NanoString Technologies Inc (NSTG) 2022 Q2 法說會逐字稿

Hello, and welcome to the NanoString Second Quarter Operating Results. My name is Kate, and I'll be call making your call today. (Operator Instructions)

I'll now hand over to your host, Doug Farrell, Vice President of Investor Relations to begin. Doug, please go ahead.

Thank you very much. On the call with me today is Brad Gray, our President and CEO; as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the second quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, the impact of the COVID-19 pandemic and other macroeconomic factors, future growth, trends and related factors, expectations regarding current and future instrument orders, prospects for expanding and penetrating our addressable markets, as well as our strategic focus and objectives and the development status anticipated success of recent and planned product offerings.

Forward-looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update any forward-looking statements. Later in the call, Tom will be discussing our financial results and 2022 guidance. We have prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which are described in detail in our press release.

Throughout the call, all financial measures will be GAAP, unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure in the new section in this press release.

To aid analysts and investors in building their models, we've posted exhibits under the Financial Information tab of our Investor Relations home page that include a presentation of non-GAAP or adjusted measures and other selected financial data. I'd like to remind everyone that next week we'll be participating in both the Canaccord and UBS Healthcare Conferences. We look forward to having the opportunity to speak with many of you there.

Now I'll turn the call over to Brad.

Thanks, Doug. Good afternoon, and thank you for joining us. I'm pleased to report strong results from our second quarter, during which we rapidly expanded our spatial biology customer base while improving our commercial execution. We booked orders for approximately 50 spatial biology instruments, an increase of about 65% year-on-year and 40% sequentially.

We achieved the midpoint of our Q2 revenue guidance even as our order mix shifted towards CosMx Spatial Molecular Imagers, which we're currently building our backlog rather than generating current period revenue. These solid Q2 results and strong demand for our novel platforms to underscore our continued leadership in spatial biology and have set up NanoString for a strong revenue growth in 2023 and beyond.

During the call today, I'll provide an update on our commercial execution and the dynamics that we're seeing in the spatial market. I'll then provide an overview of our progress towards our strategic objectives before handing the call over to Tom to review the details of our financial results and our outlook for the balance of the year. Our team has rallied behind the rigorous steps we are taking to sharpen our commercial execution. Members of the sales team are settling into their new roles and are more effectively managing both short- and long-term instrument opportunities.

We're pleased with the progress and the expected commercial execution across to continue to improve during the third and fourth quarters of the year. During June, we had a successful showing of the annual AGBT meeting, where spatial biology with a key focus and accounted for about 25% of all presentations and post. NanoString and our customers led the field in terms of scientific content, showcasing 20 scientific abstracts, including 15 for CosMx. We also hosted our fourth Annual Spatial Summit which drew a standing room only crowd of more than 300 attendees in Orlando and another 300-plus researchers who participated virtually. The AGBT conference also highlighted the degree to which the research community is being rapidly educated regarding spatial biology.

Now through the 8 companies are marketing new spatial platforms, primarily single-cell imagers in the same product category as our CosMx SMI. Against this backdrop, several new market dynamics have come into focus. First, we are competing in a spatial biology land grab as researchers commit to platforms and companies that will power their future research.

The simplest way to measure progress during this phase of market development is the pace of orders for new spatial biology instruments. As a result, total spatial biology instrument orders will be -- begin to feature prominently in our guidance and reporting for the balance of 2022. Second, the combined energy of so many vendors marketing single-cell imagers is rapidly increasing customer interest in this product category. As a result for NanoString is that we're currently finding the volume of orders for our CosMx SMI to be equal to or even greater than the orders for our well-established GeoMx DSP. Rather than fight this market trend, we embrace it. We are equally pleased to place a CosMx or a GeoMx system as either one represents an expansion and a research community's commitment to our platform and an equally valuable revenue opportunity for NanoString.

Third and most importantly, we believe that NanoString is well positioned to win the spatial biology land ramp. We provide a complete portfolio of spatial biology solutions that includes a whole transcripts on profiler and the HyFlex imager integrated with a cloud-based informatics suite, all supported by blue chip partners, including Illumina, LICA, Abcam and Biotech. This portfolio provides researchers with a compelling ecosystem that can offer a solution for virtually any spatial biology experiment that scientists might design.

Now I'd like to provide an update on our strategic objectives for the year, which are tied to the individual products in our portfolio. Our first objective is to drive GeoMx DSP further into the mainstream, broadening adoption across multiple areas of bio discovery and translational research.

During the second quarter, GeoMx instrument revenue grew about 10% sequentially. NGS readout for whole transcriptome assays continue to be the most popular application driving about 85% of new GeoMx placements. 2/3 of systems were sold to translational researchers who represent our historical customer base, while 1/3 went to discovery researchers who represent a new target market for us.

Instrument bundles increased in popularity and accounted for a record 35% of GeoMx instrument orders, demonstrating that many new customers are jumping into our spatial biology ecosystem with both feet. Most of these bundles included both GeoMx and a CosMx system, and several included all 3 of our platforms: GeoMx, CosMx and nCounter.

Consumable pull-through for GeoMx was $77,000 per system on an annualized basis and consistent with our seasonal expectations. About 80% of the cost of GeoMx consumables were for RNA analysis as our whole transcriptome panels expand to reach beyond the cancer researchers who are our primary early adopters.

In May, NanoString and Illumina launched a seamless cloud-based workflow that employs the spatial -- improves the spatial data analysis experience of customers using Illumina NextSeq platform to process samples for par on GeoMx. This system includes an integrated push button run planning tool as well as automated downstream processing using the DRAGEN Bio-IT platform. We believe that this simple, fast end-to-end solution will improve customers' productivity and experience.

Our GeoMx customers have already been tremendously productive. As of the end of Q2, they had published approximately 130 pure UK publications using GeoMx. And in July, they added another 14 [mails]. We continue to see positive leading indicators for GeoMx adoption as well. Orders for new GeoMx test drives through our Technology Access Program increased 20% sequentially from Q1 to Q2.

GeoMx has driven about half the opportunities entering our spatial biology instrument funnel year-to-date. Based on our funnel and improving commercial execution, we expect the pace of GeoMx instrument sales to increase in the second half of the year even as new orders are split about evenly between GeoMx and CosMx.

Our second objective for 2022 is to launch CosMx and the leading molecular imaging platform. The excitement around CosMx continues to exceed our expectations. We took orders from more than 25 CosMx systems in Q2, about double the pace that GeoMx was generating at the same point in its launch. The synergy between our spatial biology platforms and the appeal of our ecosystem is undeniable as evidenced by the fact that 2/3 of our cumulative context orders have come from customers who have also adopted GeoMx. Reflecting the breadth of excitement regarding CosMx, we are also seeing tremendous interest from customers who are engaging with NanoString for the first time.

During the second quarter, more than 80% of CosMx orders came from new customers. Half of these orders came from researchers working outside of oncology in areas such as immunology, neurology and a host of other applications. These trends demonstrate that CosMx is helping win the spatial Myology land grab. While researchers can now choose among several molecular imagers, CosMx leads with best-in-class performance metrics including highest flex RNA, the capability to image proteins, robust data quality, all done and challenging FFPE tissue.

Although emerging companies are seeking to promote their offerings, these entrants cannot match our specifications, product portfolio, commercial channel, brand reputation, partnership ecosystem or financial resources. We remain on track to begin shipping commercial CosMx instruments during Q4. Earlier this week, we shipped our first beta system to a customer and are planning to ship 2 more to other customers this month. Meanwhile, we're allowing customers to test drive CosMx via our technology access program. About 40% of these test drives have already generated an order for CosMx instrument, while many others have provided data for brand applications that may support future CosMx orders.

Our third strategic objective for the year is to launch our atomic spatial informatics platform. CosMx is an easily use cloud-based solution that enables image analysis, data visualization, global collaboration and highly scalable compute and storage capacity for both CosMx and GeoMx.

In addition, AtoMx uses a flexible data structure ready to be examined using artificial intelligence and machine learning approaches. We showcase AtoMx during the AGBT meeting and customer feedback was outstanding. Researchers appreciated that we anticipated and addressed the challenge of managing large spatial biology data sets. And we believe that AtoMx provides an important differentiator between NanoString's portfolio and the more limited offerings of our competitors. We plan to launch AtoMx during this fall.

Our full fourth objective for 2022 is to sustain growth for our nCounter franchise, nCounter is the foundational business that supports both our global channel and continued innovation. In April, we introduced our new nCounter Pro, which incorporates a comprehensive cybersecurity soluship and can be easily paired with ROSALIND, a collaborative data analysis platform. These enhancements have been well received, especially by our biopharma customers. We continue to introduce new panels to drive adoption and markets outside of cancer.

This quarter, we launched a cardiovascular disease channel, which is now the subject of a collaboration across 5 thought-leading institutions. We'll also expand our cell and gene therapy portfolio for nCounter, and we'll be integrating this application into our spatial platforms. These applications are considered some of the most promising for developing the new next generation of therapies across many disease areas.

Now I'd like to turn the call over to Tom to review the details of our financial results and outlook.

Thanks, Brad, and thanks all for joining us today. For the second quarter of 2022, product and service revenue was $32 million. We sold about 50 spatial biology systems during Q2, an increase of approximately 65% as compared to the about 30 systems sold during Q2 2021. Orders were comprised of more than 20 GeoMx systems and more than 25 CosMx systems.

Q2 spatial revenue was $10.9 million, including GeoMx instrument revenue of $5.2 million and GeoMx consumables revenue of $5.7 million. Due to annualized GeoMx consumables pull-through was $77,000 per installed system. At the end of Q2, our GeoMx installed base was approximately 315 instruments. For CosMx, our over 25 new system orders in Q2 added approximately $6 million of revenue backlog and bringing our cumulative CosMx total to over 60 orders in our cumulative CosMx revenue backlog to about $14 million. We expect to begin recognizing material revenue from our growing CosMx order book at the start of 2023.

For our nCounter business, which includes all service, Q2 revenue was $21.1 million. Instrument revenue was $4.3 million, consumables revenue was $12.2 million, and Q2 annualized NCounter consumables pull-through was approximately $45,000 per installed system. Service revenue, inclusive of all service contract revenue for all platforms and spatial biology TAP revenue was about $4.6 billion. At the end of Q2, our nCounter installed base was approximately 1,085 instruments.

Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, depreciation and certain other items. Please refer to our press release as well as the exhibits we have posted to our Investor Relations web page for detailed information on how our non-GAAP or adjusted measures are prepared. Q2 adjusted gross margin was 54%, a decrease of 200 basis points as compared to Q2 of last year. The year-over-year change in gross margins was mainly driven by investments we're making in our manufacturing capacity in advance of the commercial launch of caustics.

Adjusted R&D expense was $14.5 million, flat year-over-year and adjusted SG&A expense was $30.2 million, an increase of 39% year-over-year. The increase in SG&A year-over-year was driven primarily by the full run rate impact of investments made in our spatial biology related commercial initiatives, including the expansion of our sales force, service and customer support groups. Our adjusted EBITDA loss was $27.5 million, and our cash and cash equivalents were $272.3 million as of June 30.

Turning to guidance. We are updating our full year 2022 outlook to reflect the updated expected mix of spatial biology system orders and our current expectation of the pace of improvement of sales execution. For 2022, we now expect to receive orders for about 200 spatial biology systems, consistent with previous guidance as updated in May, while our expectation for the total number of spatial biology system orders unchanged. Our view of the GeoMx, CosMx, AtoMx has. We now expect our order mix this year to be comprised of approximately 100 GeoMx system orders, approximately 100 CosMx system orders as compared to our last update, which reflected about 140 GeoMx orders and about 60 CosMx orders.

We have not included any material CosMx revenue recognition in our 2022 guidance. As a result, we're adjusting our expected 2022 full year spatial biology revenue to $50 million to $55 million to reflect our updated expected system order mix.

Our full year estimated pull-through guidance for GeoMx is unchanged from our previous range of $90,000 to $95,000. We also expect -- continue to expect full year nCounter revenue of $90 million to $95 million, an estimated pull-through of $50,000 to $55,000 all unchanged from our previous guidance. For total revenue, we now expect to record about $140 million to $150 million in 2022 reflecting the updated expected mix of spatial biology system orders.

Turning to margins and expenses. We are reiterating our previous full year guidance for adjusted gross margin, which we expect will be in the range of 56% to 58% and operating expenses, and we are therefore updating our expected 2022 adjusted EBITDA loss to a range of $75 million to $85 million from the previous range of $65 million to $75 million.

For the third quarter, we expect to book orders for about 55 spatial biology systems, representing about 60% year-over-year growth with an approximate 50-50 mix of GeoMx and CosMx.

Spatial Biology revenue of $12 million to $13 million, which in Q3 will only include revenue recognized from geometries and consumables, nCounter revenue of $22 million to $24 million and total revenue of $34 million to $37 million.

Finally, I'd like to comment on our setup for 2023. The 100 CosMx orders expected in 2022 combined with the 20 orders we received in 2021 will bring cumulative CosMx orders entering 2023 to about 120 total, representing about $30 million of revenue backlog. During 2023, we expect to recognize substantially all of this caustic instrument backlog while continuing to accumulate additional orders. This provides line of sight for 2023 revenue growth of more than [40%].

Our balance sheet remains strong, and we continue to be confident we have the resources to achieve cash flow breakeven while sustaining our key investments and growing our spatial biology market share and leadership position.

Now I'll turn the call over to Brad for our closing comments.

Thanks, Tom. NanoString is rapidly winning the most valuable properties in the ongoing spatial biology land rent. We believe our market position will continue to grow stronger in the future based on our broad portfolio, unique ecosystem and strong financial position. Because confidence is not yet shipping, our progress is best reflected in the current growth of our spatial biology instrument orders and our outstanding setup of revenue growth for 2023.

Now we'd like to open the call for your questions.

(Operator Instructions) The first question comes from Catherine Schulte from Baird.

Unfortunately, unable to hear you. So we will move to the next question. We take the next question from Kyle Mikson from Canaccord Genuity.

Alex (inaudible), I'm on for Kyle Mikson. So I was just curious if you could provide some color on the performance of the commercial team during the quarter. Also, some of your competitors had to make some customer workforces recently. Are there plans to cut cost given some of the looming recession indicators Also, if so, why are you so confident that this cost cutting more hinder CosMx commercial launch?

Thank you for the questions. First, let me start with the color on the commercial performance. I'm pleased with the improvement in commercial execution that we saw in Q2. I'd highlight 2 areas in particular. One, the commercial team is really transitioning well into their new roles that were signed back in January. They've all gone through role-specific training. We've seen the teams work together well, each playing in the position that they're now assigned to. We're also seeing more effective management of both short- and long-term opportunities, meaning closing business in the current quarter while continuing to develop a funnel for future quarters. So that performance has been approved. We've also seen normalization and the performance of accounts that were transitioned from one rep to the other, which was a real short point for us during the first quarter. That improved substantially in the second quarter, and those account types are performing basically equally.

I do expect this to continue to improve our performance in the second half. Two areas that we're looking at, in particular, are making sure that our account managers who come from a consumable sales background begin to become just as effective as selling our spatial biology instruments as our account managers who have instrument backgrounds are, and I'm sure they will.

And finally, we're looking for improved performance from our most junior consumable reps who are still coming up the curve and learning how to be field-based sales individuals. So overall, I'm pleased with the progress, but there's more still to come.

On your second question, NanoString does not have plans to cut costs at this time. We believe that we have the right commercial infrastructure and people on staff. We expect to grow into that cost base nicely through the second half of this year and in particular, when the large backlog of CosMx revenue that will enter 2023 with begins to run through our P&L. So we have no plans for cost cutting at this time.

Really good color there. And just one more question, if that's okay. I was curious about the AtoMx most typically, if you got to post updates on the beta testing and eventual launch timing. And also just taking a higher-level look at things. So we always had the cloud-bases portal that hopefully streamlined workflows. But I was wondering if you could highlight some of the ways in which this a portals differentiated from what we're seeing from competitors in the space.

Yes. Well, we think AtoMx is an underappreciated competitive advantage for NanoString. No other provider is making the investments that NanoString is in cloud-based solutions to manage the massive amount of data that spatial biology platforms produce. These are data sets that are so large that can't be easily e-mailed around from one researcher together. So we need to create workspaces in the cloud where multiple users can dial in, manipulate, visualize analyze and store their data sets.

AtoMx importantly will also tie together NanoString's 2 separate spatial biology instrument platforms into a single sort of desktop where all the informatics can be stored, analyzed on the same basic platform. So AtoMx will launch basically simultaneously with the commercial shipment of CosMx, which is slated to happen in the fourth quarter of this year. Beta testing is ongoing. Feedback so far has been excellent, and we look forward to sharing more as time goes on.

The next question comes from Dan Brennan from Cowen.

I guess, maybe first one would be just on GeoMx. For second half pull-through numbers, what's the visibility on getting to your full year numbers given the jumping off point right now with the first half of the year?

I think that, Dan, as we commented in the last quarter, the seasonal pattern that we're seeing right now is pretty consistent with the seasonal pattern that we saw for last year. So if you assume a seasonal pattern and pull-through percentage change in Q3 and Q4, like you saw in 2021, that gets you to our $90,000 to $95,000 range to take for the full year.

Got it. Okay. And in terms of the shift here towards CosMx, which is showing some nice really good order momentum, but kind of somewhat at the expense of GeoMx, which is a big question mark and kind of how these 2 products coexist, complementary or cannibalistic like what -- maybe could you give us some color around how you're thinking about -- you gave some color on 2023. How do we think about the jumping off for GeoMx as we get into 2023?

Yes. This is Brad, Dan, I'll take that one. When we first characterized these 2 different product categories, the whole transcriptome profiling category from GeoMx and the single-cell imaging platform category for CosMx, we estimated their total addressable market is about equal. We said that there were about 7,000 labs worldwide that could own both of these 2 systems in that most labs in the long term would need both capabilities, the ability to look at all genes on GeoMx and the ability to get single cell resolution on CosMx. I think it's safe to say that we underestimated just how quickly the single cell resolution of CosMx would appeal to researchers and have them shipped for that to be their first spatial biology instrument purchase. So that's what we're seeing right now. We're seeing a lot of excitement about that resolution that excitement has been reinforced by years of marketing non-spatial single cell biology and by 8 different competitors in the market, all of them are detailing researchers on this capability.

The great news for NanoString is that we're basically indifferent between which of those 2 instruments any customer chooses to order. We are not going to spend time talking to somebody who is interested in a CosMx out of that and then do a GeoMx just because one revenue recognizes this year. We are happy to get our first platform into their lab with an expectation that in many cases, we will come back in subsequent years and sell them a second of the other platform.

So I think as we enter 2023, you're going to hear us talk about total spatial biology instruments rather than trying to project individual installed base growth for the GeoMx versus the content platform. 2022 has taught us that, that mix is difficult to predict. And in 2023, we will revenue recognize both will basically be indifferent to mix. So that's a long-winded way of saying we think that GeoMx has a tremendous opportunity ahead of us that over time, these product lines should remain about equal in their total opportunity, and that's the instrument mix that we expect in the second half. And that as rev rec normalizes across these systems the mix will matter less and less. So stay tuned.

And you've talked a lot about CosMx, GeoMx owners do you expect -- have you seen any evidence, although CosMx is just seeing some orders now through 3 quarters now. But from those early orders, are there a fair amount of those that don't have a GeoMx where you think you could follow up with the GeoMx, just what's that conversation like?

Well, as I outlined in my prepared remarks, cumulatively over the approximately 60 CosMx systems that we sold a large fraction have a GeoMx system, either at the time that they purchased or bought in a bundle simultaneously as they made a major investment in spatial biology for the first time. So I think that shows that it is possible for us to go in and place both of our spatial biology systems and really make that lab a very NanoString-oriented spatial biology lab.

In the most recent quarter, though, 80% of CosMx went to customers with whom NanoString had never done business. They didn't have encounters and they didn't have GeoMx systems. These tended to be traditional single-cell biology researchers who are using droplet-based approaches from other providers in the past who are eagle either to get single cell resolution in their spatial. So we're seeing the opportunity for us to expand beyond our traditional installed base as well.

Maybe if I could sneak one... that's like [23] so -- yes.

Dan, let me just add one more piece of color that I think could be helpful. we think a lot about cannibalization and the question of whether CosMx is likely to cannibalize GeoMx in the long term. One of the metrics that we keep a close eye on here is the rate at which new opportunities are being added to our GeoMx and CosMx bundles. If we started to see substantial a slowdown in the rate of new customers who are interested in GeoMx relative to CosMx, that would be an indicator of cannibalization. We do not see that kind of slowdown.

On a year-to-date basis, that number of new opportunities that we've added to the GeoMx and the CosMx funnels are about equal. And in fact, the number of GeoMx opportunities we've put in our funnel has increased year-on-year versus the same period. I think that underscores the idea that in the long term, both of these instruments are likely to be vibrant businesses and then most labs will need both the whole transcriptome and a single cell capability.

Right. But maybe one more follow-up. But is it fair to say the fact that the GeoMx number is coming down this year, CosMx is going up that -- is that due to just you underestimated maybe -- or you overestimated the demand this year for GeoMx or is it sales force capacity? Or just why that's interesting data point, but for the GeoMx stepped down this year, what's the catalyst for that versus where we were a quarter ago?

We think about it as total instrument opportunities in the year. So if you look at our May guidance, the implicit guidance was about 200 instruments. At that time, we thought it would be about 140 GeoMx systems that we sell this year and about 60 CosMx systems. What has changed in the period since is that it's become clear that, that same 200 systems, which is consistent with previous guidance, will be a 100 instrument and 100 instrument mix. rather than a 140 GeoMx and 60 CosMx mix.

So I would say we properly estimated the total demand for spatial biology instruments during the year, but we misjudged the mix, which is more tilted at least at this point in time towards single-cell biology systems. And as I said, I think in the answer to a previous question, the reasons are several fold.

One is single-cell biology in a nonspatial format has been a very productive area of science, and there's a whole bunch of customers who are waiting for a spatial solution that provided that, and we're coming into the market for spatial biology and 2 is there is a lot of marketing of that product category that's happening right now with base providers in the space and NanoString is winning, I think, a very amiable share of the overall volume of that demand.

Got it. And then maybe last one, and I'll go back in the queue. But just for CosMx, do you feel like as we get out, say, 12 months and more of these players get into the market that the concern from some is that there's going to be so many players in the market will be kind of -- there will be a lot of inertia from decision-making. Are you seeing that yet today? Do you expect to see that? Just I know you -- right now, you're in a leadership position with AtoMx and the sales force and the product set. But like do you expect in 12 months for there to be any degradation in your like relative share or growth?

No, quite the opposite, Dan. I think over time, some of the smaller entrants in this market may no longer be meaningful participants. I believe that our market leadership position will be reinforced and grow stronger through our -- the success and elaboration of our product pipeline and that like in the NGS market, there'll be a consolidation around a small number of standards and NanoString will absolutely be one of those.

The sales cycle right now on imagers on CosMx is incredibly fast. We, of course, weren't talking about this platform really even publicly 12 months ago, and here we are out selling in the most recent quarter, GeoMx in terms of number of units. Our customers are being very decisive about choosing our platform. We believe that has to do both with its superior specifications and with NanoString's brand reputation and overall space ecosystem.

Next is a question from Catherine Schulte from Baird.

We appear to have just lost Catherine's line. So we'll move on to the next question. We have a question from Tejas Savant from Morgan Stanley.

This is Edmond on for Tejas. Just circling back to the mix of CosMx and GeoMx that are expected. I understand what drove the excitement behind CosMx. But I just kind of want to parse out. I think you guys have previously said that sales reps were having problems balancing new products in the portfolio and some of them are gravitating more towards CosMx versus GeoMx. I'm just wondering if any of that played into this dynamic you're seeing today?

Great question and a good follow-up to some of our commercial execution improvements. During the first quarter, we did see a bifurcation within our sales force between those reps who gravitated to sell in GeoMx and those reps who gravitated to selling CosMx. That bad bifurcation largely disappeared in the second quarter. All of our reps are enjoying success across both platforms. But overall, net debt CosMx slightly outsold GeoMx during the second quarter. But through work and training and repositioning of our platforms, we feel that every rep is positioned to sell each of these platforms successfully. In fact, most of the time when we enter a customer discussion now I wouldn't call it either a GeoMx or a CosMx sales call.

It's a NanoString spatial biology sales call. Because we have the leading platform in both the profile and imager category as well as an informatic suite, we're able to go in from a very strong position, talking about the type of science that, that customer wants to perform in spatial and helping them navigate which of the systems is the right first system investment that lab. And that's really what our sales reps are doing successfully now.

Got it. And then, Brad, circling back to your beta instrument for CosMx that shipped in August. I believe that was initially planned for shipment in June. I was wondering if you can comment on what caused the bill here.

Actually, what caused the delay -- the primary cost of the delay would be availability of the customer. As you can imagine, many customers go on vacation in the summer. When we install the system, we want to have basically several weeks of that customer's full attention to install, to train and to get the utilization of that system going. And the best time for that particular customer was to start in August.

Got it. That makes sense. And then back to your comment earlier about in the most recent quarter, 80% of the CosMx orders went to new to NanoString customers. And these guys are typically single-cell work for researchers. I was just wondering how these 80% of customers that ordered CosMx, how many of them are currently performing spatial profiling.

That's a good question. I don't have a quick answer to that at this stage. But I would guess it's a minority. I mean spatial profiling is so new that most customers who buy any of our systems are making their first investment in that new capability. So my expectation would be that a relatively small number of them are doing spatial profiling today, and most are adopting it for the first time.

Next, we have a question from Dan Arias from Stifel.

Some dial-in issues here, so apologies if you've touched on these. But Brad, to what extent is bundling of the 2 systems playing a role in the orders that you're driving? And is there anything in the product and service outlook that reflects a pricing change on the GeoMx?

Dan, thanks for the questions. Bundling has become an important tactic for us. About 35% of the GeoMx orders during the quarter were bundled I'd say, of that 35%, probably 25% of the 35% was CosMx plus GeoMx orders. So people who were kind of doubling down on the NanoString spatial biology franchise. And that's really a great sign for us. We're happy to see that. In fact, as a further answer to some of the cannibalization of questions before. When we look at dialogues with customers that began a GeoMx dialogues where they ended up by a CosMx more time than not, they ended up buying a CosMx in a bundle with the GeoMx rather than switching from GeoMx to CosMx. So it's another great indication that this is not cannibalization, but rather synergy.

So bundling is helpful. Our standard bundling discount is about 15%. So it does not materially change the ASPs of our platforms. And so we are not modeling any meaningful change in ASP for GeoMx in the second half of the year.

Okay. Helpful. Maybe on consumables pull-through for GeoMx. I appreciate Tom's comments on seasonality, but just overall, what are you hearing from customers about usage? It sounds like you're on your way with the commercial team fixes, but that was more of an instrument issue, I believe, in com pull-through was 77,000. So what is it that seems to explain the step down from the mid-90s level that you saw for last year?

Well, the first thing that explains the step down is the fraction of systems that are relatively newly installed. As we mentioned on our May call, we've observed a pattern that shows that customers require quite some time for it to become fully effective in running their new GeoMx system. This is a more pronounced issue with those customers who are using the whole transcriptome [atlas], who require the connectivity to an illumina sequencer and very often auxiliary storage and compute capacity to deal with the large data sets. And so as the pace of instrument placement has increased throughout the launch, so too has the fraction of new of our installed base that is relatively new, and that is modestly suppressing the overall growth and pull-through that we might otherwise be seeing. We have an initiative that's focused on what we call site activation, working to support the customer and building up their own workflow and wondering how to design experiments. It is working in terms of site activation modestly improving in the second quarter, but it's going to take some time before we see that play through on overall average pull-through.

Okay. I mean, if I could just push you a little bit on that. I mean you're placing fewer GeoMx systems now than you were in the past. So shouldn't you have been seeing the impact on the consumables rate last year when you're replacing more GeoMx systems on the consumables pull-through, I mean it would seemingly be less of a factor now given that you're in the 20s range and you were in the 30s range last year.

Well, you have to remember, the very large volume of orders that we had last year were all in the second half, right? So those sites that of the 50-plus for instance, orders that we had in the fourth quarter, most of them were not installed into the first and activated until the second quarter, according to the normal cadence of how shift install and activation work. So in fact, that huge bolus of instrument orders from last year are exactly the sites that are suppressing pulls room now.

Okay. Maybe just one more since hopefully, we're at the end of the Q&A here. Is there anything that you think you would run into manufacturing capability wise on CosMx? In other words, if orders sound like they're trending pretty nicely. Would you run up against any constraints on the production side at all that we should be aware of?

We're working very hard, Dan, to make sure we don't. As our internal forecast for the volume of instruments has been revised upward, we've been working very closely with our contract manufacturer to prepurchase parts for the assembly of systems and identifying parts that are at risk and even having them custom manufactured in small batches so that we can be sure that we're able to fulfill demand. So we don't have any line of sight to a supply chain constraint at this time, but we are working hard to make sure that remains the case.

We have a follow-up question from Dan Brennan from Cowen.

Just maybe 1 or 2 more. Just on the macro, anything you're seeing, given the global economy, what it's doing? Have you seen any pauses or longer sales cycle? And have you baked anything into the back half of the year given the expectation is for the economy to likely get worse from here?

Yes, it's been a rapidly growing product category like spatial biology, macro factors are probably in the noise. China certainly is a factor that we see China -- the lockdowns in China without a doubt, have slowed down of the commerce and the scientific activity in that region for us, and it probably played through to the tune of $0.5 million to $1 million order for us.

China is a relatively small part of NanoString's business. It's more of a growth opportunity for us as a company. than it is a current drag on our overall outlook. We have not seen the challenges in Europe that some of our colleagues have talked about. So I don't -- I think it's relatively modest in terms of what the macroeconomic impact has been for us.

I do think a recovery in China is built into our second half guidance, not a miraculous one because it's a relatively small part of our mix, but we're starting to see improvements there, and we hope they'll continue -- expect they'll continue.

Got it. And then just on free cash. I know you guys have talked about confidence in getting the free cash flow positivity, I guess, with the balance sheet cash you have, you stepped up your spending a little bit. Just kind of remind us given the increasing focus on capital preservation and/or just capital-like pathway, how do we think about your cash balance today and what the burn rate looks like as we move forward?

Yes. I think the most important factor in that, Dan, to consider is a big backlog of CosMx revenue we're entering into next year with combined with the comments that we've made about moderating our expense growth and growing into our base of expenses in 2023.

In particular, you can see we've already started to do that with R&D where we had flat year-over-year growth in R&D expenses. So when you take the CosMx backlog and expected revenue for next year, run it over what our existing expense base is, you start to get to the math that you need to get you pretty quickly to see our cash balance more than adequate as it gets to profitability. We're still thinking about that in the revenue range. We've talked about previously in the $300 million to $400 million revenue range, somewhere in that ZIP code is where we would reach cash flow breakeven and resources we have are plenty to get us there.

Got it. And then maybe a final one, just on CosMx and pull-through. I think you've talked about a good placeholder is what GeoMx does. I know it's early, but any color on how we think about the use case for CosMx. And is there a headroom on CosMx to increase the sample throughput at all since it sounds like that could really maybe unlock some new markets as well.

Yes. Dan, for modeling purposes, I'd say modeling CosMx pull-through as similar to GeoMx is still the best answer. We're in a position to give you until we've begun to see actual utilization on that system.

From the question of what throughput, if possible and whether there are opportunities to increase our throughput. The answer is yes. We are working on techniques that would allow us to increase the number of samples that are processed for weeks on that system and expect to hear more on that as time goes on.

(Operator Instructions) So I'll now hand the call back over to our speakers for any closing remarks.

Thanks, everyone, for joining us today. If you did miss any portion of the call, there will be a replay available in the next 2 hours or so to access that call U.S. callers please dial (866) 813-9403, International callers please dial (929) 458-6194. The conference idea is the same for both. It's 426771. Thank you very much. That concludes our call.

Goodbye. This now concludes today's call. Thank you all for joining. Please disconnect your lines.