Affymetrix Net Soars, Sales Dip - Analyst Blog

California-based genetic products maker Affymetrix Inc's (AFFX) fourth-quarter fiscal 2010 adjusted (excluding one-time items) earnings per share of 5 cents were ahead of the Zacks Consensus Estimate of 3 cents and the year-ago earnings of 4 cents per share. Profit for the quarter cruised 42% year over year to $4 million (or 6 cents a share) as lowers costs offset a decline in the top line.

For fiscal 2010, adjusted net loss per share of 17 cents was higher than the Zacks Consensus Estimate of a loss of 12 cents. The adjusted loss excludes one-time items including a $6.3 million gain on repurchase of convertible notes.

Revenue Analysis

Revenues for the quarter dipped 4% year over year to $84.9 million, mostly in line with the Zacks Consensus Estimate. Sales were affected by lower product revenues. For the full year, revenues slipped 5% to $310.7 million, yet modestly beating the Zacks Consensus Estimate of $310 million. Revenues in 2010 were hurt by a sluggish scientific services business.

A soft operating backdrop in Europe affected Affymetrix in 2010 as it was hit by lower spending by academic research organizations impacted by government actions (such as budget cuts) to address surging debt levels and weak currencies.

Product revenues for the quarter slid 11% year over year to $71.9 million owing to declines in consumables (down 11.8% to $63.4 million) and instrument revenues (down 6.6% to $8.5 million). DNA and RNA products sales declined 14% and 19%, respectively. On a positive note, service revenues rose 8.5% to $6.4 million while royalties and other revenues climbed roughly three and half fold to $6.6 million.

Margins and Expenses

Gross margin for the quarter declined to 58.1% from 60.6% a year ago as higher costs associated with portfolio review were offset by an increase in margins for array products. Product gross margin fell to 56.1% from 61.3% a year ago. Consolidated costs and expenses fell roughly 7.7% year over year to $79.7 million largely attributable to a 17% decline in selling, general and administrative expenses.

Financial Condition

Affymetrix exited fiscal 2010 with cash and cash equivalents and available for sale securities (short-term) of $102.7 million, down 63% year over year. The company de-leveraged its balance sheet in the quarter having bought back $53 million of its 3.5% convertible notes, which reduced the outstanding convertible debt balance to $95 million from $148.6 million in the previous quarter.

The company generated more than $48 million in operating cash flow during fiscal 2010 (including $23 million in the fourth quarter), representing a five-fold, year-over-year increase. Capital spending for the year declined 24.5% year over year to $7.7 million while free cash flow was roughly $40 million.

Outlook

Affymetrix has not issued any specific revenue and earnings targets for fiscal 2011. However, the company aims to expand gross margin by 200 basis points year over year in 2011 and expects to be cash flow positive through the year. Affymetrix is pursuing a number of strategies (including expansion into new markets) aimed at expanding its top line, representing a top priority in 2011. 

Affymetrix is a leading provider of microarray-based products and services to the global research community. Along with Illumina Inc. (ILMN), it is one of the two major providers of microarray technologies primarily used in the field of genetic research. However, Affymetrix is challenged by competitive product offerings that leverage advanced technologies.

Affymetrix is broadening its customer base through new product introductions and strategic alliances. The company continues to enjoy steady end-user demand for its arrays as evidenced by sustained volume growth over the past few quarters.

The company's Axiom array platform (launched in October 2009) has been a key driver for its DNA business, representing roughly 40% of total volumes in both the fourth quarter and fiscal 2010, boosted by healthy customer demand.

Affymetrix, in January 2011, launched its first high-density rice genotyping test dubbed GeneChip Rice 44K SNP Genotyping Array, designed to offer an affordable, high-quality method to identify rice varieties and explore genetic traits. 

In a major move, Affymetrix recently embarked into an agreement with Fischer Scientific Inc, a unit of Thermo Fisher Scientific (TMO), to distribute the GeneAtlas system, its premium microarray solution, across the U.S. and Canada. The agreement will enable Affymetrix to leverage Fisher Scientific's leadership in the life sciences industry to expand sales in  the research markets.

 
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