep.
Customers.
Interested in our technology at the forefront the most important of those is the launch of our cosmetics 6000, Plex, RNA assay, which will put our technology at 12% to 15 times.
Higher plex than the competition there is already tremendous customer interest in that and that will become available for shipment in the first quarter and then on the genomics side. The recently launched genomics Io Protium Atlas, which is five times higher plex than any other protein panels offer.
By other companies is driving a resurgence in interest in that platform. So I think the secular interest in spatial biology combined with.
Our specific and compelling product offerings should be the key drivers of growth in 2024 on the instrument side and then I guess, maybe finally, we placed a tremendous number of complex instruments. During 2023 that will just be becoming.
<unk> and utilizing consumables in 2024, and so we expect to see.
That we expect that to drive.
Space will consumable growth, which has the benefit of also expanding our gross margins and the way that Tom alluded to in his prepared remarks.
So I guess those are the three big catalysts.
Cosmic <unk> K, the genomics IPA and the activation in consumable utilization of our rapidly growing spatial biology installed base.
Great. Thank you that's very helpful.
Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of UBS. Please go ahead. Your line is open.
Hey, everyone you have Christian on for John.
Thanks for taking my question I guess, starting off on the cause of <unk> in Europe. I know you guys previously put out some I guess you could say workarounds in terms of having.
Customers, it's kind of <expletive> their samples that crows in jurisdictions not affected by the injunction I was just wondering if you can give any update.
And maybe even if you can maybe possibly like quantify how well that's working the customer reception to the Howard Stern, etc.
Yes, so we obviously want science in Europe to continue to benefit from our market, leading causing space on molecular imager, we think it would be a tragedy for European science that they were constrained.
To work on the less.
Flexible offerings of our competitors. So we're working as flexibly as we can with those groups.
Help them get access to our technology by shipping samples.
To either <unk> located to those samples can be process, where.
There is no injunctions and I'd say we've had.
Modest success on that I think a number of our customers are still in the process of figuring out how best to do that.
And.
And.
Our customers have been.
Yes, very supportive of the company.
Overall, the scientific community is rooting Fernando Springs, as seen in our litigation and to maintain choice in the marketplace.
Don't think I can really be too quantitative about that.
I think overall, it's fair to say whatever commerce results from those types of activities is going to be a modest part of our overall mix. The primary driver of our growth will be the continued.
<unk> of our technologies into those major markets that are not enjoying and just as a reminder, I think we issued this kind of an important fact that the time of the UPC injunction the nation's debt to 17 countries that are part of that UPC jurisdiction only account for about 10% or less of our.
Overall cosmetics demand and backlog so it's while it's obviously a headwind.
One that should overall change the overall shape of the market.
No. Thanks for that that makes it makes a lot of sense and then switching gears I know China isn't the most material.
Geography for your revenue Max Q.
Can you give us some color on what you have on what you have been seeing over there and then also just on it looks like.
Throughout Tom you guys have been changing the mix in terms of the cause mix from primarily academic it's still primarily academic biopharma and.
Biopharma and <unk> are becoming a bigger mix of that pie.
Is that a is.
Is the primary driver of that.
Actually like more <unk>.
<unk>.
Buying instruments demand from that side or are you seeing anything on the academic where sales cycles have been slowing and then maybe purchasing hasn't been up to.
Previous levels, if that makes sense.
Yes, let me take the Biopharma slide and then I'm going to ask Tom to take the China.
The China piece on.
On the Biopharma front, yes, we are pleased to see an increase in interest in the complex system from the Biopharma community.
I'd say overall, the translational research and Biopharma communities have been.
Lower adopters of non spatial single cell technologies, but I believe we're starting to see that tick up and single cells facial technologies are ticking up right alongside it.
Yes, <unk> are I think.
Very great Avenue for Biopharma companies to access technologies that they're not 100% sure they want to scale internally, yet, especially smaller more cash constrained biopharma companies, who would be reluctant to spend $300000 on a piece of capital equipment. So.
<unk> has been a really great Avenue for us to bring spatial biology to those segments of the market.
Tom maybe you can take the question on China trends on China.
Less than 10% of our revenue is consistent with what it was last quarter and I would be remiss we would be.
To draw any macro trends from our sales in China, We've got a relatively new sales effort. There is just it's just I would say, we're just too small of a portion of our revenue and our overall business and $1 has a hole for us to draw any.
Any macro trends from it but.
But it doesn't if you just looked at it in and of itself, but it hasnt been and our sales have been pretty consistent as a percentage of the total in China over the last several periods.
Your next question comes from the line of Morgan Stanley. Please go ahead. Your line is open.
Good evening guys. This is edmunds.
Just wanted to ask you quickly are Brad how does the cognex asps trending lately or was this a meaningful driver of the.
Lower gross margins in third quarter.
How should we be thinking about the cognex ESPN for given that on the last call. You noted asps have been improving but you're still continuing some of your discounting tactics.
Tactics.
I'm going to let Tom answer that question in Edmond Yeah. Thanks, Ed for the question Yeah, Our Asps were up a bit in Q3 over Q2s were up just over $2 30 on ASP.
It's a little bit less than we had originally expected.
I wouldn't say, there's necessarily due to any sort of overall broad pricing pressure, that's just how the ship.
Shook out during the quarter. It is a little bit lower than was originally planned we would still continue to expect those to rise in coming quarters. As there has been there have been rising list prices across all of the competitors in this marketplace as well as the continued popularity of these products puts us in a position where pricing isn't really the key driver.
For these instruments, so I think as we get into next year. It probably should go up but if I were modeling based on ASP CLO and I think you could use $2 30 is a good number where we were in Q3.
For your models for next year.
Got it Super helpful. And then switching gears a little bit to looking at.
Cosmic <unk> panel I was wondering if you guys could provide some color on the mix of hubs or how users are deciding which panels to us I know you guys have the <unk> panel that you guys have a human IL 100, Plex panel in a mouse panel I guess I'm trying to figure out with the upcoming 6K panel next year what are your expectations for one game annual usage.
Yes, what we've seen every time Edmond.
Provide a new panel of higher plex.
It does tend to cannibalize, the lower plex panels, and Thats consistent with my prepared remarks, whereas I characterized scientist is having a huge fomo or fear of missing out.
Scientists are paranoid that if they don't include a gene in their panel they'll somehow missed the most important insight and as a result more complex is generally better. So just to take the couple of panels that you mentioned when we initially developed a 100 Plex Io panel, we thought there would be great dimmed.
And for that on the system it could run a lot faster than the 1000 flex.
It's more cost effective there has been virtually zero demand for that panel.
The 1000, plus human panel today is by far our most popular panel followed by.
I'm sure what will be good demand for the mouse analysts coming to market.
<unk> accounts for the majority of the type of science that most of our customers do because they're focused on human translational biology.
So that's most of it.
But I would expect that as we bring the 6000 flex the market, we may very well see a rapid transition towards that higher plex panel EBIT at a price premium.
Because customers are.
Interested in making sure they are not missing important biology.
Got it Super helpful and then Brett its good to hear some early feedback for your immuno oncology proteome Atlas further genomics what are your contribution expectations for this in 'twenty four and how should we be thinking about I guess genomics consumable revenue growth in the upcoming year.
Yeah. That's a really good question and then I think we're going to hold off on providing quantitative feedback on that until we do our 2024 guide, but I will say.
Protein is a very popular application for genomics historically, its been half of our samples, but much less than half the revenue because the average unit price of a protein plants at 50, <unk> is less than the average unit price of our whole transcriptome Atlas.
That will change with the <unk>.
Oh Proteome Atlas is priced at a premium to our whole transcriptome Atlas because there's really nothing like it in the world.
So I think that bodes well for the potential.
Pull through on our existing installed base.
I am excited about the early resurgence of interest in acquiring genomics instruments that has resulted from this new capability.
But it's a little too early to quantify that will provide an update on our February call.
In more detail.
Got it thank you for the time today.
Thank you Matt.
Have no further questions in our queue at this time I will now turn the call over to Doug Farrell for closing remarks.
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