We also expect people to, before kind of jumping in at large scale with Visium HD, to order some reagents in smaller quantities to test it out, to benchmark it. So we fully expect the customers will stay fully within the GEM-X ecosystem, but it will take some amount of time to kind of turn it over and transition and decide when and where to transition onto HD. Similar dynamic on the GEM-X side. Again, it runs on existing Chromium iX series instruments. The workflow is similar to what they will be doing with the current assays, just better. The data similar, just better. Everything is just sort of better. So we do expect them to naturally transition to the GEM-X architecture. But again, there’s going to be the same amount of friction where people will first order these reagents to test them, to benchmark them before deciding which studies to transition when on to the new architecture.
Justin McAnear: Just to add, the impact on revenue throughout the year, we do think the biggest impact with the transition is going to be in Q1. These transitions are going to be executed throughout the year. But as far as seasonality goes, when you look at what we would expect Q1 to be in relation to the midpoint of our guidance range, I would expect somewhere in between 20% to 22% of the annual revenue would be in Q1 as a result of these transitions.
Kyle Mikson: Going back to single cell elasticity of demand, when next gen was introduced in 2019, I think that was with IP ligation. I’m not sure if there was a price reduction associated with that, but Chromium consumables have around 20% CAGR since then, possibly catalyzed by the next gen release. Do you think that the GEM-X introduction and the price decrease here could similarly kind of reaccelerate Chromium consumables because that’s grown like single digits the past two years?
Serge Saxonov: [indiscernible] didn’t actually lower the price back when I launched it. As far as GEM-X price reductions are concerned, we do fully expect that, over time, it will lead to higher demand, more reactions, and ultimately more revenue. For sure. We have some evidence of that dynamic based on the progression of customer accounts with Flex assays where as customers transition to higher levels of flexing, which results in lower price per sample, their total number of reactions and total revenue in those accounts goes up as more incremental projects get added.
Operator: Your next question comes from the line of Patrick Donnelly with Citi.
Patrick Donnelly: Justin, probably the first one for you. Just in terms of some of these moving pieces, both 1Q and the year, can you talk about the margin progression? Obviously, those have been pressured quite a bit from the Xenium and maybe some of the consumable piece, but the ramp coming soon and the consumables piece will obviously bring the margins up. If you just help us think about how that’s going to progress this year on the gross margin piece and then any color on the expenses would be helpful as well.
Justin McAnear: First, let me talk about our philosophy for gross margin overall. We realized that that’s a key strength of ours. We’re committed to driving high gross margins long term. And we believe that we have the ability over the long term to get back to higher gross margins. But we have been investing in the Xenium platform. Since launch, we’ve talked about the mix of – basically the strength of the Xenium instrument placements, being by far the largest driver on the change in margin, as of late. We do think that as the Xenium consumable streams ramp up, that will help to offset the margin of the instrument. And over time, this platform will have a margin overall that’s comparable to our other product lines, that consumables themselves have gross margins that are similar to the other consumables that we sell.
For GEM-X, we do have a slightly higher cost for GEM-X. But that is more of a transitory thing that will more impact Q2 and Q3, and that’s given how our licenses are structured. There’s going to be a very minimal impact beyond Q3. So, the gross margin may fluctuate in the first three quarters of 2024 just based upon the mix of Xenium instruments and the mix of GEM-X. But like I said, beginning in Q4, the royalty payments will normalize and we would expect a very minimal impact after that. The other one to mention which is Visium HD, just coming up the manufacturing ramp of that. With any new product, you start off with yields probably a little bit less than where you expect them to be longer term. And so, we do expect some impact on Visium HD, just due to the yields.
But over time, as we improve those, we expect to see the improvement as well.
Patrick Donnelly: Serge, there has obviously been a bunch of questions about single cell and kind of catalyzing it back to growth. Can you just talk about what you’re doing internally? I know we chat a little bit about it at AGBT. But just in terms of incentivizing the sales force, I think you guys went all in on spatial and Xenium last year. How far do you swing the pendulum back to single cell this year? Maybe just talk about some of the strategy and how you think that could impact single cell.
Serge Saxonov: As we talked about before, last year in 2023, much of the company’s focus was on spatial and especially on Xenium. We’ve put extra incentives on the commercial team to put Xenium on the right trajectory and, obviously, it has borne fruit and has worked well. As we entered this year, we have been telling the team to bring a more balanced perspective and a balanced allocation of attention across the portfolio. As we go into this year, we now have – as part of our quotas, there is a number on – Chromium is part of their incentive structure. We are watching this very carefully. It’s a good question to see to make sure that there is appropriate balance. We do have now some added specialization on the team to continue to drive spatial and to drive Xenium, which is giving more room for our overall commercial team to be able to drive Chromium, which as a franchise has a much wider footprint.
And so, we feel like we’re putting the right measures and the right incentives in place, but something that we’re absolutely watching and we will be as we progress through the year.
Operator: Your next question comes from the line of Subbu Nambi with Guggenheim.
Subbu Nambi: For single cell, which application is most frequently used by customers between, let’s say, RNA expression, ataxia. The reason I ask is, I was wondering what percent customers will naturally upgrade to GEM-X until Flex is available in this architecture. And then I have one follow-up.
Serge Saxonov: The largest applications that we have are the ones that we’ve been able to on GEM-X, which is three prime gene expression of five prime which comprises – I think includes immune profiling. Those are the biggest applications. They also represent more than 50% of the volume for Chromium.
Subbu Nambi: And what would flex be, roughly 20% to 30% or more than that?
Serge Saxonov: So we haven’t talked about the precise percentages around the different applications around Flex. Flex, at this point, is a material fraction of overall Chromium portfolio, larger fraction in terms of reactions, somewhat smaller in terms of revenue.
Operator: Your next question comes from the line of Tejas Savant with Morgan Stanley.
Tejas Savant: Justin, just a couple of quick cleanups for you on the guide. First, I get your point around anchoring to the midpoint and the upside/downside sort of color you provided, very helpful. But can you just put a finer point on the degree to which you’re anticipating a budget flush in 2024? And then what are you assuming in the guide for China? Is it essentially sort of 4Q trends continuing for 2024?
Justin McAnear: Maybe starting with the last part of your question, we did consider what we saw at the end of Q4, as we thought about the beginning of this year, and that was contemplated in our guide. As far as the guide overall, the biggest drivers are what I highlighted before, just around the product transitions and the Xenium pull forward. As far as the year end, on the budget dynamics, really, it’s taken more of an average view of the seasonality that we’ve seen in the past. And rather than trying to assume something binary, like budget flush or no budget flush.
Operator: Your next question comes from the line of Mike Ryskin with Bank of America.
Michael Ryskin: Actually want to follow up on China real quick but I want to expand on that a little bit. It’s been one of the major headwinds to growth over the last couple of years, obviously. And as a percent of revenues, it’s dropped significantly. In the fourth quarter, you were down to like 6% of revenues coming from China and that used to be north of sort of 20%. So from that perspective, it’s especially not a headwind anymore as you go into 2024, whereas if you strip it out, throughout the last couple years would have been much, much higher. So we talked about things from a GEM-X, Visium, Xenium perspective, can you talk about it from a geography perspective? Feels like for 2024 guide to be 10% of the midpoint, some of the other geographies have to be decelerate significantly. So could you just reconcile those two approaches to thinking about the guide? And I do have a follow-up.
Justin McAnear: For China, keep in mind that, in 2023, things started to take a downturn in China beginning in Q2. Q1 of 2023 was still roughly a solid quarter in China. So, for Q1, we do have a more difficult compare considering that. And then it also impacts the year-over-year 2024 over 2023 compare as well. Going forward, as far as what we assumed in 2024 for China, that’s been more informed by what we’ve seen more recently around Q3 and Q4. And so, overall, we aren’t forecasting anything in China to get better right now. And so, I would characterize it as roughly flat sequentially, but then year-over-year down when you consider the impact of Q1 2023.
Operator: Your next question comes from the line of Matt Sykes with Goldman Sachs.
Matthew Sykes: Maybe just following up on some of the color you gave to Patrick’s questions on margins, more of a philosophical question for you, Justin. As you think about – given that 10x has now transitioned to multi-product company, you’ve got different growth rates, different mixes, different margin profiles for each of these products. How do you think about the overall gross margin profile of that company? And is there sort of a line in the sand you’re willing to draw at 60%, 61%, whatever the level is? And how do you manage that, given the commercial efforts, balance between the different products? How much are you thinking about your margins and where you want them to maintain them in the near term when you’re doing that?
Justin McAnear: That’s a great question. I think, first, it’s important to understand that we have a very long term view of the business. We are definitely not focused on the near term. And so, margin plays into that, especially when we think about – when you look at what we’ve done with the Xenium platform, where we know the instrument is lower margin, but that’s really an investment in the future when you consider the consumable revenue streams. When we look at new product development, we have margin targets that we incorporate into the thinking and design there as far as the trade-offs around the cost and the features and the volume. And so, there is robust thinking that goes into that. We do have targets internally.
I’d hesitate to put out a number publicly right now, but know that margin is very important to us, that we recognize the strength that that’s driven for us to be able to reinvest back into the business. But also keep in mind too that we do have a very long term orientation where we’re focused on doing what’s best for the business overall.
Operator: And your last question comes from the line of Mason Carrico with Stephens.
Mason Carrico: A lot has been asked here, but I just had one clean up real quick. So, Justin, I think that you guys had talked about HD and the potential for it to accelerate CytAssist placements. And I may have heard this wrong. But in response to a prior question, I think you said that you expected CytAssist instruments to be down year-over-year. So could you help me reconcile the two or maybe clarify what you said about CytAssist placements expectations this year?
Justin McAnear: I was talking to the assumptions that are in our guidance range right now. So at the midpoint, for Visium instruments, so CytAssist, that has an assumption of being slightly down year-over-year. And then there’s an upside if the adoption curve of Visium HD will help drive more CytAssist instruments. And just think about what we’ve done over the last year and since launching the CytAssist roughly a year-and-a-half ago where our messaging has been focused on the CytAssist being the future of the Visium platform and that having a really strong adoption curve and a number of strong placement quarters, with a good number of customers who we believe have not just bought it to use Visium, but have also purchased it to be to be ready for Visium HD. And so, I don’t want to get too far ahead of ourselves with an assumption in the guidance range because I think that there has been a lot of placements ahead of Visium HD to be ready for it.
Serge Saxonov: Maybe just like a slight note to add, what I was referring to my prepared remarks is that the sales of CytAssist this year will be – some of them at least, or a lot of them will be driven by Visium HD. That is not to say that there is necessarily going to be an increase over what was the placements before because we certainly drove a lot of placements of CytAssist last year in anticipation of HD launch.
Operator: And this concludes today’s call. Thank you for joining. You may now disconnect.
