NanoString Technologies Inc (NSTG) 2022 Q4 法說會逐字稿

Good afternoon. Thank you for attending today's NanoString Fourth Quarter and Fiscal Year '22 Operating Results Call. My name is [Forum], and I will be your moderator for today's call. (Operator Instructions)

It is now my pleasure to pass the conference over to our host, Doug Farrell, Investor Relations of NanoString. Mr. Farrell, please proceed.

Thank you, operator, and thanks for joining us today. On the call with me today is Brad Gray, our President and CEO; and our CFO, Tom Bailey. Earlier today, we released our financial results for the fourth quarter and fiscal year ended December 31, 2022.

During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, future cash flows, current and future instrument orders, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, as well as the development status and anticipated success of recent product offerings and the impact of macroeconomic factors.

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 guidance for 2023 to be 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 this 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 such measure in this afternoon's press release.

To aid the analysts and investors in building their models, we have posted exhibits under the Financial Information tab of our Investor Relations home page that include a presentation of our non-GAAP or adjusted measures and selected other financial data. I'd like to remind everyone that we'll be participating in the Cowen Healthcare Conference [in March] next week. In addition to our fireside corporate discussion, [Brad and Tom] will be participating in a panel focused on AI-based genomics and drug discovery on Tuesday afternoon. It will include participants from [NVIDIA] and generative medicine. We look forward to having the opportunity to speak with many of you then.

Now I would like to turn the call over to Brad.

Thanks, Doug. Good afternoon, and thank you for joining us today. We are thrilled with the momentum that's building in the spatial biology market. NanoString currently offers researchers the most compelling portfolio of spatial biology solutions, and we believe that ongoing innovations will continue to extend our lead. As we begin 2023, we enjoyed both growing demand and a substantial backlog and believe that we are poised for strong revenue growth.

I'll begin by recapping some highlights from our fourth quarter and fiscal year 2022 before outlining our priorities for 2023. 2022 was a year of transition for spatial biology as the arrival of single cell imagers, both expanded demand and shifted mix within the market. With our best-in-class CosMx Spatial Molecular Imager, we were able to capitalize on this trend and grew our total spatial biology instrument orders by 50% year-on-year to approximately 250 systems across CosMx and our GeoMx Digital Spatial Profiler.

In the process, we broadened our customer base beyond the core oncology researchers who we've served in the past, reaching discovery researchers who've embraced single-cell biology. This has allowed us to generate about 70% of our CosMx orders from customers who are new to NanoString. Our finish to the year was particularly strong. During Q4, we generated orders for more than 105 spatial instruments and began delivering the first CosMx commercial shipments. At the year-end, we had captured orders for around 180 CosMx instruments and built a revenue backlog valued at approximately $40 million.

We also saw tremendous scientific moment as we surpassed 7,000 peer-reviewed papers enabled by our technologies, including approximately 200 using our spatial biology platforms. CosMx was featured in the December 2022 issue of Nature Biotechnology with a high-resolution single-cell image of RNA protein from CosMx gracing the terminals cover. CosMx was also recognized as one of the top 10 innovations by the Scientist Magazine and their annual survey highlighting products that are poised to revolutionize research and advance our scientific understanding.

Our spatial biology platforms also reached mainstream media as on the January issue of National Geographic, which contained an article on aging, which highlighted Alzheimer's research from Wake Forest University Medical Center using both GeoMx and CosMx to perform high-resolution mapping of brain tissue. As we begin 2023, we're convinced that our early mover advantage, the scalability of our technologies and our product innovation engine, put us in a leading position in the spatial biology market.

Now I'd like to provide an outline of our strategic objectives for the year ahead. Our first objective for 2023 is to rapidly penetrate the spatial biology market. Spatial biology was nature's net of the year just 2 years ago, and the field is still in its infancy. We estimate that the addressable market and spatial biology research alone is valued at $6 billion across 7,000 labs, only 5% of which have been penetrated to date. Our focus is on winning share as this market develops by capturing instrument orders and making our customers successful.

We kicked off 2023 by providing important updates on our spatial biology product portfolio and roadmap at the Advances in Genome Biology and Technology Conference, or AGBT. Spatial biology featured prominently at AGBT this year, representing about 25% of the total presentations and posters. For the second year in a row, NanoString had the most spatial biology studies of any technology provider, almost double the number of spatial abstracts of our nearest competitor.

AGBT provides a perfect venue in which to build our brand with basic discovery researchers who are still getting to know NanoString. We capitalized on the opportunity to be the gold sponsor for this year's meeting, and I could not be more pleased with our showing. Following the conclusion of the meeting, consulting firm DeciBio published a survey of attendees that rated spatial biology as the most exciting space with NanoString the most mentioned company.

During the meeting, we achieved 3 key objectives. First, we publicly demonstrated our AtoMx Spatial Informatics Platform. AtoMx is a flexible, open source, cloud-based informatics platform that provides secure, scalable storage and analysis for spatial biology researchers. Think of it as the iCloud of NanoString spatial biology ecosystem. Customer interest in AtoMx is extremely high, and we have conducted dozens of AtoMx demos during the meeting.

Feedback from the customers was extremely positive. Those who have already ordered a CosMx system cannot wait to get their hands on the total solution provided by CosMx plus AtoMx. Researchers appreciate that AtoMx allows them to focus on the science and avoid the headaches of building and maintaining their own compute and storage infrastructure. AtoMx also provides this highly scalable storage and compute power for a fraction of the upfront cost of on-site capabilities, making the decision to move data to the cloud and easy one.

Second, we used AGBT to unveil our CosMx assay road map, which will continue to set the standard for plex. Plex is the term used to describe the number of unique genes or proteins that a platform can analyze. We believe plex is the most critical differentiator in the spatial imager class, as it directly determines the amount of information generated from precious samples. Our belief that plex is the #1 attribute is grounded in our real-world experience as when we have offered customers using our CosMx technology access program, the choice between our 1,000 plex assay or a cheaper and faster turnaround time 100 plex assay, every stable customer opted for the higher plex assay.

The plex provided by CosMx already stands head and shoulders above the competition. With our currently available 1,000 plex assays offering twice the amount of data per sample as imagers from other manufacturers. As we showed in AGBT, we're pushing plex further and faster than anyone expected. We revealed our 6,000-plex human RNA assay, which provides 12x the data per sample of that provided by competing platforms.

To be clear, these data were not from some small-scale proof-of-concept experiment, we have worked with multiple research customers to use this assay to generate real insights. And 2 of those customers were in hand at AGBT presenting and discussing their 6,000-plex data. Our 6000-plex offering is already in full product development, and we plan to make it available through our technology access program in the fourth quarter and to begin shipping it to customers early next year.

Finally, we used the AGBT meeting to highlight an exciting new collaboration with Dr. Chris Mason and others at the Weill Cornell School of Medicine called the Spatial Atlas of Human Anatomy or SAHA. The abstract described SAHA was selected [for a one we] talk during the opening night of AGBT. As Dr. Mason described, researchers at Cornell will use the GeoMx whole transcriptome assay to analyze tissues from 30 different organs provided by a healthy and genetically diverse population of adults.

The researchers plan to make the Atlas available researchers around the world through periodic releases, and we believe that SAHA will become an important reference database of mobile tissue that which may be crucial for enabling precision medicine therapeutic approaches. Coming out of AGBT, it was clear to us that CosMx as the performance attributes to remain the platform of choice for single cell imaging. Our confidence in our ability to rapidly penetrate the spatial biology market has never been higher.

Our second objective is to deliver more predictable revenue growth over the course of 2023. In 2022, we struggled to predict the mix of spatial biology instrument demand between our CosMx and GeoMx systems, resulting in inconsistent revenue. We believe that 2023 is set up to be a very different year. First, we're shipping and recognizing revenue on both spatial biology instruments. So the overall revenue will be less sensitive to mix. Second, we expect our primary revenue growth driver to be CosMx instrument orders that we've already captured and which are currently in backlog.

We plan to execute a meter rollout of CosMx instrument shipments designed to provide excellent customer experience as we scale up manufacturing, installs and training. We will start with a manageable number of installations during Q1, increasing the pace in Q2 and then remaining at a relatively steady pace over the balance of the year. This gives us a high degree of confidence in the predictability of our revenue growth in 2023.

Our third strategic objective is to demonstrate continued progress towards cash breakeven. This is a prime directive for the company, and everyone on our team knows it. During Q4, we made hard choices to optimize our cost structure heading into 2023. We reduced our headcount from about 800 employees to about 700 employees.

For 2023, we're guiding revenue growth in the range of 34% to 41%, which we are expecting to deliver while modestly lowering our operating expenses, driving a substantial improvement in our adjusted net loss for the year, and an improving financial profile quarter-by-quarter throughout the year. We exit 2022 with more than $195 million of cash and equivalents and believe that with these resources in hand, we are well positioned to sustain our operations to breakeven and profitable growth.

I'd now like to turn the call over to Tom to review the details of our financial results and to provide our financial outlook for the year.

Thanks, Brad, and thanks all for joining us today. For the fourth quarter of 2022, revenue was $34.4 million in the middle of our guidance range. Q4 spatial biology revenue was $14.8 million above the upper end of our spatial revenue guidance range. Our cumulative CosMx SMI order book as of December 31 was approximately 180 systems, including about 80 new orders received in Q4. We shipped the first 13 CosMx systems to customers in Q4, generating revenue of approximately $3 million, leaving us a backlog of over 165 systems. We expect to ship in 2023 with a revenue value of approximately $40 million.

Q4 GeoMx revenue was $11.4 million, a 23% sequential improvement. GeoMx instrument revenue was $5.4 million, reflecting over 25 new systems shipped. Consumables revenue was $6 million and Q4 annualized GeoMx pull-through was about $73,000 per system. At the end of Q4, our GeoMx installed base was approximately 350 instruments with about 20 instruments installed during the quarter.

Q4 nCounter revenue which includes all of service was $19.6 million. nCounter instrument revenue was $2.5 million. Consumables revenue was $12.1 million and Q4 annualized nCounter pull-through was approximately $44,000 per system. At the end of Q4, our nCounter installed base was approximately 1,120 instruments with about 15 instruments installed during the quarter.

Turning to margins and expenses. Commentary reflects non-GAAP or adjusted results, which for Q4 exclude the impact of stock-based compensation, depreciation, litigation and certain nonrecurring restructuring and severance expenses. 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.

Q4 adjusted gross margin was 43%. Our Q4 adjusted gross margin was impacted by manufacturing variances held on our balance sheet due mainly to under-absorbed labor we expensed in Q4, together with the reduction in our workforce. Inclusion of these additional charges in Q4, cost of goods sold impacted our Q4 adjusted gross margin by about 8 percentage points.

Q4 adjusted R&D expense was $15 million, a decrease of 4% year-over-year and adjusted SG&A expense was $27.5 million, an increase of 4% year-over-year. Q4 adjusted operating expense trends reflect the initial impact of expense reductions we implemented in Q4, balanced by investments we continue to make in our spatial biology manufacturing capacity and efficiencies and in our spatial biology product development field support and commercial initiatives. Our Q4 adjusted EBITDA loss was $27.7 million. We exited the quarter with approximately $196.5 million of cash, cash equivalents and short-term investments.

Transitioning to our 2023 outlook. We expect 2023 revenue of $170 million to $180 million, representing annual growth of 34% to 41%. Our range includes spatial biology revenue of $95 million to $100 million, a more than doubling of our spatial revenue compared to 2022. nCounter revenue, which includes all of service and other revenue is expected to be in the range of $75 million to $80 million, a 6% decline at the midpoint of the range and is more mature part of our business moved into cash cow.

We expect about 40% of total revenue to be recorded in the first half of 2023 and about 60% in the second half. Seasonality will be strongly influenced by the pace of CosMx shipments, which will steadily increase over the course of the year as we increase our capacity to manufacture and install CosMx instruments. We expect to clear our current order backlog of over 165 units by the fourth quarter.

We expect 2023 adjusted EBITDA loss to range from $65 million to $75 million, a significant improvement compared to 2022, more substantively in the second half of the year as our spatial biology revenue grows on a reduced operating expense base. We expect adjusted gross margins will be temporarily lower in 2023 as our revenue mix shifts towards CosMx instruments before improving in 2024 and beyond as these systems begin to pull through higher margin consumables.

For the first quarter of 2023, we expect revenue will be in the range of $32 million to $34 million, reflecting typical sequential and seasonal patterns and our measured pacing of CosMx shipments. Our Q1 range includes $15 million to $16 million of spatial biology revenue and USD17 million to USD18 million of nCounter and service revenue.

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

Thanks, Tom. In closing, we feel great about our setup for 2023. Momentum in our spatial business is building, and we've established CosMx as a market-leading spatial imager. At year-end, we had a backlog of CosMx orders valued approximately $40 million, giving us excellent visibility to our revenue trajectory for the year. For 2023, we expect to generate healthy revenue growth while reducing operating expenses, which will allow us to work in a disciplined fashion towards achieving cash flow breakeven.

With that, I'd like to now open the line for your questions.

Certainly. (Operator Instructions) Our first question comes from the line of Dan Brennan with Cowen.

This is Kyle on for Dan. I just want to start with nCounter really quickly. So what's sort of baked into the guide here from a customer trends perspective? I know this isn't really a growth driver here, but what are the puts and takes we should sort of think about where this number could come in maybe higher or lower this year?

This is Brad. I'll start and I'll let Tom build on my answer. As you know, Kyle, nCounter is really a mature business that's moved into a cash cow mode of operations. It's a business that is about 80% consumables and about 20% instrumentation. So our primary focus is on maintaining the high activity levels of our existing installed base. And most of our sales effort focuses on the consumable portion of endeavor. That being said, we have guided down nCounter for the year. We've guided for a total income of revenue, inclusive of service down being about -- down about 5%, which really includes instrument and consumables down an aggregate of 10%, offset by some growth in service revenue. So we are not looking for this business to be a growth driver in the future. And I would say there's probably limited opportunity for nCounter at this stage to a surprise to the upside. That being said, we think our guide is appropriately conservative given the stage of the business that we don't see a lot of downside risk either.

Got it. And then moving on to cash burn maybe. So you're targeting for adjusted EBITDA this year. How should we think about the cash burn? How does that trend throughout the year? And given the burn, how do you plan to fund the business? And do you anticipate needing to raise capital in the next few years here?

Yes. I would say on the cash burn, Kyle, it would be EBITDA plus a few puts and takes on the cash flow statement. But I think using the EBITDA guide as a good proxy for the cash burn will be a great place to start that you would see improvement in that over the back half of the year, in particular, the CosMx ship that's a ramp over a flat base of operating expenses. And on the capital raise point, no, we don't anticipate having -- being put into a position to have to do a capital raise. As you look out over subsequent years, the growth in our business over what is now an expense base that we deal was filed in for the spatial biology business that we intend to support should it be -- to put us in a new position to be able to get to cash flow breakeven on our existing balance sheet resources. So we don't anticipate needing to do another raise to fund the growth of the business.

Our next question comes from the line of Dan Arias with Stifel.

Brad or Tom on CosMx. Can you -- as you guys continue to work the order book higher here, can you just talk a little bit about manufacturing capabilities and the levels at which you start to become constrained on production? And then relatedly, what do you think the placement and revenue recognition feeling is for the year, after which we should think about all incremental activity being a 2024 event or an impact in 2024?

Dan, this is Brad. I'll take the first half and let Tom build on it, if he wishes. I'd say right now, we're operating in a phase where we're scaling up both our ability to manufacture the CosMx instrument, and we're training our field service engineers and field application scientists on how to install, train and activate sites. And we're doing that at a measured pace in the first quarter that's consistent with Tom's Guide. As I said in my prepared remarks, we expect that pace to basically double from Q1 to Q2 and then remain at a reasonably steady pace through the balance of the year.

Implicit you asked about the ceiling and our overall kind of spatial instrument shipments for the year. I think implicit in our guide is about 280 to 300 total spatial instrument placements by which I mean CosMx plus GeoMx. And I think we're in a position to handle that is a wide range of different mixes. I don't think we're baking -- I want to be clear that we're not [baking] GeoMx recovery into our guide for the year, but we can dial up CosMx shipments over the course of the year if needed, if that's the way that the mix of demand continues to trend.

Okay. Maybe if I could just follow up on that point on GeoMx. It looks like you shipped 7 GeoMx instruments during the quarter. Obviously, the order number was higher than that. So what's driving the spread between the 2? And then to your point on what you may or may not be assuming for recovery in GeoMx, what is the pull-through assumption that we should work with? I mean, I know you feel good about the CosMx contributions. So just trying to understand the consumables contribution that you kind of have baked in for GeoMx this year.

Yes. I think we're not currently guiding pull-through for 2023. We're guiding total overall spatial revenue. So we won't be giving pull-through commentary. But -- and I think you can look at our -- we're not -- to be clear, we're not building in a recovery beyond the averages that we saw in 2022.

On the question of the number of CosMx and GeoMx instruments that we shipped in Q4, I think you may have underestimated it, Dan. We actually -- I'll turn it over to Tom to speak to that question.

Yes. When you look at the parsing of the revenue Dan, for Q4, we shipped about 25 GeoMx instruments that we install about 20. Remember, there's always a difference between what we ship and rev rec and what we installed during the quarter. But the number to think about (technical difficulty) shipments was about 25 units during the quarter for GeoMx, which was an improvement over (technical difficulty) sequentially by about [55%].

Do you think that, that spread between installs and shipments stays the same over the course of the year?

It varies from quarter-to-quarter, Dan, depending upon how many we have or what our backlog of installs is at the end of the quarter and when the orders tend to come in during the quarter. So if you have a more back-end loaded quarter, sometimes we can have more orders than installs in a given quarter. That's a Q4 phenomenon often is when that happens. By the way to have a catch-up in Q1, that's why we typically talk about those numbers separately, what we've shipped in rev rec versus installed. So keep an eye out for those in our scripts. And if you have questions on those as we go through the modeling, we can address those. It won't always be the same every quarter.

Our next question comes from the line of Kyle Mikson with Canaccord.

Congrats on the end of the year and (inaudible) weeks ago. So just maybe like a multiple question on the kind of the financial side going forward. Tom, earlier in the questions you were talking about like the cadence of -- I think cash burn EBITDA. Could you actually just walk through like what maybe first half second half could look like with the EBITDA, I think it was like $65 million to $75 million loss for the year?

And then secondly, with the -- you got this $230 million convert coming up in '25. Clearly, that's above like that's more than the current cash balance. How are you thinking about that kind of [miles] that kind of like timing for that, like just overall? And could you think of -- Brad, you mentioned nCounter being a cash cow, I mean, what about maybe monetizing that business to offset that convert over there?

Yes. So I'll start with the pacing of EBITDA, Kyle. So I think the simple way to think about that is we talked about 40% of revenue in this first half and 60% in the second half. So if you think about that over kind of a 50-ish percent gross margin and down operating expenses year-over-year that won't vary a lot from quarter-to-quarter. That would get you a pretty good proxy of what the pattern for EBITDA improvement would look like over the course of the year. But simply expect to see most of the improvement in the second half as compared to the first half.

And then on the convert, I would say with respect to our convertible debt, our 2023 business trajectory here with the growth that we're seeing sets us up really nicely with respect to addressing the convert in particular, with the [AA] of our spatial business, driving really strong revenue growth over lower OpEx in 2022. So as a result of that setup, we've got a really broad menu of potential options available for addressing the convert and financing our business in general. And we've also still got 2 years to go before maturity. So we'll have a thoughtful redundancy, we'll have the opportunity for our business to mature and deliver great results heading into any need to address the convert. And I'll let Brad...

Yes. Kyle, I want to take the question about kind of nCounters place within NanoString strategy. You're right. nCounter is a cash cow business is no longer the growth driver than it used to be. But it still does have tremendous strategic value to the company. It's an amazing brand. It is the platform that has been historically synonymous with NanoString. And it has a huge installed base and a set of customer relationships that go with that installed base. It also provides -- well, it doesn't provide growth, it provides tremendous cash flow with revenue on a relatively low amount of sales effort that allows us to reinvest in our rapidly growing spatial business, and it would be low to give that up. That being said, if the right kind of structure came along that where someone was willing to pay real strategic value to that portion of the business. We, of course, would entertain it as we always would any kind of opportunity that was favorable to our shareholders.

Okay. That was great, guys. And just sticking with spatial, many of the GeoMx customers, I guess there's like 350 units out there. I don't know how many customers had this, but most of those guys are probably thinking about purchasing one of these single cell spatial imagers. A lot of those customers are going to CosMx, obviously buying those -- on those actually -- as you said in the past. How is that trending lately? Are there more GeoMx customers skipping, CosMx altogether kind of transition to continuing imagers? Like how are you -- like what are you doing to incentivize those customers [anti] used to kind of stick with NanoString other than just getting away for instruments or other promotions?

Yes. It's a great question, Kyle. The synergy between our 2 systems is incredibly strong. And we think that we've created a product portfolio that's designed to really deliver that synergy to our customers. As we really think about 3 platforms, right? We have GeoMx, which is our whole transcriptome high-throughput system that really allows researchers to ask questions about how samples compare to each other across multicellular regions. We have our CosMx, which is lower throughput at sort of a deeper study of a small set of samples, the highest plex single-cell imager. And then to tie all those together, we have our AtoMx Spatial Informatics Platform, which allows people to put their data and studies in the same repository and use a familiar set of interfaces to query and get the most out of those data sets.

So we really do encourage people to sort of purchase whichever of the 2 instruments is most fitting with their most urgent science. And then we believe that to the extent that they grow their capabilities, they'll be inclined to purchase another NanoString platform in the future. I think our early experience with CosMx suggest that's working. 45% of all of our CosMx orders have gone to laboratories that also had GeoMx. Probably 30% of that 45% is the previous GeoMx owners and 15%, the other 15% of the 45% are new to NanoString customers who bought a bundle of both systems at the same time. To incentivize those bundles, we absolutely give price breaks as we would in a large meaningful customer, they're modest and don't impact our revenue, and we treat them as really positive things.

In terms of how it's been trending though, over the course of 2022, CosMx went from being an imager that we were selling predominantly to researchers who already knew NanoString through the ownership of the GeoMx to a system that was predominantly reaching new to NanoString customers who were coming from single cell biology or other types of science that we have not participated in yet. So I would expect the fraction of CosMx going into GeoMx labs to continue to go down as it becomes the first spatial system that many customers choose to adopt. And that's okay. That doesn't undermine in any way the synergy between our systems. And we will open 2 courses to come back and fill the GeoMx systems to those who first bought CosMx and then later on, on transcriptome profile.

Okay. Makes sense. Then let me just ask one quick one before I jump. So there's been over 100 customer projects delivered using CosMx. I think a lot of those were the TAP program. Any takeaways with respect to those sort of projects like the [repeat stability] of the platform out in the fields, like currently, you have these 13 units out there? Anything kind of tangible so far?

Yes. I think we've had great learnings from both the TAP and the first 13 systems. Maybe speak -- I'll speak with the TAP first. One of the learnings of TAP is the huge preference for Hi-Plex that I mentioned in my prepared remarks. We had initially launched TAP with 2 offerings, a 1,000-plex offering and a 100-plex offering, not a single researcher has opted for the 100-plex RNA offering. It strongly validates that our strategy of making plex the most important spec that we continue to be market leader there. I think the other really big learning from the TAP program has been the very broad tissue compatibility of CosMx. At last count, 68 different types of tissue and tumors had been studied use in CosMx, and just is shown to be a tremendously generalizable instrument.

Switching gears towards that first 13 instruments that we shipped in the Q4, we are getting great feedback and success with those first customers. Just in terms of the mix of those customers, yes, most of them are oncology oriented researchers, their geographic spread was similar to our overall business. They span North America, Europe as well as Asia. There are about 50% new systems, 50% -- sorry, 50% new to management customers, 50% incumbent customers and a good mix of academic and pharma. So they're nicely representative. And I think the feedback has been on the CosMx instrument, people love the ease of use. And even relative to those people who own GeoMx, they find CosMx easier to use and easier to get trained on. There's been great feedback on the quality of the data and the consistency of the results across runs and samples.

We've also started to get really positive feedback from them on AtoMx. They love that it's comprehensive and flexible. They're enjoying initially using the data analysis modules that we have built into the AtoMx system, but they're also beginning to load their own data analysis modules through the open source functionality that we've built in. And these groups have experiments lined up. They're sort of moving beyond the training phase and into their own science and experimentation. And I'm optimistic that utilization on CosMx will ramp even faster than we saw on GeoMx, because it's an easier system to use and some of the experimental designs are more obvious.

Our next question comes from the line of [Martha Nazaretha] from JPMorgan.

So I just wanted to dig into first quarter a little bit more. You discussed the revenue expectations. Could you perhaps provide a little bit more color on the instrument placement, EBITDA and cash burn expectations?

Yes. For the quarter, we -- although that historically have only just guided for revenue, and that's the guide that we gave was consistent with that. And on the revenue details, we've elected to simplify our approach this year and just guide for spatial revenue and all the rest of the components of the guidance are consistent with the commentary that we made around nCounter being managed more on a cash cow basis coming out of the fourth quarter and the measured pacing of CosMx instruments really being the most material impactful thing to the spatial guide in the first quarter relative to the total overall for the year.

I think one more thing to add on that is from an EBITDA basic perspective, I think in Tom's earlier remarks, you made it clear, EBITDA will improve sequentially as the year goes on. Q1 will be our lowest EBITDA quarter, meaning the largest loss. And as our business grows with more and more CosMx shipments over the course of the year, we'll see that sequentially improving financial profile.

Our next question comes from the line of John Sourbeer with UBS.

Maybe just to start off, any updates on China and how that performed in the quarter? And just how do you expect that to recover throughout the year?

Yes. China obviously had a lackluster year overall during the lockdowns of last year. We started to see some recovery in the fourth quarter, and we are optimistic that we'll see continued recovery throughout 2023. NanoString built a really fabulous direct sales team in China just as the lockdowns were about to happen. We actually met that team in person for the first time at our global commercial meeting earlier this month. They are, I can say, very impressive and very energized to get out. But all that being said, China remains a relatively small part of NanoString's overall revenue profile, maybe between 5% and 10% historically. And I hope it will grow over time, but we're not counting on a recovery in China as a major growth driver for the company.

Got it. And I know you're not providing pull-through guidance, but any color just now that you have the instruments out there on the CosMx, just how we think from a high level of how you see that pull-through ramping there to get towards that targeted 70,000 to 75,000 annualized range.

Yes. I think it's early days. I don't think we've learned enough to know whether our previous estimates of 75,000 anyway on CosMx are the right ones or not. There's no update there. But I guess what I will say is we've talked publicly about the long learning cycles that we experienced in GeoMx, which requires customers to define regions of interest and learn a certain amount of morphology to be able to process their samples quickly and efficiently. It's clear from the early trading of CosMx that by skipping that step and allowing researchers to scan the entirety of the slide, the learning curve is a lot faster. And my hope is that we will not have the multiyear cycle that GeoMx is required in some cases to get in terms to full utilization, but we'll be looking at a few quarters instead. So stay tuned. We'll be able to say more about that as the year goes on.

And then last one here on my end, and I appreciate the guidance around nCounter and that 6% revenue decline. Just any way to think about the long-term prospect of business, do you expect similar declines year-over-year over the long term? Or how should we think about this over the longer -- the next couple of years?

Yes, John, I do think we have probably seen the peak nCounter revenue, installed base includes instruments that are now -- some of them 15 years old. They are not being as actively used as they once were. And as the installed base ages, it's likely that pull-through across the entirety of that installed base, inclusive of the inactivated systems will continue to come down. So it's consistent with what our guide is in 2023. And I think if you're building a multiyear model, look for a long, slow sort of sunset for nCounter offset -- much more than offset by strong growth on the spatial side.

Our next question comes from the line of Tejas Savant with Morgan Stanley.

This is Edmund on for Tejas. Just in terms of the pricing assumptions baked into the guidance for '23, given all the talk on bundling and discounts for larger customers and your emphasis on capturing the lifetime value of customers versus upfront instrument revenues, how should we be thinking about the pricing assumptions baked into CosMx prices for 2023?

Sure. I'll take that one. We've assumed modestly lower ASPs on instruments throughout our guide in 2023. So like consistent with the rest of the guidance approach, we've taken a conservative approach to that. But it's not materially lower because cost mix does have a higher list pricing than it has a higher ASP than GeoMx does currently consistent with the other imaging products that are out there and then given the specs that we have in features that we feel as appropriate. So I think that if you wanted to keep it simple across all spatial instruments, I think you could just assume that ASPs would be consistent overall when you're looking at the mix of all the different systems with what we realized in 2022, the $230,000 to $240,000 per box would be a good assumption to use for spatial.

Got it. That's super helpful. And just on the note of conservatism, if we simply add the CosMx backlog of about $40 million to our 2022 revenues of $127 million, that gets you to $167 million, which is actually pretty close to the midpoint of your guide. Are you just baking in a lot of conservatism here? Or do you genuinely see potential headwinds that could materialize on either the nCounter business or the GeoMx business based on the way you're framing your '23 outlook?

Yes. I think one of our key goals this year, headwind is to avoid negative surprises. And so our guidance is consistent with that approach and with the commentary that we offered at the JPMorgan conference and earlier this year on what folks should expect. So I think that, that was the approach that we used this year. And I think we feel good about where our range is set currently in the setup heading into this year, both on the top line and on the bottom line with the improvement that we put into expenses coming into this year.

Got it. Super helpful, Tom. And then, Brad, maybe just one for you. Could you provide some more color on your cell segmentation approach in CosMx? And how important are these features to your customers when it comes into comparing you versus your peers? Is that a point of differentiation for you guys? Or is it more or less similar across the board? And I think based on some of my conversations with our researchers in spatial biology, a lot of them have noted that some of the segmentation methodologies today are still suboptimal. So I was just wondering what you had in the development pipeline for improving this.

Edmund, that's an impressively technical and astute question. Our cell segmentation approach is different from that used by competing imagers. We have a focus on using the protein morphology markers that have been a big part of both the GeoMx and the CosMx rollout to identify the actual cell boundaries and to create more accurate assignment (inaudible) to cells than it would be otherwise possible. That's enabled by an AI machine learning algorithm that identifies cell boundaries and execute segmentation. And I think right now, we're market-leading in that feature that I'm sure competitors are working quickly to catch up.

Cell segmentation is an ongoing area of innovation, different tissue types have different challenges on cell segmentation. Brain tissue, for instance, is very challenging. It's very morphologically similar erogenous despite the fact that neurons are very different in nature. So we are continuing to innovate on cell segmentation algorithms to continue to serve a broader and broader audience of researchers. But I think we're market leading at this point in time.

This concludes our question-and-answer session for today's call. I will now pass back to Doug for any final remarks. Thank you.

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