10X Genomics Inc. (TXG) Q2 2022 Earnings Call Transcript

10X Genomics Inc. (NASDAQ: TXG) Q2 2022 earnings call dated Aug. 08, 2022

Corporate Participants:

Cassie Corneau — Investor Relations

Serge Saxonov — Chief Executive Officer, Co-founder

Jim Wilbur — Chief Commercial Officer

Justin McAnear — Chief Financial Officer

Analysts:

Matthew Sykes — Goldman Sachs — Analyst

Michael Ryskin — Bank of America — Analyst

Daniel Arias — Stifel — Analyst

Tejas Savant — Morgan Stanley — Analyst

Patrick Donnelly — Citi — Analyst

Daniel Brennan — Cowen — Analyst

Julia Qin — J.P. Morgan — Analyst

Matt Larew — William Blair — Analyst

Kyle Mikson — Canaccord Genuity — Analyst

Presentation:

Operator

Good afternoon. Thank you for attending the 10x Genomics Second Quarter Earnings Call. [Operator Instructions] I’d now like to pass the conference over to your host, Cathy Cornell with Investor Relations and Strategic Finance at 10x Genomics. Thank you. You may proceed.

Cassie Corneau — Investor Relations

Thank you, and good afternoon, everyone. Earlier today 10x Genomics released financial results for the second quarter ended June 30, 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 email to investors@10xgenomics.com. An archived webcast of this call will be available on the Investor tab of the company’s website 10xgenomics.com for at least 45 days following this call.

Before we begin, I’d like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release 10x Genomics issued today and in the documents and reports filed by 10x Genomics from time to time with the Securities and Exchange Commission. 10x Genomics disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise.

Joining the call today are Serge Saxonov, our CEO and Co-Founder; Justin McAnear, our Chief Financial Officer; and Jim Wilbur, our Chief Commercial Officer. With that, I will now turn the call over to Serge.

Serge Saxonov — Chief Executive Officer, Co-founder

Thanks, Cathy. Good afternoon and thank you for joining us. Revenue for the second quarter declined 1% year-over-year, in line with our pre-announcement in mid-July. Our results this quarter fell short of our expectations as we navigated challenges in both the macro environment and with our execution. While some of these issues are behind us, we expect others will persists into the back half of the year.

Based on these lingering headwinds in our first half results, we now expect full year revenue in the range of $500 million to $520 million, representing growth of 2% to 6% over the prior year. While our top line growth this year will be slower than our previous expectations, we firmly believe the underlying opportunity for single-cell and spatial technology is as strong as ever. Our call today, I will focus of what we’re doing to ready our organization for a next phase of growth. Justin will provide more details on the specific impacts to our second quarter revenue and our outlook for the year as well as give additional color on steps we’re taking to strengthen our financial profile.

I’m proud of our track record of product innovation and the growth we’ve delivered over the past few years. We have progressed at a truly rapid pace amidst a very challenging environment. And with that incredible speed we have quickly outgo on some of the processes and systems that got us here. And while we have some work ahead of us, we’re building from a great foundation. This quarter, our fundamentals are incredibly strong. We’re focusing on the strength that have always differentiated us, driving our innovation engine, providing a superior customer experience and then investing in a long-term. In parallel, we will improve our execution and implement tools and processes so we can increase leverage and scale to the next level of growth.

Finally, I continue to have full confidence in both our vision and our approach to achieving that vision. We have built the leading platforms for single-cell and spatial biology and we’re just getting started. As the only company to have the three fundamental technology approaches for single-cell and spatial biology under one roof, we’re uniquely positioned to be the best partner to help researchers around the world interrogate, resolve in master biology.

Now, let me share a bit more about our progress and pipeline in each of our three platforms. Starting with Chromium, which is the unambiguous leader in single-cell analysis, during the quarter we continue to see solid demand for Chromium X Series instruments. We are proud of the broad appeal and demonstrate the success of the platform in its first full year since launch. Customers are enthusiastic about the new platform and its expanded capabilities, including access to our fixed RNA profiling kit, which is exclusively available on X Series.

Turning to consumables, where the breadth performance and workflow of our broad menu of assays is an important differentiator for us and for our customers. As planned during the quarter, we began shipping two new kits designed to help make more samples and more sample type available for single-cell analysis. It’s been great to see the early energy for both our nuclei isolation kit and our fixed RNA profiling kit. The nuclei isolation kit, our first offering to help ease sample preparation provides a simple scalable workflows to make frozen tissues and previously challenging sample types more accessible for routine single-cell analysis. This is a great example of how our continued innovation and workflow simplification will help expand our opportunity, bringing new labs and researchers into the 10x ecosystem and increase utilization among existing customers. It’s early, but we’re really excited by the strong initial adoption of this kit.

We’re also really pleased with the early feedback on our fixed RNA profiling kit, which will blink of the potential to be transformative for the Chromium franchise over the long term. This assay enables researchers to lock in cell state at the point of sample collection and we removes time and transport constraints typically associated with single-cell workforce. It also offers a number of significant advantages, including improved gene sensitivity, increased sequencing efficiency and built in simple multiplexing to achieve lower price and scale. While adopting a new workloads takes time, researchers have been running pilot experiments and assay comparisons to see firsthand the performance of this asset. The feedback would — so far has been universally positive.

At the AGBT conference in June we demonstrated how our fixed RNA kits can also unlock for the first time ever FFP preserved samples for single-cell analysis. This is a groundbreaking capability that we believe have the potential to be a real game changer as it opens up vast volumes of archival samples. Given the all of the progress to date the single-cell has been made using fresh frozen tissues, we expect this breakthrough capability should enable much more research, particularly in translational settings. Looking forward, we are excited about our Chromium pipeline. We’re on track to launch BEAM-Ab and BEAM-T by the end of the year.

Now, turning to Visium, while we’re still early in the Visium lifecycle, we continue to be encouraged by the widest Visium adoption of the platform as the leading tool for our unbiased spatial discovery. In Q2, we saw increasing adoption of Visium FFPE, which exceeded fresh frozen and sales for the first time. To date our customers have relied on Visium in almost 300 papers and pre-prints. This is an important leading indicator and it also demonstrates the success, the discovery in translational researchers are already having with the current Visium platform. In June, we began shipping Visium CytAssist, our first spatial instrument. While it’s still very early, we are pleased with the initial response and demand we’re seeing from customers.

By addressing the key challenges our customers have faced with the Visium workload, CytAssist will enable more routine use of the Visium platform. It was also significantly expand the number of samples around Visium. We believe the ease of use, overall experience and performance is much better for customers and the data generated using the instrument is superb. CytAssist will be a key enabler of the Visium platform going forward. In June, we also launched the second version of our Visium FFP assay. We’re making it available exclusively on CytAssist so customers can take full advantage of the instruments, ease of use and higher quality data. This new kit will give researchers high performance, a better and more reliable workflow and an added flexibility of larger captured areas.

I also want to provide an update on Visium HD and our work to develop a high resolution whole transcriptome offering. This is proved to be a very ambitious undertaking. Bringing up this new technology and associated manufacturing capabilities at the quality, scale and resolution our customers expect is taking more time than we anticipated. As a result, we no longer expect to launch Visium HD this year. While we aren’t providing an updated timeline right now, we are fully committed to delivering this capability to researchers as soon as we can.

Turning to Zenium, we continue to make great progress on the platform which we expect begin shipping — to begin shipping by the end of the year as planned. At AGBT, the energy, interest and enthusiasm from customers will solvable and exciting to see so broadly. Internally, what has been particularly inspiring to our team is a strikingly powerful data we’ve been getting from our experiments, showing great levels of sensitivity, specificity and flex on challenging samples. This has been reinforced by the positive reactions of customers with whom we have shared with data. We’ll build the Zenium platform with several key design principles in mind. The goal is to be able to determine cell types and cell space in the tissue of interest and measure what each cell is doing, the platform used to work across a wide range of tissues, sample type, applications and biological systems.

Importantly, Zenium was designed to enable routine use. We believe from launch, Zenium will have the highest throughput of any in-situ instrument in its cast, enabling researchers to analyze the most tissue area of single molecule resolution in the least amount of time. And finally, we design Zenium to scale with customers’ evolving research needs. Neutral kits will be able to support the measurement of thousands of genes and introduction of proteins on the same section. We firmly believe in Zenium’s differentiated position both at launch and as we look ahead at our comprehensive long-term roadmap for the platform.

Our team has established collaborations with key opinion leaders to inform and validate the development of future gene panels. We’re combining this customer input with a wealth of single-cell data to design a broad menu of high quality curated gene specific to both tissue types and application area. Researchers will also have the ability to add large numbers of custom genes. We believe our leadership in single-cell and spatial transcriptome mix gives us a particular advantage with Zenium, because most in-situ experiments make use of single-cell data to determine the genes of interest and to contextualize in-situ analysis.

Stepping back, we continue to have every confidence in our technology leadership across each of our three platforms. We believe our cadence of technological advancement and velocity of new product launches is unrivaled. Our pipeline is exciting and ambitious and it has already resulted in five major product launches this year. Looking forward, we are either to build on this momentum and our track record of breakthrough technologies.

Now, let’s spend a few minutes on commercial. Over the past few years, we’ve grown incredibly fast. Too fast then the infrastructure we’ve built didn’t always scale with us, especially in commercial areas. In recent quarters is becoming clearer what we’ve got us to this point of growth wasn’t going to get us to the next. We’re proud of the breadth and talent of our global commercial team. This is a group that has worked tirelessly to drive adoption of our technologies and support customers at every phase of the experiments. Our challenge and our opportunity is to make sure our team has the right leadership tools and processes so we can increase leverage, scale to the next level of growth and unlock the massive opportunity we have ahead of us.

Implementing better systems and tools will help us improve both our commercial execution and the customer experience in a number of ways. I’ll share a few I’d highlight. First, we will reduce friction in the sales process and make ordering and reordering more efficient for our customers and our sales team. Second, we will establish more rigorous and metric driven sales tactics to consistently manage our customers through every step of the sales cycle. We’ll do this by establishing universal processes, robust training programs and better analytics that help customer outreach and engagement. And third, we believe the right processes and systems will help us improve visibility and information flows both within commercial and between commercial and the rest of 10x.

Altogether, we believe this will help our sales can be more efficient and effective with our time and know how to prioritize their efforts to have the biggest impact. This is essential as we further expand the breadth and depth of our portfolio, increase adoption with existing customers and continue to make inroads with new customer segments and applications.

Now, I’m really excited to have Jim Wilbur on Board as our new Chief Commercial Officer to lead this work. Jim has dedicated his entire career at the building transformational tools in the life sciences. He comes to us from Meso Scale Discovery, highly regarded, global leader in instruments and assays that have revolutionized protein measurement. Jim understands and is passionate about the sales at both the strategic and a very granular level. He knows what drives customer and sales team behavior. He has a deep scientific and technical background to developing high performing teams and is fundamentally a builder, which impacts me, because we have so much more building ahead of us. He is a seamless fit with the 10x mission and culture and we’re thrilled to have him here.

Now, I’ll turn it over to Jim to say a few words.

Jim Wilbur — Chief Commercial Officer

Thanks, Serge. I’m really excited to be here. What’s struck me about this opportunity is the scope and scale of what’s possible. It’s already well established that single-cell analysis has been transformational in our understanding of biology. My belief and I know it’s one you all share is that the biggest single-cell has become it’s really just getting started. I believe the future will bring an enormous expansion in the number and types of researchers and investigators using these tools and the types of questions that are going to get asked and answered. It’s been an amazing start. It is absolutely exceeded my expectations. We’re building on a great foundation and we’ll give our talented team the resources and support they need you get absolutely everything out of the tremendous opportunity ahead. This journey toward ever higher levels of commercial excellence is going to be fun.

Serge Saxonov — Chief Executive Officer, Co-founder

Thanks, Jim. In addition to a broad commercial reach and powerful innovation engine, we see our strong cash position as an important differentiator, especially in this environment. We will be deliberate in protecting it, while also continuing to invest in our strategy and long-term growth. Last week, we took action to reduce our global workforce by approximately 8%. You heard me say it’s the people of 10x who make the magic happen, which is what make decisions like these so difficult. While the outcomes we made affected every organization, there was less impact among our R&D and field-based customer facing teams.

The changes we made warranty, especially don’t directly impacted but they were necessary to make 10x more resilient in the current environment and more focused on our mission to drive our next phase of growth. We don’t expect these changes to have a material impact on near-term execution or our long-term growth trajectory. Looking at the work ahead, we’re incredibly grateful to our team for their dedication to our customers and tireless pursuit of our mission. To recognize the hard work and impacts, we’re making investments to further strengthen redemption and sustain the team’s high engagement. As I shared with you last week, during times of change, we’re staying focused on what’s comes, our mission and our opportunity. We expect that in the future just about all tissue samples whether for basic research of our clinical diagnostics will need to be analyzed single-cell resolution in spatial context and at large scale. The endpoint is clear, but as 2022 has shown the path to get there is not linear.

Through their research, discoveries and publications, our customers remind us with increasing frequency of the tremendous potential of our technologies to accelerate the mastery of biology and ultimately advance human health. Here just the view of the recent discoveries and basic questions that have inspired and motivated our team in recent months. In Times Magazine, we saw publications of the first large-scale cohort studies linking population genetics with single-cell sequencing. These studies revealed an extensive catalog of molecular signatures in autoimmune diseases, opening the door to a new era of functional genetics. Our tool enable the discoveries of molecular signatures in two recent studies of age-related macular degeneration and the glaucoma. These studies will help the better diagnosis and treatment of these devastating eye diseases.

One of the central questions in CAR T therapy is teasing out what determines success and survival of injected CAR T cells. Our customers are using our immune profiling in gene expression solutions to help answer that question in order to improve and help administrative T cell therapies. And just last week, science published a large study of samples from patients who suffered heart failure. The researchers performed single nucleus RNA sequencing on to 1 million cells to reveal that underlying biology and point to interventional opportunities and personalized treatments. It’s clear that discoveries like these have enormous potential to transform how we predict, diagnose, treat and ultimately cure disease. This is why we do what with you. This is why despite all the progress we’ve made, we believe is still early days and this is why we are so confident in the endpoint and the 10x the best company to deliver on that.

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

Justin McAnear — Chief Financial Officer

Thank you, Serge. Total revenue for the three months ended June 30, 2022 was $114.6 million compared to $115.8 million for the prior-year period, representing a 1% decrease year-over-year. Revenue was flat compared to the first quarter of this year. Consumables revenue was $97.9 million, increasing 1% over the prior year period and flat compared to the first quarter of this year. Instrument revenue was $14.7 million, decreasing 13% from the prior year period and up 2% from the first quarter of this year. Service revenue was $1.9 million, increasing 7% over the prior year period. Our Q2 results were impacted by macro headwinds as well as some internal challenges. This was particularly evident outside of the U.S.

Starting first with APAC, revenue for the second quarter was $18.1 million, decreasing 15% from the prior year period and down 47% compared to the first quarter of this year. Revenues in the region were impacted by lockdowns in China that increase in scope and duration beyond the assumption that we shared on our Q1 earnings call in early May. They extended into June and spread beyond the Shanghai area impacting customer activity and resulting in lower sales.

Turning to EMEA, revenue for the second quarter was $25.6 million, decreasing 11% from the prior year period and up 25% from the first quarter of this year. While revenues in the region improved sequentially, results were impacted by unfavorable currency fluctuations, delayed customer reorders related to the previously discussed cold chain logistics issue and some execution challenges. In the Americas revenue for the second quarter was $70.9 million, increasing 8% over the prior year period and up 19% compared to the first quarter of this year.

Turning to the rest of the income statement. Gross profit for the second quarter was $86.9 million compared to a gross profit of $110.9 million for the prior year period. As a reminder, in the second quarter of 2021 we booked a one-time reversal of $14.7 million of accrued royalties related to a litigation settlement. Gross margin for the second quarter was 76% compared to 96% in the prior year period. The decline in gross margin was primarily due to be accrued royalties reversal in Q2 2021 as well as changes in the product mix and the increased manufacturing and logistics costs.

Total operating expenses for the second quarter were $150 million, an increase of 24% from $121.3 million for the second 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 second quarter were $70.7 million compared to $53.4 million for the second quarter of 2021. SG&A expenses for the second quarter were $79.3 million compared to $68.7 million for the second quarter of 2021.

Operating loss for the second quarter was $63.1 million compared to a loss of $10.3 million for the second quarter of 2021, primarily due to the impact of increased personnel-related expenses. This includes $36.3 million of stock-based compensation for the second quarter of 2022 compared to $26.9 million for the second quarter of 2021. Net loss for the period was $64.5 million compared to a net loss of $11.1 million for the second quarter of 2021. We ended the quarter with $500 million in cash and cash equivalents and marketable securities net of restricted cash.

As we are operating in a macro environment with increased economic uncertainty, we implemented a reduction in force of 8% of our global workforce to reduce spending, preserve cash and strengthen our financial profile. We estimate that we will incur between $5 million and $6 million of cost, consisting primarily of cash severance, which we expect to recognize in the third quarter of 2022. In addition, we have canceled a number of open hiring requisitions and reduced our near-term hiring plan while implementing targeted reductions in non-headcount spend as well. Our goal is to be free cash flow positive by the end of 2023. Over the next few quarters, we will — we expect elevated levels of capital expenditures and subsequent cash burn as we finish construction of our operations facility in positive. Completion is expected at the end of Q1 2023 and we are evaluating options to finance the facility after completion.

Now turning to our revenue outlook for 2022. We now expect our full-year 2022 revenue to be in the range of $500 million to $520 million, representing growth of 2% to 6% over full-year 2021. In the first half of the year, we experienced a slower than expected rebound as we emerge from the pandemic environment. This was driven in part by macro factors, some of which we expect to continue into the back half of the year. While we continue to have confidence in the tremendous opportunity our products are unlocking and the underlying demand for our technology.

We are adjusting our expectations for the second half to reflect a more modest rate of increase and lingering macro headwinds. Thus, we expect Q3 revenue growth in the low to mid-teens percent over Q2 and we’d also expect Q4 to exhibit the same seasonality that we’ve seen in the past, barring any material changes to the macro environment. We look forward to providing additional information on our business at an upcoming Investor Day planned for later this year. Stay tune for more details to come.

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

Serge Saxonov — Chief Executive Officer, Co-founder

Thanks, Justin. Before we start Q&A, I want to thank our team. The work we do at 10x is both challenging and exciting and that’s what makes it meaningful and worth it. I’m so proud of this team and the tremendous impact you’re making. I couldn’t be more optimistic and confident about the future. Thank you for all your doing every day to push 10x our mission and science forward.

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

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Matt Sykes with Goldman Sachs. You may proceed.

Matthew Sykes — Goldman Sachs — Analyst

Hi, good afternoon. Thanks for taking my questions. Maybe the first question — really appreciate all the color on ’22 and the macro factors involved there. I know it’s — you might give us more details later this year. But any kind of early view on how we should think about ’23 just in terms of growth. You’ve got a lot of new products coming on. I know Visium HD is being delayed, but there’s some number of new products coming on that could impact that growth rate. But in terms of rebound, if we assume some of the macro factors start to dissipate the end of this year, any kind of color you can provide us with on what ’23 may look like for you.

Justin McAnear — Chief Financial Officer

Hi, Matt. First off, there is a lot to be excited about when we think about 2023. So as you mentioned, lot of new products coming out. It’s going to be the first full year of Zenium. It’s going to be the first full year of CytAssist and Fixed RNA as well. And I also think that we’re going to start to see us reaping some of the benefits to improvements in just systems and tools and processes that we’ve spoken about on the commercial side as well. But as far as giving any color past that, right now I think we’ll get through Q3 and Q4 without forecasting too far ahead of what we’re seeing and we will share more of a view on the key drivers on 2023 later in the year in the Investor Day that we mentioned.

Matthew Sykes — Goldman Sachs — Analyst

Got it. Thanks, Justin. Appreciate it. And then maybe one for Jim or Serge. Just, you talked a little bit about some of the commercial strategies you’re going to put in place in harnessing the data analytics. Could you maybe give a little bit more color in terms of where you feel like the greatest areas of improvement could be, whether it’s engagement with existing customers or maybe trying to penetrate new areas? And what the type of efforts that you put together in terms of data analytics? How that could enhance that? Just trying to get a sense for, from a timing perspective how we could expect to see some of these changes you’re going to do the commercial strategy start to take place. Thank you.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah. So, I would emphasize, maybe to step back a little bit, a lot of what we’re going to be doing, a lot of what we’re going to be implementing Matt is more around the mechanics of commercial execution, not the fundamentals of this strategy. We feel — we firmly feel that we have confidence in our markets and in the customers that are out there and that we are approaching our markets with the right set of products and the right high level strategy. Now in terms of all the tools and the metrics that we’re going to be — systems are going to be implementing, you kind of step back and think from first principles, we have — we — you mentioned as we were — we have to focus on adding new customers to the ecosystem. We also need to focus on increasing the usage with existing customers.

And if you think about where those — how our business has evolved over the several years, there has been a huge increase in the complexity of our portfolio and also in just the sheer number of customers that we have. And so it is on us to make it our teams, certainly our sales reps and others, the tools, much better tools to for them to know how to best to spend their time most effectively and most efficiently and have the right analytics information flows and those. So, that’s going to be the interest. I think there is a lot to be done across the board. It’s not any specific area that I would point to. It’s a huge opportunity. And it’s not going to be the kind of thing we’re just sort of flip a switch necessarily. But over the coming quarters, we should expect to see progress.

Matthew Sykes — Goldman Sachs — Analyst

Great. Thanks very much.

Operator

Thank you. The next question is from the line of Derik De Bruin with Bank of America. You may proceed.

Michael Ryskin — Bank of America — Analyst

Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow up on Matt’s second question there. Jim, I realized that you’ve only been in the role for a couple of weeks now, but I wonder if you could give us a little bit more of an update on your thoughts on some of the commercial revamps going forward. How do you think about retention of the existing sales force versus some turnover that we’d already seen, and we could probably expect to continue to see? Can you give us a timeline on how long you think until the organization will be in the right place to sort of implement the strategy? I guess, put another way, for how much longer is there going to be a revamp versus when will you be ready to go forward?

Serge Saxonov — Chief Executive Officer, Co-founder

So, Mike, let me pick up the question. As you alluded to, Jim has been here for all of the business. So I want to be careful in terms of feel the pressure on the specifics yet. One thing I do want to emphasize, like I said in the previous answer is the team is very strong, the commercial team all around is strong. And in terms of — we believe in a team and what we have been focused on is bringing the new leadership and the new tools and the use systems and new processes. So it is going to be a function over the next several quarters as we proceed to implement those changes. I think — I don’t think there is a lot more to add and I would caution against focusing too much on the team turnover, which has not really been the case at this point.

Michael Ryskin — Bank of America — Analyst

Okay, great, thanks. And then maybe just for follow-up, in the past couple of quarters there has been a lot of discussion about halo users and non-halo users and sort of as the installed base has grown how the divergence of some parts of the customer base and utilization that comes with that. I was wondering if you could give us an update on that sort of, are you noticing continuing trends there, is it have some of the efforts you’ve taken to address that, has that improved. Just to give us a little bit of a sense of what’s going on the pull through per system or maybe on the utilization side of things. Thanks.

Serge Saxonov — Chief Executive Officer, Co-founder

So I wouldn’t say there has been a huge changes since when we talked about it earlier in the year. Those data does tend to be — there has been a lot of puts update so far this year. So it’s hard to do at this stage to make any confidence statements around these kind of longer term patterns, which you — which makes more sense to summarize in the course of — across more like a year. Overall sort of similar trends we’ve seen before where instrument owners have consistent usage and consistent ramps and daily users that would be more episodic and use the product less.

Michael Ryskin — Bank of America — Analyst

Great, thanks.

Operator

Thank you, Mr. De Bruin. The next question is from the line of Dan Arias with Stifel. You may proceed.

Daniel Arias — Stifel — Analyst

Afternoon, guys. Thanks for the questions. I had a little problem my phone here. Hopefully that doesn’t get in the way of able to ask these here. But Serge or Justin maybe just back on new products, but more focused on this year, should we think about some of the key new portfolio elements there Fixed RNA side of sticks etc. playing a role in the 3Q to 4Q step up that you alluded to as a part of the outlook.

Serge Saxonov — Chief Executive Officer, Co-founder

We certainly feel good about these products. I’ve mentioned CytAssist there in particular is the new instrument. So — and there is quite robust demand we’re seeing from customers certainly as you probably see in multiple times now Fixed RNA profiling is a very exciting product. The one note of caution there is that it’s a new workflow. It take some amount of time for people to benchmark it against our previous workflows. So there’s going to be some amount of ramp that we still need to kind of see how that performs.

Justin McAnear — Chief Financial Officer

Yeah. And Dan as far as a step up from Q3 to Q4 goes what we’re really getting across there is just we’d expect Q4 to exhibit the same type of seasonality that we’ve seen in the past. And then typically with new products, we don’t typically subscribe too much volume to new products right at launch or right after launch and we’re always launching new products and they do typically take a number of quarters to get traction before they become meaningful.

Daniel Arias — Stifel — Analyst

Okay. Maybe Serge just as a follow-up, I wanted to ask a question about CellPlex. As you’ve thought about the moving parts and the dynamics in the single-cell market today and you think about that product seemingly being important for the long-term adoption of single-cell, I’m just curious if you think in the short-term that there is any negative impact that you’re seeing on consumables growth just from reducing the per sample cost, but maybe not seeing the volume increases at the same magnitude this year.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah, this is something that we’ve been watching, I would say, on several fronts. CellPlex is one high throughput HD kit is another one that has sort of some of the similar dynamics of reducing price for data point in order to drive volume. I would say so far, to the extent that we can tell has been fairly minimal kind of the extent of cannibalization on that front. There is some, but it also has opened up some new projects and studies. So, net-net I don’t think there is a material change here that we’re seeing.

Daniel Arias — Stifel — Analyst

Okay. Appreciated, guys. Thank you.

Operator

Thank you. The next question is from the line of Tejas Savant with Morgan Stanley. You may proceed.

Tejas Savant — Morgan Stanley — Analyst

Hey, guys, good evening, and thanks for the time here. So, Serge or Justin perhaps, can you just share some color on trends in July, and into August here. I’m just trying to sort of juxtapose what is essentially sort of a mid-teen mess for 2Q versus the $100 million plus that you’re taking down the guide by. And any specific color on Americas growth here. Was that essentially related to commercial missteps year-over-year 8%, a little bit underwhelming.

Justin McAnear — Chief Financial Officer

Hey, Tejas, as far as your first question goes on trends to date, when we gave our updated guidance, we also gave some color on how we expect Q3 to go with a low to mid-teens percent increase from Q2 to Q3 and so far this quarter the trends that we’re seeing support that view. And then as far as your second question, just around overall growth in the different regions, the biggest impacts that we’ve seen are in APAC and EMEA, to a lesser degree in AMR, but within all regions we have seen some degree of slowness coming out of the first part of the year.

Tejas Savant — Morgan Stanley — Analyst

Got it. That’s helpful. And then just as a follow-up, one of your peers in spatial here called out this mix shift if you will, away from multi-cellular resolution platforms to single-cell or sub-cellular imagers. What are you hearing from your customers and what does that imply for your Visium platform going forward, particularly in terms of the HD slippage into next year?

Serge Saxonov — Chief Executive Officer, Co-founder

So, we haven’t seen like I would say a material slowdown in Visium adoption. I think it’s been sort of a different set of use cases for many — in many ways and still quite early in our market. So it has been — Visium has been growing especially Visium FFP has been growing quite robustly. So from that perspective, I think we are feeling good about the Visium trajectory especially not with CytAssist coming out, which should put an additional sort of acceleration to the platform. But we absolutely see the excitement around in future approaches and you’re referring to what happened at AGBT and we’re certainly investing very aggressively Zenium.. I’m really looking to launching that platform, where we see a lot of interest from customers, a lot of excitement internally here as well.

Tejas Savant — Morgan Stanley — Analyst

Got it. Thanks for the time guys.

Operator

Thank you. The next question is from the line of Patrick Donnelly with Citi. You may proceed.

Patrick Donnelly — Citi — Analyst

Hey, guys, thanks for taking my questions. Maybe a similar vein to Tejas’ first question there. Just in terms of visibility, Justin, can you talk about overall the visibility you’re getting, I mean, obviously three months ago, you guys maintain the guidance, you can do about the Europe and China headwinds those are somewhat known, North America seems like it came in pretty light. Can you just talk about just the general trend visibility into the overall business as we move forward.

Justin McAnear — Chief Financial Officer

Hey, Patrick, sure. So, I think before getting into the core of the question just talk a lot about the drivers for Q2. The biggest drivers on the Q2 miss were the extended lockdowns in China and also the currency impact as well. So just a few things on that, on China, historically China has been about 15% of our business, and when you look at Q2, they did a fraction of what they have done before. And when we did our earnings call in the last cycle and we reiterated guidance, we also shared our assumptions for that guidance update, which had the China lockdowns abating basically in May. And they did — and they extended into June and they also increase in scope as well.

And then currency, currency was a material issue in Q2 as well. Keep in mind that 45% of our revenue is outside the U.S. And when you look at 2022 revenue whereas about 17% is indirect foreign currency, we also have distributors that we sell through that sell — that we sell to in U.S. dollars, that sell to customers in the foreign currency. So I think the impact of currency — as it shifted over over the whole of Q2 impacted more than that 17% that’s in the direct foreign currency. I think it extended past that as well.

And so then also you have the impact of China currency and then just the growth rates that we were expecting coming out of the pandemic environment. And it was a pretty depressed Q1 with the Omicron impact in the first quarter. And coming out — coming into Q2 into Q3 and Q4 we did expect a higher acceleration and we haven’t seen that yet. And so really what we’re expecting a more modest increase today and still an improvement it’s not to the degree that we were expecting earlier in the year. And so right now, we’re going to forecast what we’re currently seeing with the more modest growth on top of that.

Patrick Donnelly — Citi — Analyst

Understood. Okay. One one Serge or Justin can answer this one. I mean, just in terms of kind of the balancing of kind of growth and profitability, so you guys came out of the IPO obviously spent pretty aggressively going after the big opportunity, put up great results for a couple of year stretch there, now kind of pruning the workforce and being focused on profitability. Can you just talk about how you guys balance that internally again, still talking about the opportunity being very significant at the same time focus on profitability. Maybe just talk about how you find that balance where you’re going to direct the incremental dollars from here and kind of think about chasing growth versus I guess profitable growth versus kind of any growth, maybe just a little bit of color there. Thank you.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah. So, I’ll say like, first of all, very high level, we’re still very much in growth mode. The opportunity is huge. It’s actually grown larger than at the time of the IPO, and I have every confidence this is as big a thing as it has ever exist in the life science tools. And so it’s our job to realize this opportunity and that’s our number one priority. Now, stepping back, if you look at again what’s happen since over the last couple of years since IPO we’ve doubled the size of the team in the last few years. And it’s not just the size that we’ve increased, the team’s also organizational complexity, more layers, more roles, sometimes over specialized roles. And so there is an element of streamlining the organization in — reflecting on the current macroeconomic environment, reflecting on current revenue rates, doing some amount of adjustments to the organization and being more careful and deliberate with how was plan going forward. And so, it is definitely a balance, but at the first order like we’ve absolutely investing and expanding lots of growth. But now we’re also doing it with the constraint that Justin put out there driving toward being free cash flow positive.

Patrick Donnelly — Citi — Analyst

Got it. Thanks, Serge.

Operator

Thank you. The next question is from the line of Daniel Brennan with Cowen. You may proceed.

Daniel Brennan — Cowen — Analyst

Hey, guys, thanks for taking the questions. Maybe the first one is on single-cell. So you highlighted Serge upfront incredibly positive fundamental environment, but obviously the last couple of quarters hasn’t been as evident to us. So can you just give us some insight on what the underlying market single-cell is growing at? Has there been any slowdown from 3D spatial cannibalization? And between the drag from the one-off factors how your base business is doing? I’d be interested to get some more color there. I know there was a question earlier on the halo effect, but maybe you can just give us a little more flavor there. And I have a follow-up. Thank you.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah, so as far as the beginning of this, the growth of the year had a whole lot of different effects puts and take from different sides. So it’s a little hard to invert long on things from just what out in the last two quarters. We go back the first principles of the fundamentals that has not changed, like the people need single-cell resolution. They certainly needed for applications all across life sciences, all across biology. So no question around that. As far as the question, in terms of cannibalization for spatial 3D spatial, I don’t think that can be a material effect at this point given that there is not really matchable technologies out there and we certainly would be seeing that on our side as well that were happening. I think it’s more broadly — the slowdown we’ve been seeing recently against these broad macroeconomic factors that just mentioned and also generally we’re still trying to figure out what is the kind of the new world of research look like coming out of the pandemic environment over the last two years.

Daniel Brennan — Cowen — Analyst

Okay, got it. And then on 3D spatial, I know you haven’t really broken out specifics on the business in the past, it would help to get some color on how we think about the relative size of that business and/or your share. And when we think about, at least, if you’re not going to share that, but at least if you think about the new product impact of ’23 like is this an incremental driver to year-over-year growth or is this potentially a material driver to growth. Thanks.

Justin McAnear — Chief Financial Officer

Hi, Dan. I’ll start with that. So we don’t currently, you’re right, we don’t currently break Visium out. We will talk more about our plans for that at the Analyst Day that we talked about in prepared remarks. But I can tell you as far as trends go, over the last few quarters it’s relative percent of overall revenue hasn’t fluctuated too much, meaning it’s been consistent volume-wise with the rest of the business.

Operator

Thank you. The next question is from the line of Julia Qin with JP Morgan. You may proceed.

Julia Qin — J.P. Morgan — Analyst

Hi, good afternoon. Thanks for taking the question. First on Visium HD, could you give us a little bit more color on the nature of the delay and give us a little more detail on what’s the bottleneck remain to be addressed and how confident are you that that’s going to be addressed in the relative near term? Thanks.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah. So, as I said, there is — this is like a very ambitious undertaking. We’ve been involve in new technology, new manufacturing capabilities. And while the initial data for — look really good we ran into some technical manufacturing issues with scaling this. So we are committed to delivering the capability, but — and we know it can be fundamentally it can be done, because we have the data to show that can be done, but it will take more time and we are adjusting our product development approaches here, but we’re not ready yet to talk about the specifics or an updated timeline.

Julia Qin — J.P. Morgan — Analyst

Got it. And then on Zenium, just making sure if you’re still on track to launch that by year-end and are you taking pre-orders to take advantage of this year’s customer budget?

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah. So, on Zenium, we are on track to launch it before the end of the year and we have started taking pre-orders at — for these instruments to precisely — partially for that reason.

Julia Qin — J.P. Morgan — Analyst

Got it. Thank you.

Operator

Thank you. The next question is from the line of Matt Larew with William Blair. You may proceed.

Matt Larew — William Blair — Analyst

Hey, good evening. I want to just quickly follow up there on Julia’s first question. Is it technical feasibility issues that you are still working to address or are those issues that you solved and it’s a matter of scale up and manufacturing where the quality and consistency need to be content? Just trying to assess that whether this is a technical feasibility or feasibility at scale issue.

Serge Saxonov — Chief Executive Officer, Co-founder

It is really feasibility at scale issue, because again internally we have shown that it works in the data and it transitioning into a scale is where there have been new challenges that we have encountered.

Matt Larew — William Blair — Analyst

Okay. And you mentioned last quarter that the delays to HD were affecting current Visium to demand. Is that still been the case and are you [indecipherable] customers are trial other products. Just curious what your conversations with customers have been about the delay.

Serge Saxonov — Chief Executive Officer, Co-founder

Well, so it still very early, so we’ll have to see how that plays out with customers. Like I said time HD was going some customer sales. It may actually unlock some going forward. But this is too early to tackle at this stage.

Matt Larew — William Blair — Analyst

Okay. Justin based on results year-to-date, I just curious, are you still expecting to see year-over-year growth in Chromium instrument placements?

Justin McAnear — Chief Financial Officer

Hi, Matt. Good question. Earlier we had said that we expected to be roughly flat year-over-year. I think with what we’ve seen so far actualize in Q1 and Q2 and then just the adjusted expectations that we have for the back end of the year. I would say at this point we’d expect it to be flat to slightly lower than last year.

Matt Larew — William Blair — Analyst

Appreciate the detail. Thanks.

Operator

Thank you. The next question is from the line of Kyle Mikson with Canaccord Genuity. You may proceed.

Kyle Mikson — Canaccord Genuity — Analyst

All right, great. Thanks guys for the questions. Justin, you mentioned the goal to be free cash flow breakeven or positive by the end of ’23. Obviously at the quarterly number, you can get there. Could you just talk about like the underlying assumptions behind the expectation at least directionally like you want this deal, right?

Justin McAnear — Chief Financial Officer

Hi, Kyle. So, as far as us putting us the goal to become free cash flow positive in 2023, by the end of 2023, we feel that hitting that it’s an important milestone for us to hit to make sure that we have the right financial profile on our path to becoming a profitable company. And so obviously there’s different revenue scenarios that we’re looking at for 2023. As we’ve shown right now we are adapting to the environment that we’re in and I expect that we will continue to do so to the degree that it makes sense without hurting our longer term growth prospects.

So, we’ll share more about, like I said, the drivers for the 2023 top line later in the year. But we are committed to making sure that our spend is appropriately — is appropriate to the top line that we’re experiencing. And also just a few other points that we made on the call, we are expecting elevated levels of capex over these next few quarters, but I do expect those to drop off. So just on the expense side, that’s a key factor to understand that once that operations facility is complete in roughly the Q1 2023 timeframe. You will see a drop-off in the capex. And we expect to spend roughly a $140 million to $150 million capex over the next 12 months, but a good portion of that is front-loaded into the next couple of quarters.

Kyle Mikson — Canaccord Genuity — Analyst

All right. That’s great, thanks for that. And then for Serge just given some of the departures recently among the commercial and the marketing leadership, as well as the reduction last week, I was just wondering if you could talk about what gives you optimism that you’re not going to suffer from any brain drain or a slowdown in your trademark kind of product innovation pipeline strategy. Just you alluded to retention early in your prepared remarks, just was wondering if you could kind of expand on that.

Serge Saxonov — Chief Executive Officer, Co-founder

Yeah, so I just want to emphasize the retention comment was made very much with forward — with a forward lens. We have not had really material departures in terms of brand drain or in fact I would say the level of thought of the company right now is as high as it has ever been in fact probably higher than it has ever been and so I feel very confident going forward, especially from that perspective.

Kyle Mikson — Canaccord Genuity — Analyst

Okay, great. Thanks, guys.

Operator

[Operator Closing Remarks]