Ladies and gentlemen, welcome to the Q3 2019 Fulgent Genetics Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. 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 in 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 second 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 the 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 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 us on our call today to discuss our third quarter 2019 results. I will review the highlights from the third quarter before Paul discuss our financial results and the outlook in detail. The third quarter was another very strong quarter for us. We once again achieved the record quarterly results for both test volume and revenue while driving ongoing improvements in gross margin and the cost per test. We once again achieved GAAP profitability and generated strong cash flow. Specifically, the revenue grew 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 increase our gross margin, excluding stock-based compensation, cost per test improved to a record low of $179 per test. Non-GAAP gross margin in the third quarter was 64%, up approximately eight percent point from the third quarter last year, and up approximately 5% point sequentially. GAAP income was $1.5 million, and the non-GAAP income was $2.6 million. Non-GAAP earnings per share was $0.14 in the third quarter. Adjusted EBITDA was positive $2.9 million in the third quarter. The third quarter was another record quarter for Fulgent Genetics, demonstrating the consistent attraction we are gaining in the market. Given the recent ramp we have seen in volume, we thought it would be helpful 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 demands for our hereditary cancer panel. Our superior quality, rapid turnaround time, as well as competitive pricing, are driving notable growth in volume. As a result, oncology is becoming a growing portion of our revenue. Second, we are seeing increased demand for our sequencing service business from our channel partners we have established with various institutions and pharmaceutical companies focused on genomics for the therapeutic discoveries and development. Third, we are solidifying several logistic partnerships with cash-paying commercial genomic laboratories. We have seen early results from these partnerships, which have provided additional fuel for the recent growth. We are pleased with this recent ramp in volumes that we have experienced. At the same time, we remain balanced in our growth expectations for the quarters ahead.
Though recent growth has translated into results that have exceeded our most optimistic expectations at the start of the year, we remain measured as we look ahead and focus on increasing the sustainability of this growth. To that end, we anticipate the fluctuations in short-term demand as our strengths diversify and expand our business over the long run. We are confident that the investment we have made in additional sales avenues outside our core clinical business will contribute a large part of our business over time, driving increased stability and consistency. As our volume has ramped, I have seen resolute being able to manage this increased activities due to the investment we made in bioinformatics, computer science, artificial intelligence, people, and automation in the recent years. Our lab has operated more efficiently, and we still have a lot of capacity for additional volumes.
With this increasing volume, the efficiency of our business has become more financially apparent. We can see this in our growth margin and bottom line. Most notably, we have continuously improved in our cost per test due to the benefit of scale and automation. We are confident that with the cost among the lowest in the industry, we have the flexibility and the capability to drive a wider market. Aside from this financial advantage, our technology platform provides an even greater edge from the competitive and market position standpoint. Years of experience in our traditional core area of pediatrics rare disease has provided expertise in queries and interpretation, as well as helped to establish scientific findings which aid treatment guidelines for a certain disease.
An example of this is the work that we have done with the Parkinson Foundation, which is leveraging our data and expertise to develop more efficient treatment solutions for the disease. In addition, our software expertise from our engineers has not only provided proprietary probes, but also ability to develop and introduce quality tests within months with minimal financial investment. This enables us both introduce tests into the market quickly where we see a need or opportunity and maintain one of the largest libraries of existing tests with no additional overheads. Further, unlike many genetic testing companies, our technology platform gives us the ability to perform all these tests in-house without need for outsourcing. We believe that this financial, operational, and technological distinctions differentiate us from other genetic testing companies in the market.
To that end, we recently announced the launch of Picture Genetics, a patient-initiated consumer genetic testing offering, which we believe offers a new level of genetic testing capabilities to everyday consumers. We are pleased to be able to bring clinical-grade genetic testing results to consumers directly to enable them to make more informative decisions about their health. Picture Genetics is different from recreational at-home genetic testing offerings because they provide actionable clinical results along with genetic counseling support for those who need it. We are also offering three different tests through the Picture Genetics product line: parenting, wellness, and newborn. Our parenting and wellness tests are available online now, while newborn will be available later this year. We are excited about this opportunity to reach consumers more directly, but at the same time, we don't expect to see meaningful revenue contribution from this test in the immediate term.
Our low-cost structure and lab efficiency enable us to sustainable provide this service to consumers at an affordable price. Overall, we have an opportunity to have success driving top-line growth and expanding our test offering with little incremental overhead. We remain disciplined in our approach to spending and continue to see investment we have made paying off in growth. In the area of investment, we have continued to invest in research and development to enhance our test menu. In the third quarter, we have announced a new test for reproductive health, which is now available for consumers. We please announce the launch of our PGT-A test, which identifies the potential of normal genes in the embryos during an IVF process. This test helps women during the IVF process and enables them to have more control over embryo selections and transfer, ultimately, the increase in probability of a healthy pregnancy.
In the last 12 months, we have launched numerous new tests with various vertical markets, which fueled our growth. In summary, we had another very strong quarter as we have seen a notable growth inflection in our business. Looking ahead, we remain confident and optimistic about our market position and opportunities. I would like now to turn over the call to Paul Kim, our CFO, to provide details on our financial performance in the third quarter, and he'll also provide an update on our financial outlook for the full year 2019. Paul?
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 tests 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 growth margin continues to improve as a result of the efficiencies we're seeing. Non-GAAP growth margin improved five percentage points sequentially and eight percentage points year-over-year. We expect that growth margin should remain strong in the coming quarters. For operating expenses, we remain committed to managing expenses while investing for future growth. With our 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 11 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 continue to make investments in R&D as we grow our test menu and expand our market reach with our offerings. Lastly, G&A expense was $1.5 million, down from $1.6 million in the second quarter. Total GAAP operating expenses were $5 million for the third quarter, up from $4.5 million in the second quarter. Non-GAAP operating expenses totaled $4.2 million, up from $3.9 million last quarter. We're very pleased that we've been able to demonstrate strong momentum on the top line while only marginally increasing expenses.
This is a testament to our core competency in terms of the efficiency of our science, leverage of our model, and shows that discipline we have been building in our business is paying off. Adjusted EBITDA for the third quarter was a positive $2.9 million compared to $281,000 in the third quarter of 2018. On a non-GAAP basis, excluding equity-based compensation expense, income for the quarter was $2.6 million or $0.14 per share based on 19.5 million weighted average common shares outstanding. The effective tax rate at the end of the third quarter was 3.6%. On a non-GAAP, tax rate was 2.3% due to us recording a full valuation allowance at the early part of 2019. Turning over to the balance sheet, we generated very strong cash flow in the third quarter on our strong results.
Cash provided by operating activities was approximately $3.9 million compared to $675,000 last quarter. We remain committed to generating cash from operations going forward. As you may have seen, we filed an at-the-market shelf offering in the third quarter, which enabled us to sell primary stock in the open market. Over the course of the quarter, we sold approximately 104,000 shares and generated approximately $1.27 million growth in cash from this program prior to offering expenses. We ended the quarter with $43.6 million cash equivalents and marketable securities with no debt on the balance sheet. This equates to $2.24 in cash equivalents per share. Moving on to our outlook. As Ming discussed, we continue to see strength across our business, and we expect to see elevated test volumes in the periods ahead.
We remain confident in our business as we head into the end of the year. At the same time, we want to be measured in our guidance given the rapid inflection we saw in test volume in the last few quarters. We're applying additional conservatism given the pending impact of CMS coverage for hereditary cancer tests going forward. While the majority of our business is cash-paying with no reimbursement risk, we expect that we can see an indirect impact from these changes, given the fact that we act as a reference lab to several cash-paying commercial genomic customers who receive CMS reimbursement for hereditary cancer tests. We anticipate the fourth quarter revenues will be approximately $8 million, which translates to revenue for the full year at $32 million. This represents a year-over-year growth rate of approximately 50% for both the fourth quarter and the full year.
I would also like to take a minute to elaborate on a point that Ming made earlier regarding outsourcing test volume. We do not, and have not in the past, outsourced any of our testing capabilities. In fact, a growing number of commercial organizations have recently recognized our abilities and now are outsourcing to Fulgent. The financial results we demonstrated in recent quarters further validate our technology, operational differentiation, and approach to the market as sustainable longer term in this growing but highly competitive environment. Armed with a business that not only is forecasted to grow 50% in 2019, but generating cash and with one of the lowest cost structures in the industry, our focus going forward will be on our commercialization strategy.
This will entail focusing on international growth, further building on our sequencing as a service business, establishing deep collaborations with key medical institutions, and making reimbursement an incremental growth driver for the future. We will provide further color and detail surrounding our commercialization strategy in the future. Overall, we believe this quarter results show how our differentiation allows us to compete effectively as we both make genetic testing more affordable for consumers while maintaining a disciplined and a sustainable cost structure. We believe the same differentiation will provide attractive financial results and translate into sustainability for our business. We look forward to finishing the year on a strong note. Thank you for joining our call today. Operator, now you can open it up for questions.
Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. 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 in the quarter, and also the outlook for the fourth quarter, just suggest a step down. What are you assuming in terms of the volume versus price dynamics and the indirect impact of the CMS reimbursement on hereditary cancer screening? How does that impact ASPs? I'm just trying to get that ASP versus volume mix appropriate here for the fourth quarter. Thanks.
Paul, do you want to take that?
Sure. Thank you for the question, Erin. We've had a great third quarter. We did very well in sustaining our core business, the pediatric rare disease market. A lot of the growth during the quarter came from the introduction of the new test and the acceptability of that, and the traction, which really began at the early part of 2019. 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 and our stance is on point, and I'd 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 7,000, 8,000 tests per quarter, and now that's grown to 20,000. In looking at our prudent guidance for Q4, these customers and the relationships which provided the fast growth and the incremental growth, we feel very good with. Again, at the same time, these are new partners. 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 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, it also provides diversification as to the types of tests that we sell. I think the other comment that we made is many of these customers, they outsource to us and they're cash-paying customers, and they're the ones that are submitting claims to the CMS and these other agencies. The CMS just came out with an announcement providing some detail on what they would provide for reimbursement, having it be an FDA-approved test. We don't know quite certain how that's going to impact the reimbursement experience for these organizations that are submitting the claims.
I think based on that, and then also based on the fact that we don't want to get too ahead of ourselves, given that our volumes nearly tripled in the last six months, provides us the input on why we want to be able to be a little metered for the fourth quarter. I think having said that, if you take a look at the progression of the business, we've raised the estimates on almost every call. I think we began the year at having a business and guidance be at $26 million, which was a 20% increase in our business compared to 2018. Subsequent to that, we raised it to $29 million, and now we're raising it to $32 million. I think having said all of that, one of the things that we're really proud of is our cost structure.
We believe we have one of the lowest costs out there in the industry, even for the small amount of volumes that we have. When we perform all these tests across the board, but when you roll all of that up, whether it be on a GAAP perspective or on a non-GAAP perspective, we're very proud of our cost for test being in the $170-$180 range. We believe with additional efficiency and with additional growth, there's meaningful room to drive those costs down further.
Also, Erin, as you probably know, the CMS reimbursement rate is a lot higher than our ASP. With the growing volume we have lately, we definitely generated the attention for the national insurance organizations. They do see Fulgent Genetics as 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 our business cannot be measured by test 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. How should we be thinking about your hiring efforts going forward? I guess, where does your total sales headcount stand now, and where should we think about that trending over the next year or so? Thanks.
Yeah. Erin, that is a great question. If you take a look, even though our revenue growth is almost year-over-year, as Paul gave the guidance for 50%, our headcount has not increased dramatically. We continue improve in terms of our sales executives. We're expanding our people's capabilities in the region. This year, we have great growth in the North American business, we are expanding internationally. Our headcount now is from the increase from about 120 people 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 on for Bill. Congratulations on the nice quarter. Can you tell us the latest in the pricing environment? You've lowered the ASPs earlier this year and presumably in response to the competitive dynamic. 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. If you take a look in terms of the pricing pressure, we definitely have a lot of room to cut the price, and we are not giving tests away free. In that sense, I think we do need to make sure we have to build a business model which should be sustainable, and we cannot use $1 to buy $0.40 or $0.20 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 to be profitable. Otherwise, we cannot continue to reinvest into the business or pay back to our investors. I think that in this area, I think we have room to continue to drop the price as we continue to see that our cost can be continually lower as we see the volume growth.
We're ready to go for this another challenge into the area. I think even though we dropped the price this year, we still maintain our gross margin around 60%.
Rachel, I'd like to add a few comments. I think your comment about the ASPs is something that several individuals brought up. I think if you take a look at the ASPs, about $500 in Q3, that'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 or $512. The thing that's driving the ASP number is primarily mix in this competitive environment, a big environment, but very competitive. I think the pricing pressure is always there. 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 through consolidation and so forth. We think that is very critical. I think the other thing to take note, aside from the ASPs, is given the relative flat or the drop in the ASPs, which you really saw between the first and the second quarter, our gross margins, they continue to go up by whole percentage points. They went up by whole percentage points from Q1 to Q2. They continue to increase.
We believe, combined with our capabilities, combined with 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 efficient structure, applying our technology into our business operations, achieving higher and higher gross margins, will give us more levers to use as we address this market.
Great. Thank you. Then can you also give us a sense of the product mix between legacy rare disease testing, carrier screening, exome, and other major categories? 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 women's reproductive health area as well as the sequencing for service business. Ming, do you want to make a commentary on her last part of the question?
I think as Paul said, your answer is we see pretty strong demands for our carrier screening test internationally. That is one of the strong growth area. In addition, we definitely have developed more of the relationship with the cancer research institutions. We mentioned about the Parkinson Foundation last time. Recently, we have another contract with another major Parkinson Foundation to contract our test for them to diagnose and treat the Parkinson patients.
Great. Thank you.
Again, if you would like to ask a question at this time, please press the star and then the number one on your touchtone telephone. We have a question from the line of David Westenberg from Guggenheim. Sir, your line is now open.
Hi. Thanks for taking the question. Can you explain what's driving the outsized phenomenon in the quarter? You've been around for a while, and why do you think you're seeing a step up in the volume there? Thank you.
Yes. David, I think this is really, if you take a look at the third quarter results, really it's reflected our disciplinaries of our investment in terms of tests we introduced in the last year, end of last year and early this year. We do believe the technology, it is one of the major differentiator for us. As Paul earlier mentioned, we do not separate the number of tests for cancer, 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, it's automatically tracked by our code, the Fulgent track, the molecular barcode for every test comes in. Once they get into the system, the system will select based on the customer's request for the test.
They are either from the research for both RNA and DNA tests, as well as some companies required or the institutions required to control orders for the rare disease, cancer, or carrier screening test. All these things will be at the end classified by our bioinformatic pipeline and it generate the clinical related reports. We do feel that Fulgent have the technology advantage because not only we have strong biochemistry, but we're also very strong in terms of artificial intelligence and computer science and data science. Paul, you have anything to add on?
Yeah. David, I think since the call began, the lines of the Q&A were really behind the numbers, the reason for the numbers and guidance going forward. 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, we really honed in our operational capabilities as well, which is evidenced by us digesting that volume, and facilitating that, meeting the requirements of the customer, both from a TAT perspective, from a quality perspective. We're very pleased because digesting that volume was handled relatively easily. We have excess capacity even still. 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 indicated. We continue to produce offerings at a record pace. Picture Genetics being one of them, with very minimal investment. Armed with all of that, the foundation of the organization, the hull of the organization, feels very different than it did about a year ago. 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. 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. We believe going forward, Fulgent is very well poised for that.
That is why we're going to be 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. We believe we're making good progress on the reimbursement side. 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 it. That's a lot of good info there.