AFFX Affymetrix, Inc.

Genetic products maker Affymetrix Inc’s (AFFX) third-quarter fiscal 2011 adjusted (excluding one-time items such as impairment charges and provision for note receivable) loss per share of 10 cents was higher than the Zacks Consensus Estimate of a loss of 4 cents.

On a reported basis, the California-based company posted a loss of $9.8 million (or 14 cents a share) compared with a profit of $1 million (or a penny a share) a year ago as it saw a double-digit decline in sales. Moreover, the year ago quarter’s results were boosted by a $4.1 million gain from repurchase of convertible notes.   

Revenues

Revenues skid 13.5% year over year to roughly $64 million, also missing the Zacks Consensus Estimate of $66 million. Sales were hurt by lower product revenues which tumbled 15.3% year over year to $57 million.

Product revenues fell year over year as the company witnessed declines across consumables (down 14.4% to $52.9 million) and instrument (down 24.1% to $4.1 million) sales. DNA and RNA revenues dipped 4% and 21.6%, respectively.

Service revenues rose 8.2% year over year to $5.3 million. Royalties and other revenues fell 5.6% to roughly $1.7 million.

Margins and Expenses

Gross margin rose to 56.8% from 54.7% a year ago, benefiting from lower material costs and favorable mix. Product gross margin improved to 57% from 56% in the prior-year quarter.

Consolidated costs and expenses declined 8% year over year to $69.9 million. R&D expenses declined 5.2% while selling, general and administrative expenses rose modestly in the quarter.

Balance Sheet and Cash Flows

Affymetrix exited the quarter with cash and cash equivalents and available for sale securities (short-term) of $85.8 million, down roughly 29% year over year. Outstanding convertible debt reduced 36% year over year to roughly $95.5 million. The company generated operating cash flows of roughly $11.5 million in the quarter with free cash flows of $10 million.

Neutral on Affymetrix

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.

Affymetrix is broadening its customer base through new product launches and strategic alliances. The company continues to enjoy steady end-user demand for its arrays.

Affymetrix is pursuing a number of strategies (including expansion into new high-growth markets including cytogenetics and cancer) aimed at expanding its top line. The company reckons cytogenetics and cancer research as promising areas for expansion, representing market opportunities of roughly $200 million and $500 million, respectively.

During the third quarter, Affymetrix unveiled the innovative Cytoscan HD platform for cytogenetic analysis. Moreover, the company recently launched 18 new microarrays geared for gene expression analysis of model and applied research organisms. The new arrays will enable researchers to obtain a more complete gene expression view than conventional arrays.

Also, Affymetrix broadened its Axiom genotyping platform with the launch of the Axiom Genome-Wide Pan-African Array for studying diseases and characterizing the genetic basis of diseases in Africans and African Americans.

Moreover, Affymetrix realigned its operation during the quarter into a number of business units including gene expression, genetic analysis, life science reagents and clinical diagnostics. The company noted that the structural changes will streamline its decision-making process while improving customer focus and accountability.

However, Affymetrix is operating in an intensely competitive industry and faces risks associated with lower R&D spending by its customers, notably in Europe, due to a weak economy and government actions including budget cuts. We currently have a Neutral rating on the stock.

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