Good day, ladies and gentlemen and welcome to the Twist Bioscience Fiscal 2019 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded.I would like to introduce your host of this conference call, Mr. Jim Thorburn, Chief Financial Officer. You may begin.

All right. Thank you, Kevin. Good afternoon, everyone and thank you for joining us today for Twist Bioscience conference call to review our fiscal 2019 third quarter financial results and our business progress. Please review the press release we issued earlier today, which is available at our website, www.twistbioscience.com.With me on today's call is Dr. Emily Leproust, CEO and Cofounder of Twist. Emily will begin with a review of our overall progress and I will report on our financial and operational performance. Then Emily will discuss our upcoming milestones and direction. We will then open the call for questions. And as a reminder, this call is being recorded. The audio portion will be archived in the investors section of our website and will be available for two weeks.During today's presentation, we will make forward-looking statements within the meaning of the Federal Securities Law. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof and we disclaim any obligation to update any forward-looking statements except as required by law.With that, I'll now turn the call over to our Chief Executive Officer and Cofounder, Dr. Emily Leproust.

Thank you, Jim and good afternoon everyone. Over the course of 2019, we are very well across all areas of our business, running growth in both synbio and NGS and investing in continued technological advancements and product offerings that will establish additional sources of revenue and solidify our leadership position in the space.At the beginning of the fiscal year, we outlined a series of ambitious objectives for each of our verticals. I am pleased to report that we are meeting and, in some cases, exceeding these goals.Overall, we have shipped to 1,091 synbio and NGS customers in the first three quarters of this fiscal year compared to 717 customers in the full 2018 fiscal year. And we reported revenues of $13.6 million for the quarter.While our revenue was flat sequentially over the fiscal second quarter, our topline revenues accrued a significant accomplishment. Indeed, last quarter we had a single customer accounting for almost $3 million.Excluding this large liquid biopsy-related order, our revenues would have increased by close to $3 million sequentially.For synbio, we have now shipped to almost 1,000 customers this fiscal year and we continue to see revenue growth in this segment. During the third quarter, we prepared the move of our back-end gene production into a new manufacturing facility in South San Francisco. We are pleased to report that the move went smoothly in the first weeks of July without any production interruptions and with only minimum delays for gene orders that came in during the period from July 1st through July the 20th.In Q3, a number of customer orders increased 3.2x year-over-year while the average order size decreased by about 60% year-over-year, indicating that while we're at the beginning of the trajectory, we're reaching smaller customers in the market. We believe this is fueled by our e-commerce…

All right. Thanks, Emily. First of all, we would like to thank all the shareholders who supported our recent follow on offering in May. We raised approximately $84 million in net proceeds, which allowed us to close the June quarter with $161.8 million in cash and short-term investments.As Emily noted, the results for this quarter confirm we're executing well and now anticipate our revenue for the year will be in the range of $52 million to $53 million as compared to our previous guidance of $50 million to $52 million.I'll quickly touch on some quarterly highlights. Revenue is $13.6 million. Bookings are $18.1 million. That's a record for the company. Our commercial team is executing extremely well, continuing to deliver. Our book-to-bill ratio is 1.3 to 1. Our year-to-date orders are $50 million. Our gross margin for the third quarter is positive 16%. Our Ginkgo business is doing well with $2.4 million in orders and billings of $2.2 million in the quarter. And we're doing a good job in terms of expanding our customer base beyond Ginkgo and extending our synbio reach. We have invoiced over 1,000 customer’s quarter through year-to-date.I'll now dig into some of the details of orders for the third quarter. $18.1 million in orders represents year-over-year growth of 69% and sequential growth of 8%. Our synbio orders, defined as genes, libraries, and oligos, were $11.3 million for the quarter, including Ginkgo. Sequential growth is 7%, non-Ginkgo sequential growth was 10%. I'd like to highlight our genes business doing very, very well with orders of $9.3 million with strength in EMEA and the U.S. markets primarily driven from industrial, biotech, academic, and the pharma segments.NGS orders were approximately $6.8 million for the quarter, which is up sequentially from $6.2 million quarter two. We received orders from 178…

Thank you, Jim. As we are now in the final quarter of our fiscal year, we have achieved several key milestones with an aggregate plan to continue to grow our business. For synbio, we expect an uptick in revenue from Ginkgo as we have continued growth from the larger synbio market.We expect contribution from long oligo pools as well as our long genes and gene fragment [ph]. Looking into 2020, we have a solid roadmap to introduce products we believe would drive growth in the pharmaceutical market.For the genomics market, we continue to move customers along the continuum from pilot to production and we are encouraged by the early inroads we are making in the large [Indiscernible] market. We will continue to focus in both the traditional diagnostic market as we as the bio research and direct-to-consumer NGS opportunities.For biopharma, our science continues to progress and we plan to build our capabilities through non-dilutive collaborations and partnerships. We also look forward to signing additional revenue generating partnerships moving forward, beginning with smaller agreements focused more on services and moving along the value spectrum into true discovery partnerships.In data storage, we look forward to continuing the contract negotiations from non-dilutive financing and expect it to drive to completion. One final note, we did post case updates detailing developments in both May and June in the ongoing litigation with Agilent, which can be found under the news and events section within the Investor Relations section of our website.We continue to believe the case is meritless and we plan to defend ourselves vigorously. As you can appreciate, we will not be discussing the litigation on the call. We do encourage you to read the updates on the website.With that, let's open up the call for questions. Operator?

[Operator Instructions] Our first question comes from Tycho Peterson with JPMorgan.

Hey, guys. This is Tejas [ph] on for Tycho. I wanted to start with the NGS business. Emily, can you just -- I know you mentioned 150 plus customers that you shipped to in the quarter, really strong order book as well. How much of that was driven by the e-commerce platform launch? And how has that been shaping up over there?

That's a great question. Thank you very much. Most of that growth has not yet been reflected by the e-commerce launch. So, we are still waiting for the benefit of e-commerce.

Got it. And then just following up on NGS, I think you mentioned only two incremental customers moving to production mode. Was that surprising to you? Was it normal quarter to quarter lumpiness? It sounds like between the first and second quarter, you had six or seven customers who went from validation to production, so anything to read into the cadence there?

Not many -- it's a timing issue. I think it's a question of invalidation as well quite a bit. So it's timing. And at the same time, the people are already production picked up the difference in the one-time $2.7 order we had last quarter.

What I would add, Tejas is that we have almost 40 customers in validation stage now. Most of them are in the late validation stage. So, it's going through the pipeline. Part of that is we're having a lot of negotiations, teams tied up in terms, discussions and I think in terms of scaling, it's not a surprise. What surprises me is how many are actually moved into the late validation stage, which is encouraging.

Got it. And one quick follow-up here on LakePharma, I mean, can you talk a little bit about the success you had so far in terms of penetrating that customer base with your discovery and optimization platforms?

Yes. So we have been very useful in getting us in front of people. We're in discussion with multiple LakePharma clients. As you can imagine, those types of activities take some time to contribute. But it's been quite positive so far.

The other thing I would add on NGS is we did move our lab this quarter, consolidated in San Francisco. So, we've been very cautious in terms of how we're managing our customer base for that process. The team has actually executed extremely well.

Got it. That makes sense. On China, was there a slight delay in opening up your facility there? It sounds like it's now going to be end of calendar year. Anything to elaborate on or was it normal course of business?

Same previous quarter, we had guided to end of fiscal year for the first shipment -- sorry, I misspoke. In previous earnings calls, we had guided to the end of the previous calendar year. So, I think we are on track here.

Got it. Make sense.

Plus our priority is to get our consolidation inside of San Francisco.

Got it. And then…

In the meantime, we can ship to China from here. It would be better when we're in China, but we can still serve from here.

Got it. And then Jim, I know you probably don't want to speak too much specifically in terms of the next fiscal year just yet, but given that you've guided to mid-teens gross margins in the back half of this fiscal year and obviously, you're ramping up some commercial investments in the back half of the year here. How should we think about the margin progression? Is that mid-teens gross margin a good baseline number off which to think of sequential improvement as we move to the next 18 months or so or are there any other moving apartments that might alter that trajectory materially?

So, good question. That's one we focus on. Part of consolidating in San Francisco is we can leverage the organization of synergies. We are adding four new writers toward the back end of this year. That's going to help us scale to approximately $200 million. And as we think about the business between a 100 and 120, 130 million, we should be targeting roughly around – delivering roughly around 50% gross margins. And our goal is to scale to that sort of level as quickly as possible. And we anticipate we should be at that run rate toward the end of the next calendar year.

Got it. That's very helpful. Thanks so much guys and congrats on the quarter.

Okay.

Thank you.

Our next question comes from Ross Muken with Evercore ISI.

Hi, Ross.

Ross, your line is open. You can ask your question. If your phone line is mute could you please unmute the phone line?

Hi, can you hear me?

Yes.

HI. It's John on for Ross. Focusing on data storage and the imaging deal, I was wondering what your vision was for how you're going to commercialize. What does it take to have a commercial package in the space and does it require complementary technology such as throughput reading?

That's a great question. So, [Indiscernible] data storage, you need to be able to data in/data out. So mean that you first need to encode the data into DNA. That's software. Then you need to write the DNA. That's our silicon chip. Then you need to store the DNA. So that's the [Indiscernible] useful for that. And then when the data is needed, you have to PCR it out, PCR is well understood. And then you have to sequence it and decode, which is, again, software.In terms of go-to-market strategy, initially, where it makes the most sense is to go for code data, so, data that is not read very often. So, you need to be able to read the data when needed, but only a small percentage of the data will ever be read. What that means is a current sequencing technology will be perfect for that at this point. As sequencing technology improves over time, there maybe there will be cheaper sequencing technology that will enable us to go into markets where the data is read more often. But because we don't control the reading side, initially we focus on markets where the data is read very infrequently and FYI, that data is called WORN, which means write once and read never. The vast majority of the data in the world is WORN data.

Got it. Thank you. As far as this imaging deal is concerned, how much closer does it get you to an offering in WORN data? Do you have a timeframe of when we could expect to see anything along those lines?

We sell today. We have a small number of sales in data storage. But today, what's limiting the ramp is actually the cost. That's limited by the density in the silicon chip. Today it's about $1,000 per megabyte. If you're storing bitcoins, it is very inexpensive to store bitcoins, but if you want to store financial data or your personal photo books, that could be quite expensive today. So, that's why there's only a limited market. And so the next opportunity for us is when we can significantly lower the cost of writing.And through the silicon chip that we are developing we are enabling that transition. So, the next target point would be somewhere around $100 to $1,000 per gigabyte. At that point, once you have that, you can start serving some very interesting markets. So, the opportunity would be bigger and then the next step after that again will be to go for $100 per terabyte, which is about the price of a hard drive. At that point, you can go after the entire market.So it will be gradual, but the next step is the $100 to $1,000 per gigabyte. And as we mentioned, it will take a few quarters to design and build that first silicon chip. But the good news is we have a roadmap. We are executing it. And we are moving forward. If I may add, the non-dilutive funding that we expect to get would accelerate that.

Understood. That's very helpful. Thank you.

Our next question comes from Doug Schenkel with Cowen.

Hey. Good afternoon. So, I want to go back to an earlier question or maybe just frame it a different way. So, just recapping some of the numbers that have been covered a couple of times. The number of customer evals jumped from around 100 to over 150. 42 pilots went to 58 and then the number of folks that are in production went from 24 to 26. So, you're getting a lot more evals. The pilots are jumping too. And I think what we're waiting for is a bigger jump in production customers.Is there some rule of thumb that you can share with us on typically how long it takes to move from one stage to another and then maybe building off of that, kind of what type of dollars we're talking about? That second one may be a little bit tougher. But at -- obviously, at this point, we've had three quarters of revenue. We know what your guidance is for the NGS segment for the year.It seems like you don't have a lot baked in terms of additional conversion until the fourth quarter, which my guess is just conservativism at this point. But I ask this because it seems like you're clearly building momentum heading into the end of the fiscal year. And if you can give us some rules of thumb on these things, I think it will allow us to at least to think a little bit more intelligently about what could happen in this segment next year?

Yes. There is some conservatism. And remember, part of the conservatism dug here because we are consolidating into our conservative, anyway but we're consolidating into facility in San Francisco. We're still tracking this. What we're finding over the last few months is we have a lot of negotiations going in terms with the customers. I think what's interesting is if you take one order that we had on the microarray, which came in July, 800,000. We started negotiating that one…

In February 2018.

February 2018. So that's taken us over a year and almost six months to convert that. And we'll start shipping that when -- probably September quarter. So in terms of what we'd be expecting, this year, we're going to do around 20. We would have to step back. You're right, we're getting momentum. There's more sitting in the validation. And that's late validation negotiation.We should be anticipating that we should be looking at almost doubling that business next year. It's difficult right now to say when those validations are going to flip into adoption, but my view is once they get into validation, you're probably talking about three to six months for adoption.

And that super helpful. Go ahead, sorry Jim.

And then that's late validation.

Okay.

And we define late validation as we're actually negotiating the terms and talking about the pricing and the T's and C's.

Okay. You've got a ton of momentum. It's still early days, too early to comment on any signs that these conversion timelines where you move from one phase to the other are tightening up. I'd imagine that big one has taken a year, year and a half to get where we are now. My guess is if there's another one like that out there today, it would presumably take a bit less time. Is that fair?

Yes, definitely. That we've done it several times, we can anticipate better what people want. And so, there is less exploration of what the needs are. And a lot of those are already in the funnel. So I don't think there are a lot of people are not talking to yet. It seems conservative for this fiscal year. And I feel like we are very well-positioned for what we want to deliver next year in terms of growth.

And the other point there, Doug, is we have increased our investment in the commercial organization to support the growth. If you look at it, we're ramping up to almost 70 salespeople, of that 30-odd are going to be supporting NGS and we build technical resource around that because it is a technical sale. As we start to segment the business, each segment within NGS, whether it's through clinical or diagnostics, it really requires a different touch and different value proposition and they've got their own idiosyncrasies. So, we're building that knowledge. That's a part of the ramp has to be to get the right people in the right place talking to the right customers as well, but definitely a good product.

Let me ask one more follow-up on this topic. Just because I think that last point about the 70 new folks you're bringing in, 30 are focused on this segment. Do you expect them to help you where I think you've already been strong with basically converting some of the big research and big commercial labs that need good target capture tools at a lower price? That [Indiscernible] with some really big customers? Does the commercial reach help you more with those types of customers and converting more quickly or does it actually allow you to go after the bigger part of the market at least in terms of number of customers who may be spending a little bit less but there are a lot more of them?

Yes. I think it's all of the above. I think more people on the ground have the ability to do more of the high touch – high comp managing that we have to do with the big accounts. But at the same time, if every time we get into the account and there's a pilot we win, then it behooves us to put more people to knock on more doors early so that we can grow the funnel and move more people from pilot to production. It extends a little bit of both. It will help with the big accounts as well as the more medium ones.

Got it. Thank you Emily. Just maybe a couple of real quick cleanup ones. Where do you think gene turnaround time will be by year-end? And how important do you think that is in terms of opening up more of the market?

I think it's a critical focus of ours for growing our reach. Basically in the market the more flavors of DNA we can add, the more it will be appealing to more researchers and faster turnaround time is, in a sense, additional product features that enabled us to reach more people. So, our goal is to be consistently below 12 days turnaround time in the near future and then push that even further. At 12 days, we'll be extremely competitive. Then as you get to 11 and ten days, then it's resistible at the price point and the scale that we have.

Okay. And one last one, in the context of discussing your newer growth drivers in your prepared remarks, you mentioned the ability to use Twist-enabled SNP RNA tools to drive customers to increasingly migrate from arrays over to Novaseek. Is it fair to say that a nice validation of that would be on an upcoming call being able to disclose that you're getting early indications of interest from some of the big Ag accounts? Is that what we should look for next as a validation that you guys are progressing there?

There's a number of segments that – I think one of them is the – I'd like to mention the Ag market. Another is the direct-to-consumer DNA testing. And I think any of those will be a proof point. I think we were quite happy with our order of $800,000 in July for one of those early conversions. So, that is, in a sense, the first proof point that we can compete in that market. As we mentioned in the remarks, it's going to take some time because it's a big shift in workflow, but once you prove that price point is there, which is the most important part in genotyping then it shows you can do it. If you can do it once with the [Indiscernible] that we have, then we can go and repeat it.

Got it. Okay. Thank you again.

Thank you.

Our next question comes from Catherine Schulte with Baird.

Hi. Thanks for the questions. Going back to NGS, just curious, how has uptake been on the products you launched at AGBT, particularly the Fast Hyb protocol?

Thank you. Fast Hyb has been a great product. It's really enabled us to open some doors, where as we had mentioned before, what we enable people is a lower cost plus sequencing, plus samples, but for some people, they already have an asset that's already validated. And the cost saving that we bring may not cover the entire cost of revalidating under the new by switching product. In that case, the Fast Hyb is a fantastic door opener because at that point, we not only bring cost saving, but we bring a workflow advantage. And so, overall, it's been very well received and actually it exceeded my expectation of the customer, the positive customer reaction to it. It's really been a door opener.

Okay. You've talked a lot about seeing that conversion from SNP arrays to NGS. How many customers are you currently serving in that application today, switching from arrays?

So it's a few digits – it's less than five. It's very small numbers at this point.

Yes. We're very early in that set full inning. We've been obviously working on it for some time. And actually, we did get the order in July, which is fairly close to when we expected. So, I would say we're tracking based on our plans. It's tracking probably slightly ahead.

Okay. And then just lastly, on the drug discovery side, what else do you need in terms of your data package before you think you can monetize that capability and how far out do you think we might be from that?

That's a great question. So, right now, we know that we have find ourselves [Indiscernible] we know they are functional. I think a little bit of NVivodata will go a very long way. So that's most of the area where we are well focused at that point. Once you have NVivodata, then it's a clinical candidate.

Great. Thank you.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back over to our host.

Thank you very much Kevin. So, to conclude, it's an exciting time to be at Twist Bioscience. As we move into the final quarter of our fiscal year, we continue to deliver strong growth across our synbio and genomics businesses and we are investing in our long-term opportunities of biopharma and data storage.With a growing revenue stream driven by customers truly demonstrating the ability to change the world, long-term vertical market opportunities and a great team in place to execute on our aggregate plan, we are very well on our way toward implementing our mission to provide sensitive DNA to improve health and sustainability. We appreciate your continued support and look forward to keeping you up to date on our progress. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.