Good day, and welcome to the First Quarter 2021 Fulgent Genetics Earnings Call. At this time, I would like to turn the conference over to Nicole Borsje with Investor Relations. Please go ahead.

Great. Thanks. Good afternoon, and welcome to Fulgent Genetics first quarter 2021 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial 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. Listener 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 than what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements including 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 SEC, including the previously filed 10-K for the year ended December 31, 2020, which is available on the company's IR 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 statements for the first quarter of 2021 for more information including the description of how the company calculates non-GAAP income and earnings per share and a reconciliation of these financial measures to income and income 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 our call today to discuss our first quarter 2021 results. I will provide some opening remarks before handing it over to our chief Commercial Officer, Brandon Perthuis, to provide updates on our commercial success. And finally, Paul will discuss our financial results and outlook in detail. The first quarter marks the -- a meaningful milestone in our fight against COVID-19. It has been just over a year ago since lockdown began, and our life were disrupted in many ways by the pandemic. While, it appears that the vaccine rollout is progressing and lives slowly reaching to the state of normalcy. Our thoughts remain with those who have been impacted by this pandemic. Our team has worked tirelessly over the last 12 months to provide testing solutions to customers across the country. And while our COVID-19 testing business has been sustained demand, we are turning our focus on how we can support recovery from the worries going forward and drive growth across our core NGS business. I will elaborate on these areas of the focus in a moment, but we'll first touch on the highlights from the first quarter. We had a record quarter start for the year with Q1 revenue totaling $359 million, more than 46x of the revenue in Q1 last year and the increase of almost 22% compared to the first quarter. We delivered approximately 3.8 million tests in the quarter, and increased roughly 19% compared to first quarter and almost 290x the volume of the Q1 last year. What's most exciting is the growth with demand in our NGS revenue, which exceeded our expectations and grew115% year-over-year in the first quarter. We'll continue to drive substantial leverage, generating more than $6.59 per share in non-GAAP income in…

Thanks, Ming. We are proud of what we accomplished in the first quarter, setting numerous new financial records for our company, and we are equally proud of our company's efforts to fight the pandemic. In the first quarter, we processed over 3 million RT-PCR tests. This is roughly 284x the total volume we processed at the same time, the same quarter of last year. Since the first signs of the virus, testing has been one of the best tools in the fight against SARS-CoV-2. With the number of new cases down, we like to think the Fulgent lab team's relentless efforts to scale, meet turnaround time and deliver quality results played a small but meaningful role in our country's improvement. That said, cases appear to have plateaued at a high level, and some states are still dealing with surges as we continue to deploy our testing resources across the United States. While we demonstrated very strong performance in COVID-19 testing in the first quarter, we also saw a record in terms of our next-generation sequencing business. Our NGS volume grew 185% year-over-year from 13,000 to 38,000 tests, representing sales of $16.7 million compared to $7.8 million in the first quarter of last year, an increase of 115%. This growth was driven by our clients beginning to return to a more normal run rate, continued traction in our biopharma business and our new strategic partnerships with commercial organization. The investments we made in R&D to launch new tests in new diseases and markets has continued to create opportunities for our company. Meaning most of the growth has been outside our traditional pediatric rare disease menu and includes adult neurogenetics, hereditary cancer, hereditary cardiovascular genetics, reproductive health and sequencing as a service. With a number of new COVID-19 cases decreasing, we are…

Thanks, Brandon. We again achieved record results in the first quarter with revenues totaling $359 million, an increase of more than 4,500% compared to the first quarter of 2020. Billable tests in the quarter totaled almost 3.8 million growing almost 290x the volume of Q1 last year. The vast majority of this volume was from our business related to COVID-19. As the country began to reopen and people have begun returning to a more regular way of life, we have seen ongoing momentum in our traditional genetic testing business. Our NGS revenues in Q1 was up 115% year-over-year and 39% sequentially from Q4. Overall, we're very pleased with our Q1 results, which saw ongoing momentum with RT-PCR testing for COVID-19, complemented by our NGS testing for both COVID-19 and our core genetic testing business. Our ASP in the first quarter was $95, slightly higher than the $93 we saw in the fourth quarter. While our ASP has largely remained stable over the last few quarters, the modest [Technical Difficulty] mix of NGS tests we saw in this quarter. Cost per test in the quarter was $20, slightly higher to even versus the fourth quarter also due to the increased mix of NGS testing. Gross margins were comparable with the fourth quarter at 79.4%. Turning over to operating expenses. Total GAAP operating expenses were $18.4 million in the first quarter, up from $17.3 million in the fourth quarter. Non-GAAP operating expenses totaled $16.1 million, up from $14.8 million last quarter. Non-GAAP operating margin declined 252 basis points from the fourth quarter to 75.1%. As Ming discussed, we continue to invest in our business, particularly in headcount as we look to position ourselves for sustainable growth. Adjusted EBITDA in the first quarter was $271.9 million compared to a negative $506,000 in the…

[Operator Instructions]. And our first question comes from Steven Mah.

Congrats on the quarter.

Thank you, Steven.

Okay. First question, on the NGS business, how much was from the core genetic testing business? And how much was from COVID surveillance? And then on the new revenue guide in NGS, could you help us bridge the $70 million to the $100 million new guide on the NGS side?

Sure. So Steven, very little came from the CDC, NGS, less than $1 million. The bulk of the NGS business during Q1 came from our traditional genetic testing. We're actually very excited about the prospects of CDC, and we see this as a multi-year opportunity. And in terms of the guide, the raise from the $70 million to $100 million, we anticipate that a chunk of that will be the CDC. But the primary portion is just the growth in our ability to capture share and be more successful in posting higher NGS revenues.

Okay. Got it. All right. And then on the -- maybe you have pivoting over to the COVID-19 surveillance opportunity. So you mentioned the $1.7 billion opportunity for American Rescue Plan. Maybe could you give us some sense how that might transition throughout the year? Because I know Biden is setting up these 6 centers of excellence for genetic epidemiology studies. Maybe give a sense on your guys' thoughts on the split of that $1.7 billion between those centers and between standout services such as Fulgent?

Steven, it's Brandon. I think it's to be determined. I think what we can say is the initial grant that we received from the CDC is multiple larger than any other grants combined to date, which was, I think, a real sign of faith in Fulgent's abilities and capabilities. And so far, we performed at a very high level for the CDC. We've been doing this for a few weeks now. The collaboration with the CDC has been fantastic. We're turning out results quickly, a lot of NGS results, making new discoveries. And so I think the working relationship couldn't be stronger. So hopefully, that bodes well for Fulgent in the future as these new programs get rolled out. And hopefully, we can continue to be included in them.

Steven, just one other thing. The NGS revenues for Q1, it was a little less than $16 million and less than $1 million of that came from the CDC.

Okay. Got it. And then the balance of some of the core genetic traditional genetic testing?

That's right. And that actually surpassed our expectations from what we thought that we can achieve when we initially laid out our $70 million guidance, which gives us even more confidence in our ability to achieve more than $100 million this early on in the year.

Okay. Got it. And then maybe a follow-up on the core genetic testing business. So what drove the strength? I know you guys mentioned increasing the menu and increasing adoption. But has there been any progress on moving into network with the large payers?

Brandon again. Not measurably, Steven. We're having those conversations. We are now quite visible to those payers. They're seeing the claims from our COVID-19 claims. So we're having those conversations more so than ever, but no meaningful new contracts, so to speak, national contracts, right? So we haven't become in network with United or Cigna or something like that. Had we done that, we certainly would have updated the investment community. So no, the growth is not coming from penetrating the direct pay market. It's coming from execution on our traditional business, taking advantage of our industry-leading cost structure, being more aggressive on our pricing. Some return to normalcy, right? No doubt about that. And some of these partnerships we've established have done well for us. And we continue to onboard clients who are taking advantage of our expanded test menu. And again, at these discounted pricing, capitalizing on our cost structure.

We actually see that as upside, Steven, meaning that should we land even one of those contracts, we'll probably have to adjust our NGS guidance again. And the same thing for the COVID as well. So since we're on the topic of guidance, I'd like to make a few commentaries about how we established the guidance, the original $800 million, the assumptions that went into it and the reason on why we're upping the guidance for our base business now after the first quarter. So when we initially formed the guidance, we did take into account a number of things, including aggressive vaccination timeline, which was happening, a drop-off in positivity rates, we didn't think that it would be this slow in California, a significant shift from symptomatic to asymptomatic testing. All those things that we incorporated which was conservative when we initially laid out the guidance have taken hold, and we're experiencing it today. But we're not changing our guidance for the COVID because we have plenty of conservatism built in there. We continue to capture market share and should we land some of these big opportunities that Brandon has mentioned, that's coming from the administration, particularly for the schools, the COVID revenues and the RT-PCR revenues might have more longevity and upside to it. Now turning to the NGS portion of the business, we made a lot of comments in the previous quarters about how the strength of the company and the volumes that we're doing, the quality, the reputation would aid our base business. And that's exactly what's happening. I mean, we've experienced throughout the course of 2020 as well as in the early part of this year, expanded capabilities, homing in an operational protocol, validation, validation from the CDC at lower COGS per test. And the COGS per test and our cost structure is probably one of the lowest in the industry, whether you're looking at the RT-PCR or the traditional NGS. So how we're going to be taking the company in terms of our approach for investment is we're going to get more aggressive this year, particularly in the areas of R&D as well as sales and marketing. And we're going to get more aggressive in terms of our price because we believe that the cost structure that we have for this company is unlike the other companies in the diagnostic space.

Okay. Great. And maybe one last quick one. How much vaccination revenue from your software as a service business was in Q1? And how much of vaccine revenues and then you guide?

Yes. So if we did this call over a year ago, we probably would have called that out, but because the numbers are just getting so large at the company, it's immaterial amount, but it's not an insignificant amount. Meaning that we continue to record those revenues. And it is a driver for our business, not in a meaningful kind of a way, but as they get more traction, we might call those numbers out separately.

Our next question comes from Kevin DeGeeter.

This is Susan calling in for Kevin DeGeeter. I have a few questions. So it's no secret we follow your California testing volume. And we've noticed a change in the competitive landscape. Can you comment on market share trends that you're seeing? And what other competitors might be offering that would make them more attractive? And then I have a couple of other questions.

Certainly, Susan. So we look at the California market for Fulgent, it was largely driven by drive-thru operations. And a lot of the patients that are [Technical Difficulty] they think they may have the virus. And it's no secret that California has done a good job, decreasing the amount of cases on the West Coast. So as the number of cases come down, the number of drive-thru tests that we were doing is coming down. So what we're seeing is as the number of cases come down, there's sort of an inverse reaction, which is more back-to-work, back-to-school. And for whatever reason, we're just particularly strong in those areas outside California. So that's not to say we're not focused on driving more return to normalcy type opportunities on the West Coast, it's just kind of the nature of our business and sort of where our business fell in place. So we're seeing a lot of these -- I mentioned as a paradigm shift, right, really see more return to normalcy type testing, and we just have a large presence in that type of testing across the United States. It's not so centered in the West Coast as our drive-thru testing business was.

Okay, great. Glad that I was not totally off. So my follow-up is, I understand California drive-thru testing, where in the U.S. do you see kind of your market share growing in this back-to-normal testing? You say it's like New York, just kind of getting it give the geography?

I think at this point, we do business in every single state, including Alaska and Hawaii, I know Alaska for sure. So we're national. We've had to show that for some of these large contracts that we've been on. They want to see someone who can handle a national business, a national customer base. So we're in every single state. It's hard to single out states, but New York has been incredibly important for us, right? Not only from a revenue perspective, but from a credibility perspective, the largest school district in the United States partners with Fulgent to run their testing up there. And we've done so in a beautiful way. I mean we've just done a spectacular job together. Their efforts, our efforts have been really, really successful in New York. But we're Midwest, Southeast, South. I mean, we have large customers in many states. And there's not a lot of sort of geographical concentration outside of New York, meaning that's probably one of our larger geographies.

Just one more question. So the CDC contract for NGS is really big. Do you guys expect to get any other surveillance NGS-type contracts, maybe in China or just private companies looking to do research?

Well, Susan, this pandemic, it is global. Definitely, we are getting calls from all over place to see whether we can play a role in some of those outbreaks. We are working on the various opportunities, and we'll update to you and The Street once we land the contract.

Yes. Just kind of teeing back -- just ticking real quick on your last question. I had to say some of the surveillance programs we've implemented, some of these large employers we have, very large biotech companies in logical districts, we've detected hundreds, hundreds of positives, right, that were otherwise coming to work or going to school either mildly ill or perhaps asymptomatic. So we're seeing these programs work. We're able to identify these hundreds of people, get them isolated, get them home, test them while they're home, and when they're back, bring them back into the workforce or bring them back in a school. And we think the isolation of these positives, asymptomatically or early symptomatic is going to be really powerful in controlling the spread.

[Operator Instructions]. Our next question will come from Erin Wright.

This is Katie Tryhane on for Erin. I just -- I have a few questions for you here. How are you thinking about the cadence of COVID testing over the balance of the year, particularly as you have some of these back-to-school, back to life type of testing opportunities?

Well, Katie, we hope the number of cases continue to come down, right? This country needs the number of cases to continue to come down. We mentioned this plateaued at a high level and certain states are still struggling with it. And certainly, the globe is still struggling with it. But we want the number of cases to come down. And we think, as a number of cases come down, we continue to reopen. We continue to get back to work, back-to-school, back to travel, back to cruising on cruise lines, things we love to do, right? But we think there's going to be a big role for testing in all of that. So the national school program is certainly unprecedented. It's estimated to be over 1 million tests per day is going to be needed on a national level to screen the K-8 grade. So we see the cadence picking up significantly from employers, from travel and other organizations that are going to need to test to enable a safe and successful return to full normalcy.

Katie, this is Paul. You talked about the cadence. And like I indicated in the commentary about the guidance, when we initially laid out our guidance, we took into account pretty conservative assumptions about the impact of the vaccine and the positivity rates. So if you take a look at what we have incorporated into our business plan as well as all the analyst models that are out there, I think everyone has our COVID and the RT-PCR revenues are going down. So that's fully been baked in. I think if you take a look at our business, the diversification of the customers and the strength of where the RT-PCR revenues are coming from, we have less customer concentration than we've had ever. I mean, L.A. County is one customer that continues to keep popping up. But as Brandon mentioned, New York, Colorado, Ohio, Florida, Wisconsin. I mean, all these are big customers. So based on our positioning, because we do have conservative assumptions built into the RT-PCR. Should the level of testing pickup for various different reasons, we think that those assumptions might have to be reevaluated. But the way things sit right now, we feel comfortable with the estimates that are out there for our COVID-19 RT-PCR for the balance of the year.

Okay. Got it. And then maybe on the sales force commentary that you had mentioned. I mean, what does the timing look like for building that out? And what exactly are -- I mean how exactly do you expect that to play out? How is that -- yes so...

Yes. It's happening in real time. To build a national sales force, it doesn't happen overnight, right? So we don't have a hard deadline, and we want to have the positions filled. But it's happening in real time, a bit opportunistic now, so to speak, as we were getting a lot of talent interested in joining Fulgent. We're really happy to have Dr. Weiss on board, I think he's an amazing talent. And he'll be helpful in building out the commercial side, too, right? So it's happening in real time. We think we position our company, our capabilities and our go-to-market strategy in a way where we will be able to recruit elite salespeople internationally, right? I think we're going to focus primarily on the United States initially as we [Technical Difficulty] internationally. But I think from the international growth perspective, we do have some more strategic type opportunities in international markets that may allow us to penetrate those markets a little bit faster than just building organic sales teams internationally.

Yes. Katie, it's not that we don't have sales force, we have a very, very effective sales force, but -- and we are not satisfied with -- we're not stopping there. We're continuing adding the talented sales force to broaden our coverage and successfully when we introduced a new test, a new platform.

And we have no additional questions at this time.

All right. Thank you.

Great. Thanks, everyone, for joining us on our call today.

Thank you. Bye, bye.

And this concludes today's call. Thank you all for your participation. You may now disconnect.