Categories Earnings Call Transcripts, Health Care

10X Genomics Inc. (TXG) Q1 2022 Earnings Call Transcript

TXG Earnings Call - Final Transcript

10X Genomics Inc.  (NASDAQ: TXG) Q1 2022 earnings call dated May. 04, 2022

Corporate Participants:

Cassie Corneau — Manager, Investor Relations & Strategic Finance

Serge Saxonov — Chief Executive Officer, Co-founder

Justin McAnear — Chief Financial Officer

Analysts:

Tejas Savant — Morgan Stanley — Analyst

Dan Brennan — Cowen — Analyst

Michael Ryskin — BofA Securities — Analyst

Julia Qin — JPMorgan — Analyst

Patrick Donnelly — Citi — Analyst

Matt Larew — William Blair — Analyst

Matthew Sykes — Goldman Sachs — Analyst

Presentation:

Operator

Hello, and welcome to the 10x Genomics First Quarter 2022 Earnings Conference Call. My name is Katie, and I’ll be coordinating your call today. [Operator Instructions]

I will now hand over to your host, Cassie Corneau, Investor Relations and Strategic Finance to begin. Cassie, please go ahead.

Cassie Corneau — Manager, Investor Relations & Strategic Finance

Thank you, and good afternoon, everyone. Earlier today, 10x Genomics released financial results for the first quarter ended March 31, 2022. If you have not received this news release, or if you would like to be added to the company’s distribution list, please send an e-mail to investors@10xgenomics.com.

An archived webcast of this call will be available on the Investor tab of the company’s website, 10xgenomics.com, for at least 45 days following this call. Before we begin, I’d like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements.

Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release 10x Genomics issued today, and in the documents and reports filed by 10x Genomics from time to time with the Securities and Exchange Commission. 10x Genomics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.

Joining the call today are Serge Saxonov, our CEO and Co-Founder; and Justin McAnear, our Chief Financial Officer.

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

Serge Saxonov — Chief Executive Officer, Co-founder

Thanks, Cassie. Good afternoon, and thank you for joining us. On today’s call, I will start with an overview of our performance during the first quarter. Next, I will discuss our progress and momentum with customers and share an update on our upcoming product launches, including more detail on Xenium and the exciting opportunities we have ahead across all three platforms. Then I will hand the call over to Justin for a more detailed look at our financials, business trends and our outlook for the rest of the year.

Revenue for the first quarter totaled $114 million, up 8% year-over-year. These results reflect the slow start we experienced in January and February, largely driven by the impact of the Omicron surge and played out as we described during our year-end call in mid-February. As we moved into March, the effects of Omicron had partially abated outside of China, and customer productivity started to resume. We’re now back on site with our customers and the excitement for our Chromium and Visium portfolio and pipeline is palpable. In recent weeks, I personally had the opportunity to visit a number of our customers in person, which has further reinforced my conviction in the long-term growth trajectory for each of our 3 platforms. So while we’ll continue to navigate some near-term headwinds, I have more confidence than ever in our enormous opportunity ahead.

Every day, we’re seeing more customers and more studies that all point to the same thing, 10x is replacing the legacy toolkit of biological research in transforming how we understand an ultimately faster biology. During the quarter, we continue to see solid demand for Chromium instruments, led by the sustained enthusiasm and broadening appeal of the Chromium X Series. We’re actively working to upgrade our current customers to ensure they have access to the most powerful tools available for single cell analysis. The upcoming launch of our fixed RNA profiling kit, which will be exclusively available on Chromium X series, helped drive instrument demand with new customers and accelerate the replacement cycle among existing customers as expected.

Turning to consumables. Our high throughput kits delivered strong growth. Increasingly, customers are adopting HD kits to scale existing studies with more samples or more cells. We’re also excited to see our customers designing new experiments, specifically for HD, at a size and scale previously considered unattainable. We believe the strong adoption of our HD kits, robust reorder rates and the growing number of new labs conducting pilot studies are applying for grants demonstrates the value researchers gain from high-throughput single cell analysis and is a great indicator of future growth.

We also saw solid demand across our growth portfolio of standard throughput single cell consumables this quarter. The performance and breadth of our offerings, covering gene expression, immune profiling, epigenetics, proteins and multiomics is unrivaled and helps drive growth with both our most seasoned labs and our newest adopters. Multiome, in particular, continues to be among the fastest-growing products in our history, experiencing broad adoption across a diverse set of applications. We believe the combination of our product performance, easy workflow and diversity of applications creates real value for researchers that no other company can match.

Moving on to Visium. In Q1, we continue to see solid demand for both Fresh Frozen and FFPE. While it remains early in its life cycle, we are encouraged by the wide adoption of Visium as the ideal spatial discovery tool. In fact, according to the Museum of Spatial Transcriptomics Paper published in March 2022 edition of Nature Methods, Visium has been cited in more publications than any other special biology tool, and has been used to generate nearly 125 public data sets. No other method has even half as many.

The Nature Methods Paper also noted that more institutions have published using Visium than using the next 3 other spatial methods combined, demonstrating the breadth of Visium adoption. This confirms our view that Visium is the leader in spatial biology.

Overall, we executed as planned in Q1 and look forward to building momentum as we move through the year. Our team is focused on 3 key areas to deliver in 2022 and to accelerate growth into 2023 and beyond. First, driving our extensive new product pipeline; second, scaling our commercial organization; and third, strengthening our operational capabilities.

Let me share more on each area, beginning with R&D, where we are continuing to drive our strong cadence of technological advancement and product development. As we showcased at our second annual Xperience event in February, we have a very exciting and ambitious pipeline in each of our 3 platforms. Starting with Chromium. Chromium has long been the leader in single cell analysis, yet we continue to see a massive opportunity ahead. It is evident by the rapid growth and diversity of experiments, applications and publications that single-cell methods are replacing the conventional toolkit for measuring biology.

To make Chromium accessible to every biology lab in the world, this year’s pipeline is focused on new products that drive broad adoption, remove bottlenecks and give researchers a more flexible and streamlined workflow. In the near term, we’re particularly excited about 2 new kits that we believe will help realize the expanding potential for single cell analysis, remove obstacles to larger-scale multi-sized studies and open up more single cell applications in translational research. This includes our fixed RNA profiling kit, which has the potential to be transformative to the single-cell franchise over the long term. This product resolves a common challenge our customers currently face working with live cells. With this kit, researchers can fix their tissue at the time of collection and store it until they’re ready to begin the single-cell workflow.

In addition, researchers can batch on multiple examples as well as analyze gene expression on surface proteins from the same cell for multiomic analysis. This product also offers significant performance advantages, including higher gene sensitivities than any of our flagship assays and is the most sequencing efficient assay in our Chromium portfolio.

Our upcoming nuclear isolation kit is another example of how we’re easing the Chromium workflow for our customers to help them run more samples and more kinds of samples. Many samples presented a challenge for single cell analysis due to the difficulty of the association or encapsulation of individual cells. This can be because some tissues are particularly difficult to work with or because researchers would like to freeze their samples at collection to be processed for single cell analysis later.

To address this challenge, many researchers have turned to nuclei, which can provide single-cell information from such samples but at the cost of much more difficult and unpredictable sample prep workflows. Despite these difficulties and the need for highly specialized expertise, nuclei analysis has been rapidly growing in popularity. And now our nuclei isolation kit will greatly simplify this workflow, so more researchers can access single-cell data from frozen samples and challenging tissues. We believe this kit will help accelerate the adoption of multiple chromium assays, including Multiome and ATAC, which requires single nuclei as input. We’re now taking preorders for both products, which we expect to begin shipping over the coming weeks.

Turning now to Visium. We expect to round out a core set of the capabilities on the Visium platform with several new products focused on enabling more analyzed through the introduction of Visium plus protein, more samples with the launch of our Visium cytosis instruments and more resolution with Visium HD. Our Visium plus protein product enables simultaneous gene expression and high-plex protein analysis in the same tissue. It also offers larger capture areas and an improved workflow to give our customers more flexibility and confidence. We’re looking forward to launching this product mid-year.

In addition, we’re excited for the upcoming launch of the Visium cytosis instrument, which will simplify the logistics around the Visium workload by bridging the gap between histology and molecular biology. Pegasys will also open up their archives of tissue samples already stored on preexisting slides significantly expanding the number of samples that can be run on Visium. We expect to ship Pegasys next quarter.

And finally, Xenium. As we announced in February, we plan to ship the first instruments by the end of the year. We have already received extremely strong interest in the platform from many customers eager to be among the first to receive Xenium, and we feel great about the large funnel of opportunities we’re building. We’re very excited about the competitors and differentiation of our initial launch as well as our plans to unlock the full capabilities of the platform through our extensive product road map in the years ahead.

Through our close partnership with customers and our CartaNA Access Program, we have unique insights into the capabilities and features researchers are looking for. Customers have told us they need a high-plex, easy-to-use and scalable platform that can differentiate cell types in states in the tissues of interest and measure the right genes and pathways. To enable this, we’re developing Xenium to have great performance across all key metrics, including multiplex levels, sensitivity, specificity and throughput. And in particular, we know from customers that high throughput is critical because it determines whether the instrument is practical for routine reuse.

We’ve designed our Xenium analyzer to have the highest throughput of any in situ instrument in a glass. We believe Xenium will enable researchers to analyze the most tissue area at single molecule resolution in the least amount of time. We also believe having all 3 methods, single-cell, spatial and in situ together will be a real advantage for the research community and a real differentiator for us.

Most in situ experiments currently make use of Chromium or Visium data. We are in the best position to deliver a seamless experience to customers across all 3 platforms. And this will be reinforced by our support team who consistently received rave views from customers. Because this is an emerging field, researchers know their needs will evolve over time. So they want to trust a partner that will innovate and grow with them. Our track record here is unparalleled. Much like we’ve done with our Chromium road map, we’ll enable more allies, new classes of measurements and truly transformational capabilities in the Xenium instrument as we move forward post launch.

We’re committed to delivering rapid product advancements to ultimately establish Xenium as the unequivocal leader in in-situ analysis. We’re able to develop a world-class platform through the strength of our internal product development and intellect properties. We already have over 200 patents issued and pending in the in-situ field, including the key patents that will enable features that we believe will be extremely valuable to researchers, including high throughput and high sensitivity.

With respect to our overall patent portfolio, we recently passed the extraordinary milestone of having more than 500 patents issued in almost 1,400 patents issued and pending. As we have said before, it is our policy not to license our patents but to differentiate ourselves from our competitors by protecting our sole right to own and practice our intellectual property.

With our robust pipeline across all 3 platforms, we’re on track to make 2022 the most exciting year of product launches in our history.

Now turning to commercial, throughout the company, we’re thrilled to be back in person with our customers. For the past two years being able to connect in person in their labs and their conferences has challenged the proliferation and adoption of new technologies, including single cell tools, especially among mainstream biologists who are new to the 10x levels of scale and resolution.

Yet we know the number of researchers interested in single cell is rapidly increasing, as evidenced by the growing number of new customers entering the 10x ecosystem, either as instrument owners or as halo users.

We believe the pandemic has made it more challenging for many of our halo customers to scale and become routine users of single cell analysis in their research. There can be many reasons for this, whether it’s the challenges of working with live tissues or second order quality-related impact like supply chain constraints or labor shortages to reduce staffing levels and limit opportunities for training, collaboration or best practice sharing.

The core part of our strategy is to enable as many researchers as possible to become routine users of single cell. We have found that customers who own instruments consistently grow their usage overtime. We’re focused on driving instrument placements for both new customers and with halo users. We also want to ensure our existing customers have the best technologies for single cell analysis which is why we are focused on upgrading researchers with Chromium controllers through our Chromium X series.

We have now established a broad base of installed instruments representing a great foundation for future growth. And while we’ve made good strides within academic labs, we see a large opportunity ahead both with our existing customers increasing their usage and with new customers entering the ecosystem. We’re gaining traction throughout pharma and seeing strong growth among biotechs for increasingly adopting single cell and spatial labs. And as we look ahead, we’re also continuing to expand the breadth and depth of our commercial team. We’re on track to add nearly 100 new roles and to finish the year with a commercial team of more than 500 employees worldwide.

We are continuing to gain traction with a dedicated tissue specialist we onboarded last year. And as we prepare to launch Xenium, we’ve deployed a separate specialized market development team dedicated to spatial and in situ. This should ensure the rest of our commercial organization maintains focused momentum on growing adoption of our current on market portfolio.

Before we move on, I want to acknowledge Brad Crutchfield, our Chief Commercial Officer, who had previously announced will be leaving the company by the end of the year. Under Brad’s leadership, we have built and scaled the global commercial organization that is a real differentiator for 10x and an excellent foundation for future growth.

While he’s not joining us on today’s call, Brad continues to lead the commercial team through this transition period. We have initiated the search for our next CCO and have proactively made several changes to the commercial team in advance, including realigning regional leadership and welcoming a new Head of Commercial Operations. I want to thank Brad and the entire commercial team for their focus on execution and unwavering commitment to our customers.

And finally, turning to operations and the work we have underway to expand and strengthen our manufacturing capabilities. We’re continuing to make substantial investments in our global operations network, by adding production capacity and new capabilities to deliver differentiated products and support the long-term growth trajectory of the business.

Since opening our manufacturing center in Singapore, we have continued to ramp production at the site. We’re also building out our new Pleasanton facility and look forward to co-locating more of our R&D operations teams to enable tight collaboration and fuel our rapid pace of innovation.

In addition, our team is working hard to proactively manage our global supply chain in what remains a very dynamic and challenging environment. We are working closely with our partners and are continually evaluating our ability to source key compliance.

We’re also expanding our distribution network and carrier options to help alleviate global logistics constraints. We believe our efforts and investments to scale and fortify our operations and supply chain are essential to supporting our growth and enabling our product road map.

Our team is fully focused on driving our innovation engine, scaling our commercial organization and advancing our operational capabilities in 2022. We’re bringing the whole company effort to delivering this year and building momentum for 2023 and beyond. I want to thank the entire 10x team for their hard work, focus and dedication to our customers and to our mission.

Now, let me turn it over to Justin for more detail on our financials.

Justin McAnear — Chief Financial Officer

Thank you, Serge. Total revenue for the 3 months ended March 31, 2022, was $114.5 million compared to $105.8 million for the prior year period, representing an 8% increase year-over-year. Consumables revenue was $98 million, which increased 5% over the prior year period. Instrument revenue was $14.4 million, which increased 30% over the prior year period. Service revenue was $2.1 million, which increased 31% over the prior year period..

Looking at our regional results. Revenue for the Americas was $59.7 million, increasing 15% over the prior year period. EMEA revenue for the first quarter was $20.5 million, increasing 7% over the prior year period. Finally, APAC revenue for the first quarter was $34.3 million, in line with the prior year period.

As we shared on our earnings call in mid-February, we had a slow start to the year driven by the Omicron surge in certain geographies. This was especially pronounced with our academic research customers, which represent approximately three quarters of our revenue. As we moved into March, the effects from Omicron largely abated in North America and Europe, while the operating environment was improving in these regions, COVID-driven lockdowns in China towards the end of the quarter severely impacted lab activity there. While these lockdowns had minimal impact in Q1, we expect they will more adversely impact Q2 revenue. Additionally, our Q1 results in Europe reflect the impact of a process breakdown in the regions and logistics cold chain that led the intermittent assay performance issues. Our support team was able to trace the root cause of this sporadic issue back to products that had fallen out of required refrigerated temperature ranges. This breakdown resulted in a number of European customers receiving products that had spoiled and needed to be replaced. We have implemented additional safeguards in our logistics operations, and we are working with impacted customers in the region.

Turning to the rest of the income statement. Gross profit for the first quarter was $89 million compared to a gross profit of $88.8 million for the prior year period. Gross margin for the first quarter was 78% compared to 84% in the prior year period. The decline in gross margin was primarily driven by a change in product mix, increased manufacturing and logistics costs and higher accrued royalties. We expect our gross margin will trend slightly lower during the year due in part to changes in product mix and the impacts of inflation and increased supply chain costs.

Total operating expenses for the first quarter were $130.8 million, an increase of 32% from $99 million for the first quarter of 2021. The increase in operating expenses was primarily driven by higher personnel expenses, including stock-based compensation, increased research and development expenses and infrastructure costs, partially offset by a decrease in outside legal expenses. R&D expenses for the first quarter were $64.1 million compared to $41.9 million for the first quarter of 2021.

SG&A expenses for the first quarter were $66.7 million compared to $56.9 million for the first quarter of 2021. Operating loss for the first quarter was $41.7 million compared to a loss of $10.2 million for the first quarter of 2021, primarily due to the impact of increased personnel-related expenses. This includes $26 million of stock-based compensation for the first quarter of 2022 compared to $16.2 million for the first quarter of 2021.

Net loss for the period was $42.4 million compared to a net loss of $11.6 million in the first quarter of 2021. We ended the quarter with $539 million in cash and cash equivalents and marketable securities, net of restricted cash. Our strong balance sheet is an advantage, especially in the current environment.

Now turning to our outlook for 2022. We continue to expect our full year 2022 revenue to be in the range of $600 million to $630 million representing growth of 22% to 28% over full year 2021. Looking at Q2, we are still experiencing some lingering impact from the cold-chain driven spoilage in Europe, which we expect to be fully resolved by quarter end. Additionally, we are continuing to navigate near-term impacts driven by the macro operating environment, which include second order COVID effects, supply chain and logistics risks, and most significantly, lockdowns in China, which are scheduled to end in mid-May.

Looking beyond Q2, we are optimistic about the remainder of the year. The enthusiasm from our customers for our product portfolio and pipeline remains strong. As the operating environment continues to improve and our newer product launches have an increasing impact on revenue, we expect to see an acceleration of growth in the back half of the year. We still expect our annual revenue split to be about 40%, 60% for the first half and second half of the year with slightly more weighting to the back half of the year, reflecting the Q2 factors we just mentioned.

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

Serge Saxonov — Chief Executive Officer, Co-founder

Thanks, Justin. Our conviction in the vast opportunity ahead and our long-term growth potential is as strong as ever. One of the central learnings and perhaps the greatest revelation of the last several years of biological research is the pervasive cellular complexity that agilize just about every biological system. There is now a growing appreciation that eventually all tissues will need to be analyzed with single-cell contact in a large scale. We believe it’s going to be true for research, for clinical and full therapeutic applications. Our goal is to bring this future forward. This is why we have been investing aggressively in our 3 platforms: Chromium, Visium and Xenium. Together, they encompass all the major technological approaches for addressing cellular heterogeneity at scale. Having all 3 approaches under one roof will create tremendous value for customers who will benefit from integrated experience, our track record of technological advancements and our focus on customer success. And while we are proud of what we’ve accomplished so far, relative to where we’re going, we’re just getting started.

Our team is driving hard to execute this year and to finish with momentum that will strengthen our position to accelerate growth in 2023 and in the long term. We know what the endpoint is, and we’re confident we’re the best company to deliver on it.

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

Questions and Answers:

Operator

[Operator Instructions] We take our first question from Tejas Savant from Morgan Stanley. Please go ahead.

Tejas Savant — Morgan Stanley — Analyst

Hey, guys. Good evening and thanks for the time. Serge, maybe to kick things off on Chromium, can you share some color on where you stand in terms of the upgrade cycle for your base controller users? And then have you seen utilization of customers who upgraded to the X and iX earlier in the cycle, start to trend up here? And then any color you can share on the Halo user ordering trends as well would be helpful?

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So in terms of the upgrade cycle, so we’re in the early stages of that. As we said before when we first introduced the X, it was really aimed at the top — like top end, top tier, top 10% maybe so of our customers who are interested in sort of the leading edge of single cell analysis doing things at high throughput. We have since learned there’s more interest across our customer base and a lot of new customers have been onboarding with the X, since kind of later in the quarter and especially this quarter we announced that fixed RNA profiling is going to be available, specifically on the X that has spurred kind of more interest in our upgrade across our entire customer base. It’s still quite early I would say but it’s a meaningful trajectory to go in that direction especially as we head further into this quarter. What was the second question?

Tejas Savant — Morgan Stanley — Analyst

It was on the utilization for the customers who have upgraded earlier?

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So it’s too early to tell at this stage. I mean certainly, the people who are interested in the X in the first place would tend to be earlier customers. And so they would naturally kind of have higher usage patterns to begin with. So at this stage, it’s too early for us to kind of place a precise estimate of the usage parents and to differentiate between kind of the selection versus the actual usage of these. But directionally, it’s kind of — it’s trending in the right direction.

And as far as Halo and instrument owners is concerned, this dynamic is not really materially changed from what we’ve seen historically and it’s early to say, given all the sort of noise in the last quarter, but having said that, we’re always driving new instrument placements that has been our focus. And the key thing, and this has been very consistent that we see — and the key thing is that instrument owners keep doing well. they keep increasing their usage. They keep adding — scaling up their experiments. And that pattern has been consistent across the years and continues to be the case. And so certainly, our goal is to keep adding instrument, making instruments, adding selling more instruments to existing customers, whether they’re halos or or not, and also driving new people into the ecosystem with instruments.

Tejas Savant — Morgan Stanley — Analyst

Got it. That’s helpful. And Justin, just a quick follow-up for you on the guide. I think I heard you say the lockdowns in China are expected to end in May. So is it safe to assume that you’re expecting a full recovery to normalize activity in China in the back half of the year? Or are you assuming a more conservative sort of slope of the recovery there?

Justin McAnear — Chief Financial Officer

We’re expecting this to normalize in the back half of the year. And just for reference, China was about 18% of our revenue in Q1, about 15% of our revenue last year for the full year. And really, the biggest impact that we’re seeing right now is in Shanghai and the surrounding area, and that’s 30% to 40% of our revenue in China is in that area. And so there has been an impact in Q2, and we are expecting it to start lifting here later in this month, and we are expecting it to normalize in Q3 and Q4.

Tejas Savant — Morgan Stanley — Analyst

Very helpful. Thanks for the time guys.

Operator

We take our next question from Dan Brennan from Cohen. Please go ahead, Dan.

Dan Brennan — Cowen — Analyst

Great. Thank you. Thanks for taking the questions, guys. Maybe the first one just on the updated guide or some color that you provided. So it seems like, Justin, so typically it’s 40/60, but maybe a little bit below that. So if we say like 39% to 40%, it seems like Q2 is somewhere in the $110 million to $135 million range, which would imply a pretty good ramp, even a bigger ramp in the back half of the year. So maybe on that back half year, could you just give us a sense of how we think about the impact from some of the new products, Chromium X and kind of the fixed kit and the nuclei kit. And then just to be clear, I guess, the HD product, that’s not going to impact ’22, right? That’s going to be all in ’23? And then I have a follow-up. Thank you.

Justin McAnear — Chief Financial Officer

Yes. So I’ll start and then Serge can add some color. But as far as looking at the first half of the year compared to the back half of the year, we have some specific headwinds that have impacted us both in Q1 and in Q2. So as we head into the second half of the year, we’re largely expecting those to go away. And then typically, with new product launches, for any one product in the quarter that it launches, we don’t expect a huge impact to revenue, but we have multiple new product launches that are going on throughout this year. And we have newly introduced products as well that have been picking up traction over this year. And so all of those point to and support this acceleration in Q3 and Q4.

Dan Brennan — Cowen — Analyst

Great. Okay. Maybe then just on the new products and just a little more color. So just on the X, Serge, you talked about initially thinking 10% of the customers might want it. It sounds like it’s a bigger percentage today. Maybe could you just speak to just — I presume just kind of the core labs that are adopting that? Is that appealing more to pharma? Just how much bigger than that 10%? Maybe if you can give us a sense. And then b, the fixed kit and the nuclei kit, the decision to roll out the fixed kit only on the X. Presumably, a lot of smaller researchers might want that ability to do the fixing, too, so why not broaden it out, I guess? And any color on how those kits might appeal to open up biopharma more whether this year or going forward? Thank you.

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So on the first question, the short answer is like every customer, in terms of Chromium X where we see it going now? And remember, we have the X and we have the iX, which is kind of coming into a somewhat lower price point. And yes, initially, the interest was from the top tier of customers, but we saw kind of in the second half of last year, really the interest has been across the board. Sure, the core labs are sort of natural purchasers as well as people on the forefront of single-cell research, but we’ve seen new customers coming in, kind of almost by default, if they have funds certainly going for the X. And for sure, when we look at biotech and pharma, that’s where the demand has been very much focused on the X series. So that’s why kind of as we kind of look around, we definitely see it being applicable kind of in a very broad fashion.

There’s a lot of sort of improvements under the hood in the instrument itself. And so ultimately, as we think about where kind of the world is going and where we want our customers to be where the customers themselves want to be is just better for everyone no longer want to convert to this new technology. And so that was a big part of our thinking and a big part of why really fixed RNA profiling is also only compatible with the X. We do see the X, especially the iX being very broadly adopted kind of across the board.

Dan Brennan — Cowen — Analyst

If it’s possible, Serge, one last one. Just in terms of HD and Xenium, you talked about the profile of Xenium being superior to what’s on the market and how well Visium is doing. I don’t know if you framed this in the past, but we think about the aggregate opportunity for HD and Xenium versus your core Visium product, how do we think about like the relative opportunity set? Is it — just any way to help frame that? I know you’re not breaking these numbers out within the model today, but just at least on a relative basis, when we think about the magnitude?

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. I mean, directionally, like our feeling at this point is like Visium HD relative to standard Visium has a much higher potential, like a multiplicative potential as we think into the future. And Xenium, we feel very strongly about its potential, especially when we think about the long term. I mean, they are somewhat different use cases, and I think they’re going to be largely complementary. I think both HD and Xenium are substantially higher opportunities than what we are currently seeing would be standard resolution with Visium.

Dan Brennan — Cowen — Analyst

Great. Thank you.

Operator

We take our next question from Derik De Bruin from Bank of America. Please go ahead.

Michael Ryskin — BofA Securities — Analyst

Great. Thanks. This is Mike Ryskin on for Derik. I want to follow up on Xenium. You commented a couple of times you’re expecting to ship it by the end of this year. I think you’re not quite at the point yet where you’re taking orders? Or maybe if you are, could you give us a sense of when you anticipate to start to build that order flow, that order funnel? And any expectations you could have for — you get real about how many placements do you expect in year 1, so is it going to be a little bit of a slower launch because it is a little bit different? Sort of what customers are you targeting with initially, just any more color on that initial ramp?

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So we’re not taking orders yet. Although we’ve had a lot of discussions and engagements with our customers around it. And the interest, as we said, is very strong. And so there’s a lot of kind of very nice pipeline of customers that’s forming. As far as kind of the numbers that we expect to put out here, I mean, our focus is going to be on a customer experience very much so. So that’s going to determine more than anything else, the numbers that we’re going to be shipping. That’s going to be the focus for the first couple of years, so being in the market. From the perspective of demand, it looks incredibly encouraging at this stage. And as we kind of project to what people are interested in doing near term and in the medium term and the long term, I think the trajectory of this platform is looking incredibly strong.

Michael Ryskin — BofA Securities — Analyst

And anything you can disclose in terms of the financial, the ASP, the gross — the margin profile or anything like that.

Justin McAnear — Chief Financial Officer

Yes. We haven’t disclosed the exact pricing on that. These earlier placements, they are going to be lower margin. It’s a complicated instrument. It’s going to be higher touch. As far as the quantity, the focus initially is not going to be on quantity. It’s going to be on customer success. And so when looking at the financials, I expect a low financial contribution this year just due to what the initial focus is going to be.

Michael Ryskin — BofA Securities — Analyst

Okay. And Justin, if I can squeeze in a follow-up, what you disclosed in the prepared remarks regarding the issue in Europe. I was wondering you can go into a little bit more detail on that. How do you know there’s not going to be any lingering impact? Could you give us a sense for the scale of it? Are you sure that these customers are going to be fully able to recover it, just sort of walk us through exactly what happened there? And was it on the QTC side on your front or something in the shipping? Just if you could provide more color on that would be helpful.

Justin McAnear — Chief Financial Officer

Yes. So this was a very complex and intermittent issue, really a multivariable problem to figure out. But our products need to be shipped in a temperature-controlled environment. So that’s both while it’s in transit and when it’s being stored. And so we found that, in part, due to pressures on the overall global supply chain that includes increased delays and then also some processes on our side, along with our partners, that needed to be tightened up operationally. What this led to was shipments sporadically falling out of those temperature-controlled ranges. And then when they got to the customer, it wasn’t apparent to the customer that the product has spoiled until they actually ran the experiment.

And so when we looked at this and troubleshot it and got to the root cause, we implemented some additional safeguards, both to improve the monitoring ability for the shipments in transit and in storage and then our processes and quarantine procedures when we detect that, that product has fallen out of the temperature-controlled ranges. And then when we look at the impact, the number — the amount of products replaced was relatively small. We’re talking a couple of million dollars in Q1, about a couple million dollars planned and executed already in Q2. But the bigger impact was while we were troubleshooting with these customers, they stopped — there was a delay in ordering while they worked through the troubleshooting, gets the root cause and then we ship in the replacement, and then they do the experiment again with the replacement. And so really, those are the key impacts there.

Michael Ryskin — BofA Securities — Analyst

Great. Thanks guys.

Operator

The next question comes from Julia Quinn from JPMorgan. Please go ahead.

Julia Qin — JPMorgan — Analyst

Hi, good afternoon. Thanks for taking the question. So first, I have a follow-up on the Chromium X, iX upgrade cycle. Can you maybe give an update on the current placement mix between existing and new to 10x users? And then over what time frame do you expect the majority of your Chromium users to upgrade to the X and IX? And do you think that the fixed RNA profiling kit is that enough to lift near-term bottleneck? Or are there other remaining bottlenecks that you are hoping to address with addition?

Serge Saxonov — Chief Executive Officer, Co-founder

So in terms of the mix — so far, the mix has been roughly similar like 50-50 to the new and existing customers for the X. And that has started to shift, obviously, because of the fixed RNA profiling set. And I think that’s going to — like I said, it’s going to drive quite a bit of the strip placement cycle. It’s a little hard to predict at this stage. It’s too early how long it will take to get the majority of the customer base to switch. We’ll have to kind of see how the next couple of quarters proceed. But we feel based on the initial interest and fixations, and ultimately, high throughput that I think it’s going to be a fairly rapid cycle to get to that point.

As far as removing bottlenecks, I think fixed RNA profiling is going to be one — certainly one big enabler. As I mentioned, the nuclei is another enabler, in fact, we kind of remove the bottlenecks. We do have other solutions approaches that we’re working on. We have always been working, whether it’s developing new protocols, sharing protocols or new products. So it’s not going to be necessarily really every bottleneck that our customers have, but it will certainly be a big enabler at this stage.

Julia Qin — JPMorgan — Analyst

Got it. That’s helpful. And then in terms of converting the halo users, do you think that the pandemic impact has been the main hurdle in terms of helping these customers ramp? And is your current upcoming new offerings enough to convert them? Or do you think it would take some other initiatives to convert these halo users?

Serge Saxonov — Chief Executive Officer, Co-founder

So we’ve always been focused on placing more instruments, and we’re going to keep doing that. As far as — it’s hard to question the sort of the notion that the pandemic has made it more challenging for them. I think that will certainly help. I think new product capabilities will help customers scale up as well, like the ones we were just talking about. And it’s our goal to keep doing things.

The other big thing here, too, is that just having our salespeople, our commercial team on site, is something that has been missing for a while and is now — now that we have people on site they can actually engage with customers and help them scale up. And I think that’s another sort of accelerant that we anticipate to be meaningful going forward.

Julia Qin — JPMorgan — Analyst

Great. Last one for me on Xenium. So I understand the initial launch menu is going to be 400 flex with a path to 1,000 plex over time. Are you able to specify like over what time frame you can get to the higher plex menu? And do you think that 400 plex is enough to get your initial traction because the system is positioned more for validation and not for discovery? Just any color on that?

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So we haven’t talked about the timeline to get to other plex levels. But we do feel pretty strongly that having the right genes in this panel is really important. So all the current platforms that exist out there will be used for validation and what is necessary and having a slightly higher plex level is actually not going to help you nearly as much as having the right genes in your panel, and we’re focused on making sure we have the right kinds of panels for the right tissue. And this is where also it helps us quite a bit to have kind of close relationship with our customers and also having a lot of internal expertise that has derived from our Chromium and Visium experience to put those together.

Julia Qin — JPMorgan — Analyst

Got it, very helpful. Thank you.

Operator

We take our next question from Patrick Donnelly from Citi. Please go ahead, Patrick.

Patrick Donnelly — Citi — Analyst

Hey guys, thanks for taking the questions. Justin, when you talked about the potential near-term impacts looking at 2Q, you mentioned COVID still lingering. Can you just talk about, I guess, what you’re seeing on that front, what the customer activity looks like? I assume it’s lower on the total pool of headwinds versus the cold chain logistics in China, but you did call it out. So I just wanted to check on that and hear what you’re seeing in the field.

Justin McAnear — Chief Financial Officer

So as far as impacts for Q2, we talked about LDR. That’s a headwind in both Q1 and Q2, specifically in Europe. And then as far as COVID impacts from Q1 to Q2, really in Q1, that was a AMR and EMEA impact in Q2, it’s the China lockdowns that are the primary impacts there. And then just overall, as we’ve talked about over time, the second order impacts, which are really not having to do with closures or shutdowns, but it’s more just impact on growth rates due to people not being in person, manpower, supplies, things like that. But generally, we have seen improvements there, like we were back in person when we were looking at mid-March. And so that has been improving. But, again, it’s more of an impact on growth rate than it is on the current state.

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. And maybe I’ll add here too is, like, I mean, one of the big things that has been happening literally over the last few months, less than that, is like we see people are back in personal conferences. This, again, this has not existed before, and there is this whole sort of almost fervent of activity that we’re seeing happening with customers and now with our field teams as well. Now they can interact with people and kind of initiate kind of pick up on projects that have been laying dormant for a while or — and this is important, like initiate new projects. Again, this is something that has been more challenging kind of to do over the last 2 years as people have dealt with various types of impacts. And now it seems like there’s kind of more momentum at least based on our interactions, our field teams kind of being out there interacting with customers and also them interacting with each other. So there’s sort of this kind of — that has been a challenge, and that has been — we expect that to start kind of abating as we go into the second half of the year.

Patrick Donnelly — Citi — Analyst

Okay. That’s helpful, Serge. And then, Justin, maybe just one on the margins. You mentioned margins. The product mix brought it down a little bit. I assume the cold chain stuff didn’t help. I guess as you look kind of in the balance of the year and even more in the midterm, you’ve talked about some of the new products being a little lower gross margin. What’s the right way to think about the margin profile as we progress this year and then even in a kind of steady state for the company?

Justin McAnear — Chief Financial Officer

And as far as gross margins go, we are expecting it to trend lower this year, not by a significant amount. Some of the increases that we’ve seen on material costs and supply chain costs are already in the Q1 results, but there still remains additional risk for the factors that we’ve called out before, just increased raw material costs, increased logistics costs as well.

And then as far as product mix, that’s a big driver as well. We’ve talked in the past about our newly introduced products and products that we have in the pipeline, having a lower gross margin than existing products. This is true with the Chromium X and iX. It will be true with Xenium when it launches as well. And so really, those are the biggest factors on gross margin.

Operator

We take our next question from Matthew Larew from William Blair. Please go ahead, Matt.

Matt Larew — William Blair — Analyst

Hey, good afternoon. A couple on HD. Perhaps I missed it, but I know last quarter, you mentioned HD was expected to do a lot to the end of 2022. So is that still on track? And I think last quarter, you also mentioned that you received — sort of folks that were waiting for HD that maybe that was putting some pressure on Visium demand. So I just wonder how that has trended throughout the quarter as well.

Serge Saxonov — Chief Executive Officer, Co-founder

Yes. So we don’t have an update on the timing, still working towards launching at the end of the year. And on the second question, yes, for sure, that definitely has been an effect. We’ve been seeing customers are waiting for HD. I mean, there’s definitely a lot of customers that are jumping in and doing the standard definition Visium and getting great results and great data and ramping up. But certainly, more and more people are kind of — really kind of looking forward to HD. And yes, there’s certainly likely to be some amount of stalling of standard Visium at this stage.

Matt Larew — William Blair — Analyst

Okay. And then Justin actually just thinking about the I guess, SG&A, in particular, obviously, it’s another big year for hiring, the SG&A maybe it’s a little lighter, what we thought it’d be in the quarter. Are you having difficulty filling any roles? Or is that maybe just kind of in line with kind of a typical step down, how we should think about SG&A building throughout the year?

Justin McAnear — Chief Financial Officer

As far as if we just look at the sales and marketing piece, we expect to hire over 100 folks in sales and marketing this year. And so that has been tracking along pretty well, just looking at how we’ve been able to grow from Q4 into Q1.

SG&A, overall, obviously, a much smaller amount of hires in G&A. But even though we are growing quite rapidly in SG&A overall, like we have been able to find folks and hire them there. R&D is really the hardest area that we found to hire in overall.

Operator

The next question comes from Matt Sykes from Goldman Sachs. Please go ahead.

Matthew Sykes — Goldman Sachs — Analyst

Hi. Thanks for taking my questions. Maybe just following up on Matt’s last question, just for overall opex trends as we think about over the course of the year, just given the number of product launches you’re getting through this year in terms of R&D trends over the course of this year and maybe into next, like, how are you thinking about the opex cadence over the course of this year?

Justin McAnear — Chief Financial Officer

So this year, in particular, we’re building ahead for the Xenium launch. And so on the sales and marketing side, we’re starting to hire those support staff now. So you’re seeing increases now that were really for towards the end of the year. And then the heads that we hire towards the end of the year, I’d really think about those as enabling 2023. So there definitely is a higher ahead impact for sales and marketing in particular.

Matthew Sykes — Goldman Sachs — Analyst

Got it. And then, Serge, maybe a big picture question for. You’ve talked in the past about the potential complementary nature of having the 3 platforms on Xenium lounges. As you think about longer term, with Xenium in the market, do you think that could help reinvigorate or reaccelerate growth and particularly Visium or any other platforms as customers kind of see the entire ecosystem?

Serge Saxonov — Chief Executive Officer, Co-founder

Well, so, yes, I see there’s definitely synergistic. And I think it goes both ways kind of relationship between the platforms. And, again, Chromium, Visium exists on the discovery side of the world much more so and Xenium is going to exist on the validation side. And certainly, like I said on the call, Xenium naturally like — basically just about every paper you see now within tissues, makes use of Chromium and Visium data. And so as people kind of are pushing towards Xenium and doing these in situ experiments, there’s a natural — there’s going to be natural use cases to also draw in and run Chromium and Visium experiments to kind of map things out and discover the right markers, the right cells and cell types.

So we do see both of the kind of — all the different platforms are actually kind of pushing each other. I also kind of want to emphasize the customer experience, again, from the same perspective given that so much of the use integrate — actually makes use of all these data types together that having a single customer experience is going to be quite important and valuable to customers as they go back and forth between the platforms.

Matthew Sykes — Goldman Sachs — Analyst

Great. Thanks very much.

Operator

[Operator Closing Remarks]

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