AFFX Affymetrix, Inc.

Genetic products maker Affymetrix Inc’s (AFFX) fourth-quarter fiscal 2011 loss per share of 21 cents was higher than the Zacks Consensus Estimate of a loss of 7 cents. The California-based company recorded a loss of $14.7 million in the quarter compared with a profit of $4 million (or 6 cents a share) a year ago as it saw a double-digit decline in its top line.

For the fiscal, loss per share of 40 cents was also higher than the Zacks Consensus Estimate of a loss of 17 cents. Losses nearly tripled year over year to $28.2 million.

Revenues

Revenues for the quarter slid 23.3% year over year to roughly $65.1 million, trailing the Zacks Consensus Estimate of $66 million. Sales were hurt by declines across the board, largely on account of lower product revenues which clipped 18.4% year over year to $58.7 million.

Affymetrix saw declines across consumables (down 13% to $54.8 million) and instrument (down 55% to $3.8 million) sales in the fourth quarter. DNA and RNA revenues dipped 13% and 14%, respectively.

Service revenues skid 20.2% year over year to $5.1 million. Royalties and other revenues plummeted 80% to roughly $1.3 million.

For the full year, sales dipped 13.9% year over year to $267.5 million, also missing the Zacks Consensus Estimate of $268 million.

Margins and Expenses

Gross margin declined to 53.3% in the quarter from 58.1% a year ago, hurt by volume absorption and unfavorable mix. Product gross margin fell to 54.1% from 56.1% in the prior-year quarter.

Consolidated costs and expenses declined 4.8% year over year to $75.9 million in the quarter. R&D expenses rose 8% while selling, general and administrative expenses were essentially flat year over year at $28 million.

Balance Sheet and Cash Flows

Affymetrix exited fiscal 2011 with cash and cash equivalents and available for sale securities (short-term) of $209.9 million, a more than double year-over-year increase. Outstanding convertible debt was roughly $95.5 million, flat year over year. The company generated operating cash flows of roughly $40 million during the fiscal (including $6 million in the fourth quarter).

Guidance

Moving ahead, Affymetrix expects flat-to-low, single-digit growth in revenues in fiscal 2012 and expects sales to pick up in the back half of the year. The company forecasts operating expenses in the range of $167 million to $170 million and capital spending between $7 million and $10 million for the year. Moreover, free cash flows is expected in the band of $10 million to $15 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 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 fourth quarter, Affymetrix inked a Memorandum of Understanding (“MOU”) with leading genomics center “BGI” to co-develop and commercialize microarrays for genotyping analysis. The collaboration will aim at developing and marketing a range of plant, crop, and livestock microarrays in an effort to broaden the use of molecular tools in agriculture. Moreover, Affymetrix signed an exclusive licensing agreement with Genisphere, under which, it will use Genisphere’s proprietary FlashTag reagents with its miRNA GeneChip arrays.

Affymetrix has also taken up various steps to stabilize its expression business which accounts for roughly 45% of its sales. Moreover, the company expects its genetic analysis and clinical diagnostic business (35% of sales) to grow at least 20% in 2012, driven by its cytogenetics program and increased traction of its Axiom genotyping platform.

However, Affymetrix is operating in an intensely competitive industry and faces risks associated with lower R&D spending by its customers due to a soft economy and government actions including budget cuts. We are currently Neutral on Affymetrix, which is in line with a short-term Zacks #3 Rank (Hold).

 
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