Ladies and gentlemen, thank you for standing by, and welcome to the Twist Bioscience Fiscal 2020 First Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Jim Thorburn, Chief Financial Officer. Thank you, and please go ahead, sir.

All right. Thank you, Chris. Good afternoon, everyone, and thank you for joining us today for Twist Bioscience conference call to review our fiscal 2020 first quarter financial results and business progress. Please review our press releases we issued earlier today, which are available at our website, www.twistbioscience.com. With me on today's call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and also Mark Daniels, Chief Legal Officer of Twist. Emily will begin with a review of recent progress in Twist businesses and Mark is available for Q&A on our litigation. I will report on our financial and operational performance, and Emily will discuss our upcoming milestones and direction. We will then open the call for questions. 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 1 week. During today's presentation, we will make forward-looking statements within the meaning of the federal securities laws. 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 in the 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 Co-Founder, Dr. Emily Leproust.

Thank you, Jim, and good afternoon, everyone. I'd like to begin our call with an update announced this afternoon that we have reached a settlement with Agilent in the litigation originally filed on February 3, 2016. Under the terms of the agreement, we obtained a full release of claims made against Twist Bioscience, myself, Siyuan Chen and Solange Glaize in exchange for onetime payment of $22.5 million. The settlement agreement contains no admission of liability or wrongdoing because there were none. Agilent launched an all-out legal assault on Twist, and in the end, we not only survived but we thrived through the attack. We were prepared to take this case to trial. However, we have chosen to settle this litigation to remove the uncertainty and exceptional legal fees associated with the jury trial. In addition, we believe it is in the best interest of all of our stakeholders that we eliminate this distraction and focus on our business at hand. With that, I'd like to turn to our financial results for the first quarter of fiscal 2020. We are off to a solid start, with $17.2 million in revenues resulting from a larger number of orders shipping in the last days of the quarter. We reported impressive growth in synthetic biology and NGS revenues year-over-year. And looking forward, orders for both synbio and NGS look very strong at almost $25 million for the first quarter, which is a yearly run rate of $100 million. While we believe our order increase is due to exceptional products and commercial team, we still believe we had a bit of a bump due to the end of the calendar year from companies that need to spend their budget. We saw this in the first quarter of fiscal 2019, and we see it again in…

All right. Thank you, Emily. Litigation is settled. We're executing well, and we enjoyed a great quarter of sequential growth in orders and revenue. Let me touch on some of the quarterly highlights. Fiscal Q1 revenue was $17.2 million and exceeded our guidance. We billed $24.8 million in orders, which is a record for Twist. The quarter one book-to-bill ratio was approximately 1.4:1. Our Ginkgo business is doing well with $2.6 million in orders and revenue of $2.1 million. Synbio business, non-Ginkgo and NGS products are growing strongly, and we continue to build our customer base, and we shipped to approximately 1,000 customers this quarter. Biopharma orders is worth noting, as Emily highlighted, were approximately $700,000. Looking at the details of orders for the first quarter fiscal 2020, $24.8 million in orders represents year-on-year growth of 63% and sequential growth of 24%. Synbio orders and our synbio products are defined as genes, libraries and oligo pools, were $12.3 million for the quarter, and that includes Ginkgo orders of $2.6 million. Although Ginkgo was down from $2.8 million in the fourth quarter, our Ginkgo business fluctuates based on their project activities and received orders of approximately $3.5 million in January. Our genes business is doing very well, with orders of $9.5 million, and we're seeing strength in both EMEA and the U.S. markets, primarily from industrial biotech, academic and health segments. Our genomics products, which I'll refer to as NGS products, continue to perform very well. We booked approximately $11.8 million in orders for NGS products in quarter one, which is up sequentially from $8 million in quarter four. We received orders from 253 accounts in the quarter, and that's up from approximately 180 in quarter four, with bookings primarily from health care, which includes diagnostics, and academic institutions such as…

Thank you, Jim. As we move into 2020, we continue to innovate, execute and respond to the market needs. For synbio, we expect continued revenue growth and diversification of customers. We expect to introduce new products in line to meet the needs of markets we do not currently serve today. And we will continue to enhance our e-commerce experience. For NGS, we will continue our efforts to move customers through the pipeline from pilot to adoption. In parallel, we will introduce new products designed to meet the needs of those developing liquid biopsies and cancer research tools as well as continued focus on converting organizations that currently use SNP microarray. For biopharma, we expect to leverage the data we have generated to date on our 7 functional antibodies against GPCR targets to sign revenue-generating contracts. We announced our first collaboration in January, and remain on track to sign between 5 and 10 collaborations, some of which will include both milestones and royalties. And for data storage, we will continue to collaborate with our product team through the MIST program to create a fully integrated commercial offering in 3 to 5 years. With that, let's open up the call for questions. Operator?

[Operator Instructions]. And our first question comes from the line of Luke Sergott with Evercore ISI.

Couple of congrats, I think, are needed. I guess, to talk about the litigation, kind of walk us through why the timing is now and then deciding because you -- for a while, you're talking about willing to go through the full 9 yards, understandable why not, just kind of how that shook out?

Thank you, Luke. I'll pass it to Mark Daniels, our Chief Legal Officer.

Thank you. Look, we were prepared to take this case all the way through the trial. But you have to understand almost all cases settle, 97% of cases that are brought settled. So it's not unusual that the case settled. It was the right thing to do for the company, and it was the right thing to do for our stakeholders. We look at this settlement as a victory for Twist. It eliminates uncertainty and legal expenses. There are no royalties associated with the settlement and the legal claims were resolved.

And I guess, back to the business on -- so when thinking about the margin dynamics, Jim, can you walk me through how that's going to shake out through the year? And also within -- and also the quarter, right? So you guys did really well. You placed a lot of -- or sold a lot of the long genes. The higher-margin business like NGS continue to ramp. But the margins came in a little light. Is that more from the capacity expansions and still not at utilization? Just kind of walk us through that.

Yes. So good point, Luke. When we set up the projections for this year, we were always ramping our gross margin and targeting to grow it as we scale our revenue from roughly 20% in the fourth quarter to exiting at roughly 40% -- 20% in the first quarter to roughly exiting at 40% in the fourth quarter. Yes, we're adding capacity, bringing some heads in slightly ahead of schedule in terms of preparing for the ramp-up in the next couple of quarters. I think in terms of the way we look at it, we're directionally heading towards the 40% gross margin as we scale our revenue. We're comfortable to forecast it $80 million to $84 million. We're comfortable with the average gross margin of about 32%. And I think it's really incredible progress the team has made to move into our 60,000 square foot facility here. And as Emily highlighted, we are commissioning 2 new synthesizers, which will give us capacity as we scale through the year. Before we get into the holidays there, we expected to -- some of our customers to actually be shut down all the Christmas holidays. We actually shipped more than we expected. And we've seen some spike demand, and that's put a little extra cost and ahead than we expected, but we're tracking to what our internal models are looking like.

And our next question comes from the line of Catherine Schulte with Baird.

Congrats on the quarter and the settlement. A few questions from me. I guess, first, for the new Schrödinger collaboration, what are the next steps, milestones that we should be expecting this coming year? And what's the time line to potentially reach proof-of-concept in preclinical development there?

Thank you. So we are not sharing details of the milestones. I think what -- in terms of news flow on the pharma side, I think we've signed up for 5 to 10 collaborations. And over time, what we expect to see is growing economics of deals, and then being able to command some milestones and royalty payments per contract. So I think those are the milestones to look forward to, number of contracts, size of economics and then milestones and royalties.

Okay. And I know it's early, but any qualitative comments on how the MGI collaboration is going so far? And perhaps just your outlook for NGS uptake in Asia more broadly?

So far it's going well. And as Jim mentioned, the bookings in China are growing. And we anticipate that a portion of the growth that will come in the future quarters will be catalyzed by the collaboration with MGI and the co-marketing agreement we have together.

Okay. And then last one, I'll hop back in the queue. But any preview of what we should expect to see from you at the AGBT Conference later this month?

So we are still the sponsor. And so I think the -- it used to be -- the first time we went to AGBT, it was Twist standing up saying that we had built a new product line that had substantial advantages in terms of the cost of sequencing the sample in terms of the speed at which we could make custom product and improvement in the workflow. So it used to be me and the Twisters spreading that story. And what happened last year at AGBT, actually our customers took the stage and validated what we had said. And so in a way it was our customers that were spreading the advantages that our platform brings. And so I think the preview for this year would be more of the same, of more customer testimonial, and not only in the markets we serve today, but in the markets that we want to expand into. We have a great franchise and we've been taking market share, but we are not yet serving all of the markets. And for instance, in the conversion of the SNP microarray towards NGS, we are still in early innings. And so we'd want to showcase how our products can be transformative into other application spaces as well.

And our last question comes from the line of Doug Schenkel with Cowen.

This is Subbu on for Doug. Congratulations. You continue to have an impressive number of customers in pilot and validating your NGS product. How big could this business get for you over the next 2 to 3 years? Could this reach like $100 million in revenue by 2022? And I have a follow-up.

Well, it's a good question. We're certainly doing well in NGS. I mean, the guidance we've given for this year is between 37 and 40. We are adding more NGS resources in the field to position for ramp up. We'll get a good, strong value proposition in the market place. And not giving guidance for the following year, but the market is growing 26%, 30% a year. And we're feeling good about the opportunities. BGI, PerkinElmer collaborations are going well. We're seeing good, strong positioning in Europe and good growth opportunities in Europe. So I'm personally excited about it. We've got 33 people in the field. Their quarter targets are roughly $2 million a head. And our goal here is to accelerate in that market opportunity and optimistic about the future, but I'm not going to give guidance for -- over the next couple of years.

Got it. That's helpful. And then some really nice momentum in pharma with $700,000 in orders. What does this translate into revenue, and what have you baked into guidance?

So we expect all of the orders to transform into revenue over the next few quarters. We've guided revenue for the year of $1 million to $2 million for pharma. And so it's a great start that, in first quarter, we've already booked a substantial portion of that guidance.

And this concludes today's question-and-answer session. I would now like to turn the call back Emily Leproust, CEO and Co-Founder of Twist for any closing remarks.

Thank you, Chris. Thank you, everybody, for joining us today. It's been a very eventful and positive day for Twist, and we look forward to building on our momentum to drive future growth and business success. Have a great day.

Ladies and gentlemen, today's conference concludes today. Thank you for participating. You may now disconnect.