Good day, ladies and gentlemen, and welcome to the Q3 2019 Fulgent Genetics Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Nicole Borsje, Investor Relations. Please go ahead, Ma'am.

Great. Thank you. Good afternoon, and welcome to the Fulgent Genetics Third Quarter 2019 Financial Results Conference Call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial Officer. The Company's press release discussing its financial results is available in the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The Company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different and what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-Q for the first quarter of 2019, which is available on the company's Investor Relations website. Management's prepared remarks, including discussions of earnings and earnings per share contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for/or superior to the Company's financial results prepared in accordance with GAAP. Please see the Company's press release discussing its financial results for the third quarter 2019 for more information, including the description of how the Company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to income and incomes per share, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming.

Thank you, Nicole. Good afternoon and thank you for joining us on our call today to discuss our third quarter 2019 results. I will review the highlights from the third quarter before Paul discusses our financial results and outlook in detail. The third quarter was another very strong quarter for us. We once again achieved a record quarterly results for both test volume and the revenue, while driving ongoing improvements in gross margin and the cost per test. We once again achieved the GAAP profitability and a generally strong cash flow, specifically, the revenue growth 84% year-over-year to a record $10.3 million. Billable tests increased 272% year-over-year to a new record high of 20,697. Our ASP was $500 essentially flat compared to the second quarter of 2019. While our cost per test continue to improve, further increased our gross margin, excluding stock-based compensation costs per test improved to a record low of $179 per test. Non-GAAP gross margin in the third quarter was 64% up approximately 8 percentage point from the third quarter last year and up approximately 5 percentage point sequentially. GAAP income was $1.5 million and a non-GAAP income was $2.6 million. Non-GAAP earnings per share was $0.14 in the third quarter, and adjustable EBITDA was positive $2.19 in the third quarter. The third quarter was another record quarter for Fulgent Genetics, demonstrating the consistent traction we are gaining in the market given the recent ramp we have seen with -- to offer more insight into our test mix and how it is driving our growth. First, our core critical business, we are seeing strong demand for both our oncology test and our reproductive health business. Especially on the oncology side, we have seen increasing demand for our hereditary cancer panels. Our superior quality rapid turnaround time as…

Thanks Ming. Third quarter revenues totaled $10.3 million, an increase of 84% compared to the third quarter of 2018. Our U.S. business has continued to be the most significant driver of our momentum. Revenue from the U.S. grew 159% year-over-year and in the third quarter representing 82% of total revenue in the quarter, up from 79% in the second quarter. Billable test reached a new record high of 20,697 in the third quarter growing 272% over Q3 of last year, and increasing 26% over the second quarter of 2019. Our ASP was $500 per test essentially flat from the second quarter. Cost per test for the quarter was $188 on a GAAP basis and $179 excluding equity based compensation of 174,000. We have seen ongoing improvements in cost per test, which continues to benefit from operational efficiencies. Higher test volume, better productivity and the use of our proprietary technology including probes and informatics. Our gross margin continues to improve as a result of the efficiency, we're seeing. Non-GAAP gross margin improved five percentage points sequentially and eight percentage points year-over-year. We expect that gross margins should remain strong in the coming quarters. For operating expenses, we remain committed to managing expenses, while investing for future growth. With their continued top line outperformance, we again delivered a positive operating margin for the second quarter in a row. Non-GAAP operating margin was 24% in Q3 an improvement of 28 percentage points year-over-year and eleven percentage points sequentially. We will continue to see quarterly fluctuations in the near term as we scale. Sales and marketing expense on a GAAP basis was $1.7 million in the quarter, up from $1.3 million in the second quarter. R&D expense in Q3 was $1.7 million higher than $1.6 million in the second quarter. As Ming discussed, we…

[Operator instructing] We have a question from the line of Erin Wright from Credit Suisse. Your line is now open.

Great, thanks. Can you detail some of the key drivers of the volume growth, I guess in the quarter. And also the outlook for the fourth quarter, it just suggests a step down. I guess, what are you assuming in terms of the volume versus price dynamics and the indirect impact of the CMS reimbursement on Hereditary Cancer Screening. I guess how did that impact ASPs. I'm just trying to get that ASP versus volume mix appropriate here for the fourth quarter? Thanks.

Paul, do you think that?

Sure. So thank you for the question Erin. We've had a great third quarter. We've done very well in sustaining our core business, the Pediatric rare disease market. But a lot of the growth during the quarter came from the introduction of the new tests and the acceptability of that and attraction which really began at the early part of 2019. So whether it be in the area of oncology, whether it be in the area of women's reproductive health, or whether it be in the area of our biopharma relationships, they've all shown quite remarkable growth. I think your question about Q4 in our stance is on point, and I like to elaborate on that. If you take a look at our business, our business has really grown tremendously particularly in the area of volume in the past several quarters. At the beginning part of the year, our volume was approximately 7000, 8000 tests per quarter and now have grown to 20,000. And looking at our prudent guidance for Q4, these customers and their relationships, which provided the fast growth and the incremental growth, we feel very good with. But then again at the same time, these are new partners. So we believe, as we continue to work with them we’ll have better predictability, as to how much growth we can get from those relationships. If you take a look at -- if you take a look at these customers, and what I said earlier, we feel very confident in the diversity and the strength of our organization, particularly in the area of what we're actually selling. These new customers not only diversify us from a customer perspective, but it also provides diversification as to the types of tests that we sell. I think, the other comment that we…

And Also Erin as you probably know, the CMS has the reimbursement rate, that's a lot higher than our ASP. With the growing volume we have lately we've definitely generated the attention for the National Insurance, the organizations. They do see Fulgent Genetics is a viable player in this market. Definitely, we have a business, the capability, technology and the discipline to sustain this market for long run. I think, it was purely, I think that our business cannot be measured by test of volume. Really how much we could drive the technology, deliver the test and build a sustainable, commercial models. I think that’s really our strength in this business.

Okay. That's really helpful. And then, also how should we be thinking about your hiring efforts going forward? I guess where do -- where does your total sales headcount stand now and where should we think about that trending kind of over the next year or so? Thanks.

Yes, Erin this is a great question. If you take a look, even though our revenue growth is almost year-over-year as Paul gave you the guidance for 50%. Our head count has now increases dramatically. We continue to improve in terms of the -- our sales executives, more balanced our people's capabilities in the region. This year, we have great growth in the North American business, but we are expanding internationally. So our headcount is now increased from about 120 people at the start of the year to about 140 people now.

Okay. All right. Thank you so much.

Your next question comes from the line of Bill Clark from Piper Jaffray. Your line is now open.

Hi, this is Rachel [ph] in for Bill. Congratulations on a nice quarter. So can you tell us the latest in the pricing environment? You’ve lowered the ASPs earlier this year. And presumably in response the competitive dynamic. So is the environment more stable at this point, or do you think you'll need to do a series of price cuts over the next several years?

That's a great question. And if you take a look in terms of all the pricing pressure, we definitely have a lot of room to cut the price. And that we're not to give that away. But in that sense, I think that we do need to make sure we had to build a business model, which should be sustainable, and that we cannot use a dollar to buy 40 cents or 20 cents of revenue. I think as we demonstrated in this market, the discipline, we do have a lower cost, but we have to maintain the business, be it profitable otherwise we cannot continue to reinvest into the business or repay back the – back to our investors. I think that in this area, I think we have room to drop -- to continue drop the price, as we continue to see our costs can be continued lower, as we see volume growth. But we're ready to go forward is another challenge into the area. But I think that even though we’ve dropped the price this year, we still maintain that our gross margin of around 60%.

Rachel, I'd like to add a few comments. I think your comment about the ASP is something that several individuals they brought up. I think, if you take a look at the ASP is about $500 in Q3, it’s a little bit lower, but it's pretty consistent relatively flat with what we had in the second quarter. I believe in the second quarter it was like $510 to $512. The thing that's driving the ASP number is primarily mix, and just competitive environment, a big environment, a very very competitive. I think the pricing pressure is always there, but between Q2 and Q3 it's largely driven to mix. I think what Ming said was absolutely spot on. Based on what we achieved, we believe that we can continue to drive down the cost which we believe will be important for the long run, because companies with the most efficient and the lowest cost structures are usually one of the ones that are left you know through consolidation and so forth. So we think that that is very very critical. I think the other thing to take note aside from the ASPs is given the relative flat or the drop in the ASP what you really saw between the first and the second quarter. Our gross margins, they continue to go up by four percentage points, they went up a four percentage points from Q1 to Q2 and they continue to increase. We believe, combined with our capabilities and combined with the evidence, the financial evidence that we have right now, which says, even if ASPs continue to go down whether it be mix driven or whether it be market driven, we believe having a very very efficient structure applying our technology into our business operations, achieving higher and higher gross margins, won't give us more levers to use, as we address this market.

Great. Thank you. And then can you also give us a sense of the product mix between legacy rare disease testing, carrier screening, external [ph] and other major categories. And then also, several large reference labs talked about private payers shrinking their networks. Have you seen any evidence of this, or do you expect to see any of this pressure in the future? Thank you.

Yes, I'll take on the first part of that, and Ming can comment on your last part of the issue. We don't break out the types of tests. We don't do that internally, but based on the new customers that we have, and the nature of what they're ordering, the amount of business that we're getting from oncology and the cancer related area is a significant portion of our business. Less significant, although it's notable is the revenues that we're getting from the worker's reproductive health area as well as the sequencing for service business. And then Ming, do you want to make a commentary on her last part of the question?

Yes. I think as Paul has answered, is we see pretty strong demands for our carrier screen test internationally. So it does, it’s one of the strong growth area. And in addition, we definitely have to offer more of the relationship with the institutions of cancer research institutions. We mentioned about the Parkinson Foundation last name. Recently, we have another contract with another major Parkinson Foundation to contract our work test for them to diagnose and treat Parkinson's patients.

Great. Thank you. [Operator Instructions] We have a question from the line of David Westenberg from Guggenheim. Your line is now open.

Hi. Thanks for taking the question. So can you explain what's driving the outside phenomenon in the quarter? You've been around for a while, and kind of why do you think you're seeing and kind of a step up in the volume there. Thank you.

Yes. David. I think this is really -- if you take a look the third quarter results, really it’s reflected our distances of our investment in terms of the test. We introduced them in the last year, end of the last year, and early this year. We do believe, with the technology it is one of the major differentiator for us. As Paul earlier mentioned, we do not as separate -- the number of our tests for cancer or carrier screening, rare disease or the service revenues, because we couldn't, they all come in from various sources and they are mixed. Fortunately, we have our automation. When the orders comes in, is automatic is tracked by the -- by the hour called The Fortune track, the [Indiscernible] for every test comes in. Once it gets into the system, and the system will select based on the customer request for the test. They are either from the research for the both our main DNA test as well as some of the cost companies that required, the institutions required [Indiscernible] through the orders for the rare disease or carrier screening test. All these things will be at the end classified by the our – bioinformatics [ph] pipeline and it can generate the critical related -- the reports. So we do feel Fulgent have that technology advantage, because we not only have strong biochemistry, but we were also very strong in terms of artificial intelligence and computer science, so and data science. So Paul, you have anything to add on?

Yes, so David I think you know since the call began, the lines of a Q&A I will say you know we're really behind the numbers, the reason for the numbers and kind of guidance going forward. And you know we believe that growing the business at 50% achieving what we achieved, pretty much speaks for itself. I think looking beneath the numbers this year so far has been a year of stability for Fulgent. And we're really pleased with that. Not only do we have stability within the sales organization, but we really homed in our operational capabilities as well, which is evidenced by us suggesting that volume and facilitating that you know meeting the requirements of the customer, both from a cap perspective, from a quality perspective, and we're very pleased because digesting that volume was handled relatively easily and we have excess capacity even still. So we can take on a lot more volume. I think from an engineering perspective, we made a number of improvements and enhancements within our technical organization as Ming has -- Ming has indicated. And we continue to produce offerings at a record pace, Picture Genetics being one of them, with a very very minimal investment. So on but all of that, the foundation of the organization, the whole of the organization feels very different than it did about a year ago. And given the fact that we do have this momentum and we know better than ever our core competency and we know better than ever how tough this market is. And Ming and I we continue to learn every day, but we're very skeptical as well. We believe, this is a business that we're running. It should be measured. We need to have our focus on growth, but we believe, going forward Fulgent is very well poised for that. That is why we're going to be very very aggressive in our commercialization strategy addressing the international markets, because a lot of the growth behind the numbers came from the U.S. area here in 2019. We're also going to continue to make deeper collaborations with the major institutions. And we feel very good about announcing some of those in the coming quarters. And we believe we're making good progress on the reimbursement side. So making sure that we get aggressive on the commercialization, marketing our capabilities, we believe will be key in driving our growth for the future.

I appreciate. That’s all I’ve got.

[Operator Instructions] And there are no further questions at this time. Speakers, do you have any closing remarks?

All right. Thank you everyone for the call. And we are looking forward to provide you with our update in the coming quarters. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.