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OVERVIEW

TXG reported a better than expected revenue of 42.9M versus consensus $32M for 2Q20 and guided 3Q20 to flat with 3Q19, or revenue of 61.2M.  While the upside is helpful, we are more focused on the overall pace NIH funding for single cell sequencing that continues to accelerate in 3Q20 despite COVID-19.  The key call- out from the call revolved around how quickly scientists are returning their labs to full capacity.  Lab work is done in close proximity which makes social distancing difficult.  Many labs remain closed or on restricted access.   While progress is being made, TXG commented that only 60% of labs have reopened, some at reduced capacity utilization, although this compares favorably to the 25% at the beginning of the quarter.  We think it is reasonable to consider the accelerated funding from NIH that remains unspent as reasonably secure future revenue.  Adjusting the reported 42.9M for an average of 42% of labs being open and at least somewhat operational, the 2Q20 run rate was $101M, well ahead of the pre-COVID $89.5M estimate. The same analysis of 3Q20 which the company is guiding to flat year over year, yields a similar ~$100M in revenue.  

2Q20 EARNINGS RECAP | NOTES

• Over 600 customers, no longer disclosing "we'll update the total installed base annually"
• We started the second quarter with about 25% of customer labs open. In mid-June, as conditions began to improve, we saw a modest acceleration in U.S. lab openings, which continued through the final 2 weeks of the quarter. By quarter end, we estimated that approximately 60% of our accounts in aggregate were open for general research, with the majority of those operating at a much-reduced capacity.
• Labs within the U.S. were closed throughout most of the quarter, with a modest acceleration in openings beginning in mid-June and continuing through the final 2 weeks of the quarter
• And just one example, if finalized, the proposed increase for next year's NIH budget would be one of the largest in decades
• We saw strong demand for our instruments, particularly driven by COVID-19-related research, which often required placing the Chromium controller in a biosafety lab
• But as Brad said, most were operating at reduced capacity. Some of them much reduced capacity, and there was a pretty wide range of variability amongst those labs. We have not necessarily seen things get worse since then. Overall, if I were to give some color on how Q3 is shaping up, I would say that revenue is tracking pretty similar to where we were a year ago.
• It does look like we are shaping up to be, at least from the few weeks that we can see from this quarter, that we are on pace to be pretty similar to Q3 of last year
• As labs open for their own work, they are closed to any outside visitors
• There are now over 1,000 peer-reviewed publications featuring our single-cell products. 
• The intramural budgets are still subject to the current fiscal year, and those money still have to be spent (10% of funding)
• We have examples in Germany where you have institutions that are almost fully operational at this point. And then we have most of the big U.S. labs that are customers, if we even go to the coasts are operating probably around 50% capacity. 
• I want to emphasize that this covers kind of the legacy products, none of the Next GEM products. And so kind of appellate court ruled the case. What we saw there was that of the 3 patents, 2 of the patents were overturned on the infringement. Those patents were overturned. And to the extent of the accumulated damages, they have already been accounted for in our financials.

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Thomas Tobin
Managing Director
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William McMahon
Analyst
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