Good afternoon, ladies and gentlemen, and welcome to the 10x Genomics Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. I would now like to turn the conference over to your host, Lynn Lewis, Investor Relations. Please go ahead.
Thank you. Earlier today, 10x Genomics released financial results for the quarter ended September 30, 2019. If you have not received this news release, or you'd 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 14 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, including the company's prospectus, dated September 11th, 2019. 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. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 7th, 2019. With that, I'd like to turn the call over to Serge Saxonov, the company's Co-founder and Chief Executive Officer. Serge?
Thanks, Lynn, thank you everyone for joining us this afternoon. I'm pleased to welcome you to 10x Genomics' first earnings call as a public company to review our third quarter 2019 results. Joining me today is Justin McAnear, our Chief Financial Officer. Brad Crutchfield, our Chief Commercial Officer, will join us for Q&A. As many of you know, we completed our initial public offering in September, raising $411 million in net proceeds. I'd like to express my sincere thanks to the awesome team we have assembled at 10x Genomics. Our progress is a function of their collective hard work and dedication. I would also like to take a moment to thank our investors for their support. Finally, I'd like to acknowledge the amazing work being done by our customers around the world.
It is their work, their science, their discoveries that motivate us more than anything else at 10x. As excited as we are about how far we have come, what really drives us is the sense that we're just getting started. Now, revenue for the third quarter totaled $61.2 million, representing growth of 67% over the prior year quarter. Based on these results, we're providing full year 2019 revenue guidance of $238 million to $242 million. Before we get into more specifics on the quarter, I want to take a moment to give you a sense of the vision that is driving 10x. This is the century of biology. We expect that many of humanity's most pressing health challenges will be solved by precision diagnostics, targeted therapies, and cures to currently intractable diseases.
We also believe the biggest obstacle to this progress is that we understand very little of the underlying biology. In fact, the amount of biology we don't understand is vastly greater than what we do understand. The most fundamental feature of biology, what makes it different from just about every other discipline, what makes it so challenging, is its irreducible complexity. The way to address this complexity is to measure biology on a massive scale at the right level of resolution of individual cells, molecules, and their interactions. At 10x Genomics, our goal is to become exceptional at building technologies and tools to accelerate progress across the life sciences in the coming decades, to lead the transformation of biology through resolution and scale, to allow the world to see biology they could not see before, to do things with biology they could not do before.
We have innovated across many different fields, chemistry, hardware, microfluidics, biochemistry, software, and brought those innovations together into the products we have on the market. We provide integrated solutions, including instruments, reagents, and software. We focus on end-to-end products spanning laboratory workflows through data analysis to visualization. Since going commercial in 2015, we have launched numerous products, all aimed at measuring key analytes in biological systems, including DNA, epigenetics, RNA, proteins, and immune repertoire. Notably, our products have helped ignite the single-cell revolution that is changing our understanding of module biology. Our Chromium platform enables measurements of different kinds of analytes across thousands to hundreds of thousands of single cells. This allows researchers to see what is going on in their biological systems at the right level of resolution. Our Visium platform, which we expect to launch by the end of the year, enables spatial analysis.
Spatial analysis provides information on how cells and molecules are arranged with respect to one another in tissues. Now we have a large and rapidly growing body of scientific publications that have come out of our customers' labs. There are now over 570 papers where our customers have made fundamental scientific discoveries using our products. Even more exciting than just the number of publications has been the breadth of areas where we have seen our customers do their work and the tremendous number of applications where our products are being used. Spanning oncology, immunology, neuroscience, infectious diseases, conditions of pregnancy. It's hard to think of an area of biology where 10x is not being used. We're drawing customers and revenue from all across life science research. Our capabilities are sweeping away much of the conventional toolkit of standard biology, whether it's molecular biology, cell biology, or proteomics.
Our instruments and workloads have been designed to go on every bench in every research lab. There is no simple predicate for what we're doing. We're not replacing any single technology or approach. Rather, we are creating new markets across life science research. We estimate the total global life science research tools market to be more than $50 billion. In the near term, we believe there is a $13 billion market opportunity in front of us. This includes areas where researchers are already looking to run high throughput, large-scale experiments, things like next-generation sequencing, flow cytometry, microarrays. As the rest of the research world moves towards the new high-resolution large-scale way of studying biology, we believe that more of the total global tools market will become accessible to us over time. Importantly, this market assessment does not include any opportunities beyond the current life science research tools market.
In the long run, we believe that our approach and our technology to master biology will be foundational for the development of clinical applications and many new therapies. For now, in the near term, we're focused on the vast growth potential ahead of us in the research tools market. Today, we sell Chromium instruments, which provide a source of upfront revenue for us. Our Chromium instrument is listed at $75,000 to make it broadly accessible to our customers. Once an instrument is placed, we focus on driving utilization, which entails the purchasing of consumables and provides a source of recurring revenue. Annual Chromium consumable pull-through has averaged around $150,000 per instrument. Our consumables include proprietary microfluidic chips, slides, reagents, and other components. Chromium is a closed system, so our customers must buy reagents from us to run on our instrument.
These instruments don't close to the sample where the experiments are being done. While DNA sequencing is a part of all of our workflows, the vast majority of our customers do not own DNA sequencers, which tend to be used at centralized facilities. Typically, in these cases, DNA fragments that are produced as part of our workflow are sent to a third party or another lab for sequencing. This means that while Chromium can work as a centralized instrument and can be used by multiple users, it is designed and priced to be decentralized, to enable utilization and adoption on every lab bench. We have now built a large commercial organization to drive both instrument placements and adoption. That organization consists of over 200 employees, including a direct sales force in North America and most of Europe.
In Asia Pacific, there is a hybrid structure where 10x employees in key countries work directly with our commercial partners, who in turn are responsible for all of our sales in that region. At 10x, the most important thing to us is the success of our customers. To that end, we have built a global team of field-based application specialists and technical support scientists to help customers succeed with a specific focus on their early experience with our products. We have also developed a number of online tools that assist with customer support and training. All of this helps increase the usage of our products. Ultimately, what matters to us is that our customers can do their research effectively and drive their science forward.
Now, turning attention to last quarter, I'd like to give an update by orienting around three key themes, product innovation and impact, operational execution, and what we have done to address some of the longer-term risks. First on products. Our philosophy is to invest in programs that have potential for exponential impact on the market. We see a wealth of opportunities in front of us and are expanding our investments in R&D. We now have more resources to do so and are taking advantage of that. Our team is working on a number of programs that we believe could add substantially to our long-term growth. We're very excited about the pipeline of new products as we look to the years ahead. The first product we're launching as a public company is the new Visium Spatial Gene Expression Solution.
Last year, we acquired a Swiss company called Spatial Transcriptomics that provided a foundation on which we're building spatial analysis products. At the time of the acquisition, Spatial Transcriptomics was in the market with an early-stage product. Since acquiring the company, we have worked hard to bring this product up to the high standards we have for our commercial offerings. Our upgraded version is a complete end-to-end solution with all of the reagents and all of the software included. Visium now has five times greater resolution, more than 10 times greater sensitivity, and a significantly simplified workflow that has decreased protocol time from three days to one. This product will enable unbiased, large-scale gene expression measurements with spatial information from tissue sections. We began taking pre-orders of Visium in September and showed a lot of data in detail at the ASHG conference in October.
We're very excited about this product and its potential. Even though it's early days, the interest we're seeing from new customers has exceeded our expectations. We're anticipating a particularly intense interest in oncology, neuroscience, and developmental biology, spanning many other fields as well. We expect to begin shipping Visium products by the end of the year. The third quarter once again saw a large increase in publications from our customers' labs. While there are many great discoveries to choose from, I wanted to highlight two papers in the area of immune oncology that together made use of our gene expression, immune profiling, and epigenetic solutions. This pair of papers out of Stanford focused on understanding how immune therapy works to treat cancer.
While immune therapies have had a revolutionary impact on cancer treatment, the central challenge of the field is to understand how they work and why they're only effective in a fraction of patients. These Stanford publications focused on basal cell carcinoma and made some pretty dramatic discoveries. They learned that checkpoint inhibitor immunotherapy works by recruiting new immune cells to fight cancer rather than reactivating existing immune cells from within the tumor. They also gained a deep understanding of how the therapy-responsive immune cells are regulated. These discoveries lay the foundation for new diagnostics, new drugs, and ultimately may result in many lives being saved. This kind of work by our customers gives profound meaning to the work we do at 10x and is a huge motivator for the team. Now, turning to operations.
This was our largest quarter to date by just about any metric in terms of revenues, shipments, customers. Just by itself, rapid growth from a high volume base demonstrates really good operational execution. Last quarter saw a rapid uptake over our new Next GEM architecture, which dramatically increased the complexity around managing multiple architectures and inventory. I'm really proud of how the team executed through multiple product transitions, rapidly increasing volumes, and increasing complexity of the supply chain. We will continue to stay focused operationally and take steps to support current and future growth. Finally, I will provide an update on some of our ongoing litigation. First, with respect to our defensive litigation before the International Trade Commission, the commission announced this week a delay in the final determination until December 10th.
The final determination in the ITC litigation that we brought against Bio-Rad. The litigation brought by Bio-Rad is primarily based around a particular way of making droplets. Over the last several years, we have developed a dramatically different approach to making droplets that uses very different physics. We call this approach Next GEM. We started shipping Next GEM products in May and have been onboarding new customers with Next GEM since then. At this point, all Chromium instruments that we sell now operate exclusively with our Next GEM solutions. We've been very careful not to disrupt existing studies of our customers using our legacy GEM products and will continue selling them those consumables until it's the right time for them to switch. Overall, the transition to Next GEM has been going well, in many cases, a lot faster than we anticipated.
We expect that Next GEM will constitute substantially all of our Chromium consumable sales by the end of 2020. We were also recently pleased to announce our settlement with Becton Dickinson. We have cross-licensed certain patents related to molecular barcoding and single-cell analysis. As part of the agreement, each party has also entered into a covenant not to sue in certain fields related to each company's products. The agreement resolved all outstanding patent litigation with BD. We now have over 650 patents issued or pending, including foundational patents in single-cell analysis, epigenomics, spatial analysis, and multi-omics. We continue to invest heavily in developing our patent portfolio, which provides significant differentiation and protection. Overall, this has been a very eventful quarter at 10x Genomics.
I'm very proud of the progress our team has made to date. I'm confident we're well positioned to execute on our strategy going forward. With that, I will now turn the call over to Justin McAnear for more details on our financials.
Thank you, Serge. Total revenue for the three months ended September 30th, 2019, was $61.2 million compared to $36.6 million in the prior year period, representing a 67% increase. Revenue in the quarter was driven primarily by sales of consumables of $49.7 million, which has increased 86% over the prior year period. Instrument revenue was $10.4 million and has increased 13% over the prior year period. Service revenue was $1.1 million and increased 80% over the prior year period. North America revenue for the third quarter was $35.8 million, representing 68% growth over the prior year period. EMEA revenue for the third quarter was $12.1 million, representing 47% growth over the prior year period.
APAC revenue for the third quarter was $13.2 million, representing 89% growth over the prior year period. Gross profit for the third quarter of 2019 was $45.7 million compared to a gross profit of $31.4 million in the prior year period. Gross margin in the third quarter was 75% as compared to 86% during the third quarter of 2018. The gross margin decrease was driven by higher accrued royalties related to ongoing litigation. These royalty accruals are booked against our legacy GEM products and will decrease as we transition more customers to Next GEM products. Total operating expenses for the third quarter of 2019 were $54.8 million, an increase of 18% from $46.3 million in the third quarter of 2018.
R&D expenses for the third quarter of 2019 were $22.2 million compared to $11.1 million in the third quarter of 2018, excluding in-process R&D expenses related to acquisitions. The increase was primarily attributable to higher investments in personnel, infrastructure, and supplies. SG&A expenses for the third quarter were $32.6 million compared to $19.1 million in the third quarter of 2018. The increase was primarily due to personnel costs, with increased hiring across all SG&A functions, along with increased facilities costs due to the transition to our new global headquarters and increased legal costs. Loss from operations was $9.1 million, compared to a loss of $14.9 million in the third quarter of 2018. Net loss for the period was $9.6 million, compared to a net loss of $15.3 million in the third quarter of 2018.
We ended the third quarter of 2019 with $427.4 million in cash and cash equivalents and raised $410.8 million net of underwriting discounts and commissions and other offering expenses from our IPO in September 2019. I'm immensely proud of how our team has executed. Our IPO process ran in parallel to multiple other efforts that required operational excellence. We have been preparing to be a public company long before we became one and have been making operational investments to manage our increasing size and complexity. Earlier in the year, we began the design phase of our new ERP project. We are now in the implementation phase and expect to launch the new system mid-next year. At the same time, we are expanding our worldwide manufacturing capabilities and expect to start manufacturing in Singapore next year.
We will continue to invest in infrastructure to grow into the large and impactful company that we've envisioned. Turning to our outlook for 2019, as Serge mentioned, we expect full-year revenue for 2019 to be in the range of $238 million-$242 million, representing growth of 63%-65% over the full year 2018. At this point, I would like to turn the call back to Serge for closing comments.
Thank you, Justin. We started 10x Genomics with the goal of building technologies that will revolutionize biology. Since the company's inception back in 2012, we have been on a rapid pace of product innovation, product development, and product launches. We view this ability to innovate and develop new products as an important pillar of our competitive advantage. We have also built out a core strength with our commercial engine. This commercial leadership and close partnership with our customers allows us to have a unique view of the frontiers of biology to know where the world is going next. These insights are fed into our product development engine, helping us build products that are needed by our customers, thus furthering our commercial leadership. This virtuous cycle, driven by innovation and by customer success, is the core of our strategy now and going forward.
We can't wait to see the advances our customers will be making in the years ahead and the impact we expect to have in the coming decades. As far as we have come in a few short years, we're just getting started. With that, we will now open it up to questions. Operator?
Ladies and gentlemen, if you have a question at this time, please press the star and then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Tycho Peterson from JPMorgan. Your line is open.
Hey, thanks. I'll start with Visium. Just ahead of the launch, curious about early interest levels, how you think about the funnel. Do you envision more going to core labs or individual users? Over time, how do you think about the platform evolving as well? Is there an opportunity to get it optimized for FFPE?
Thanks, Tycho. Yeah. Obviously Visium is something that we've been excited on for a while. The cool thing is really now being able to see data and showing the data to customers and then being able to share that with them. At the high level, I would say the interest level is quite striking, both in the mix of new and existing customers. In terms of kind of the details, I'll let Brad go into some of the specifics around your question.
Hi, Tycho, this is Brad. I echo what Serge said, is that we are seeing a much broader demand. The lack of an upfront capital cost is allowing broad adoption, and across individual labs and even to core labs and even service labs. It's really kind of across the board. The customers are anxious to get the product, and we're really anxious to get it to them.
In turn, is there a pathway to get it optimized for FFPE samples over time?
Well, again, there's no fundamental reason why this technology cannot work with FFPE, and that's certainly something that we seriously think about and is in our sights.
As we think about the Next GEM transition, it sounds like it's been pretty seamless from a customer perspective. Is that your view as well, or have there been any kind of hiccups as you've kind of rolled customers over to Next GEM?
Yes. I would say the first short answer is yes. I mean, it's been, in some sense even, I would say surprising, the ease with which people have been transitioning. The number of issues has been minimal. In any product transitions, there's going to be some issues, but it's been minimal from the customer side. We're quite pleased with that.
Yeah, I'll just add, this is Brad again. I'll just add, we've really tried to build a level of transparency and trust with our customers, and as we brought this product out, like we saw when we went from version 2 to version 3 of our 3' Gene Expression product about a year ago, there's an element of trust, and we've seen, again, a much faster uptake and transfer to the Next GEM products.
Last one, just on Chromium Connect. How should we think about the rollout there, and ultimately, what does that potentially do to pull through on the system as you roll that out?
I would say, we're still on track to launch in early 2020. I would let Justin comment on kind of an impact we're expecting for the next year.
Sure. Hey, Tycho. As far as Chromium Connect goes, we're definitely excited about that product. It's a niche product that I think you're going to have to have a higher pull-through in there in order to justify the capital expenditure. The pull-through we expect will be greater than our Chromium instrument. Because of the large size of the Chromium install base right now, I think it'll take a little bit of time before you see the impact of that in our overall average pull-through.
Okay. Thank you.
Your next question comes from the line of Derik De Bruin of Bank of America. Your line is open.
Hey, guys. This is Mike Ryskin on for Derik. Thanks for taking the question. Congrats on the quarter, first of all, and on the IPO. A couple follow-up questions from me. The Next GEM chip conversion, could you give us a stat for where you were at the end of the quarter as a percent of your user base? I think you indicated end of 2020 is still your target timeline, how far along into that are you so far?
We don't share the level of detail around the conversion stats. As I've said before, it's going faster than we expected, and we have sort of increased level of confidence in terms of the 2020 endpoint. That's as far as we can say at this stage on this question.
Okay.
Justin.
And then-
Just to add to that, all the instruments that we're currently shipping today they run Next GEM exclusively, so there's no Bio-Rad royalty attached to those. Really you're talking about just the transition of consumables, which, yes, end of 2020 is still what we expect, and if you were to make an assumption, I would basically make a straight line assumption from mid-year through then.
All right. That's helpful. Then on the Visium launch. As you ramp up over the course of the fourth quarter then through next year, how do you think about the impact that's going to have on the utilization number you highlighted for the Chromium? I think of it that for the most part, at least in the beginning, existing customers that are running some of your other applications, I realize they're obviously not interchangeable, but just in terms of a funds perspective and how people spend their money allocated towards some of these more innovative research projects, do you think the spend on Visium will be purely additive, or do you anticipate some sort of cannibalization in the model?
Okay. Yeah, this is Brad. Derik, I'll take that. First off, the Visium product, that doesn't actually run on the Chromium, so it's really not dependent on that. What we've seen so far is about 20% of the customers for our Visium product are new to 10x, so that's interesting. We expect that percentage to grow over time. I would say through the balance of 2020 and probably into 2021, this would be purely additive. I don't see it as cannibalizing at all. At some point, as data sets get developed over time and as we improve all of our products, there might be some customers that preferentially would go towards a spatial context versus dissociated context. In the near future, I don't see any cannibalization.
Thanks. One last one from me. On the prepared remarks, Serge, you talked about the increased R&D spend. Anything you can point to there? There's a healthy amount of R&D already in the model. Is this sort of incremental tweaks to the product and to workflow, or is this some new applications, technology, or potentially even another box you're thinking of?
We're investing. It's a very good point, Mike. We're investing pretty heavily, and we're investing across the board in R&D. It does include existing products and existing applications, but we're also looking at things that are much further out. Across the full spectrum of solutions for our customers and beyond.
Thanks.
Your next question comes from the line of Doug Schenkel of Cowen and Company. Your line is open.
Hi, this is Adam Wieschhaus on for Doug Schenkel. Thanks for taking my questions. You know the ITC case has been delayed further until December 10th, which follows a series of earlier delays. Is there anything to read into the fact that this case has been delayed five or so times now? Can you give us your updated thoughts on how you're thinking about the likely outcomes, and if a potential negative impact is less as time goes on?
Thanks, Adam. Good question. The answer is, we don't really know, and we can't really speculate what it means. It's now the seventh time, I believe, it's gotten delayed. It could mean anything. Fundamentally, though, as we've said before during our roadshow and beyond that, we're well set up so that regardless of the outcome, the company is fine. We built out our U.S. manufacturing capacity, and it's all in good shape. Regardless of what happens, we're in good shape.
Okay. Serge, you noted in your prepared remarks that Chromium pull-throughs average around $150,000 per system. How should we think about the potential for upside from that number based on what that level of pull-through implies for the current utilization and the expectation for additional applications to come out of the instrument?
At a high level, I would say it's an average. An average just can obscure multiple dynamics that are going on underneath. One of the things we've seen consistently is that our existing customers keep increasing the usage of the systems. New customers take some time to ramp up, and we've placed a lot of instruments out there in the field over the last year and really the last couple of years. That naturally brings the average down. Of course, we put out new applications. Those would push the average up. There's also a geography component, where the Americas tend to be the highest pull-through rate and Asia-Pacific tends to be lower. To the extent that we have more sales going in APAC, that's also going to bring the average down somewhat.
There's multiple factors like this that kind of come together that feed into the average.
Okay, maybe one last one for Justin. The midpoint of Q4 implies a pretty big step up sequentially. Can you provide any more color on how you arrived at that guidance range? Are you contemplating both placement and pull-through sequential increases like we've seen in previous years? Thanks.
Yeah. Thanks, Adam. We believe our guidance is pretty balanced. We factor in both the market opportunity and our ability to execute. We look at the install base. We have a pretty good read on our sales pipeline as far as how many instruments we're going to place for this year. Just seasonally, the fourth quarter of the year is typically our biggest year due to the budgetary cycles of our customers ending at that point. We feel good about the range that we provided, and we feel that it presents a balanced view of all these different dynamics.
Great. Thank you.
Your next question comes from the line of Luke Sergott of Evercore ISI. Your line is open.
Hey, guys. Just kind of want to dig in a little bit on the placements and what you're seeing there, from the clinical, from the regular academic setting.
Hey, Luke. Generally, maybe I'll give a kind of an overview, and maybe Brad can add a few remarks. Overall, the demand seems fairly robust and the placements keep going at a nice clip. As in prior quarters, the placements are concentrated in academia. We have placements outside in the pharma biotech sector as well, not really in the clinic. That's not where we're focused.
Yeah.
I would say, yeah. I mean, at this stage, we have relative to prior quarters, we might have had to pull in of a few instruments because of the sort of the litigation events that happened last quarter.
Luke, this is Brad. To add a little bit of color to that. We saw real strong instrument placements in demand in Asia. That's been ramping up. They're kind of early in the cycle for us. We've had a team there for about 18 months. That's really starting to pay off, particularly in China. In China, we do see a lot more applications in what I would say translational research or clinical research. We see that proceeding more. I would just echo Serge's point, across the rest of the geographies, there's that combination of new to 10x, people that are adopting single cell for the first time, or people that have been using it as we would call a halo user and buy their own instrument. That's really kind of playing out in a pattern that's somewhat predictable for us.
Okay, that's helpful. Then I guess, have you guys disclosed any of the multi-unit placements that you've had out there?
No, we haven't. We certainly have a range of multiple institutions having multiples and some institutions having small numbers.
Yes. Okay, great. Thanks.
Thanks, Luke.
That brings us to the end of the Q&A session. I will now turn the call over to Serge Saxonov for closing remarks.
Well, thanks everyone, and have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.