AFFX Affymetrix, Inc.

Affymetrix Inc. (AFFX), a global genetic products company, reported first quarter fiscal 2012 adjusted (excluding one-time expenses) loss of 6 cents per share, better than the Zacks Consensus Estimate of a loss of 9 cents a share and lower than the year-ago breakeven situation.

Loss in the reported quarter was $4.2 million (or loss of 6 cents per share) versus a profit of $0.04 million in the year-ago quarter, primarily due to lower sales.

Revenues

Revenues dropped 11.5% year over year to $65.2 million, marginally ahead of the Zacks Consensus Estimate of $65 million. Sales dropped mainly due to poor consumable sales.

Revenues from products dipped 13.3% year over year to $58.5 million in the first quarter, which included consumable sales of $53.7 million, down 14.6%. However, instrument sales inched up 2.2% to $4.7 million. Services and other revenues improved 9.7% year over year to $6.8 million.

Margins

Gross margin fell to 58.1% in the quarter from 63.2% a year ago, hurt by lower sales. This was partially offset by lower warranty expense and a decline in excess and obsolescence costs in inventory. Product gross margin declined to 59.7% from 64.6% in the prior-year quarter.

Operating loss was $3.4 million in the quarter compared with an income of $3.1 million, a year-ago. Selling, general and administrative (SG&A) expenses were 42.8% of sales versus 36.9% in the year-ago quarter. Research and Development (R&D) expenses, as a percentage of sales, fell slightly to 20.4% from 22.1% in the year-ago period.

Balance Sheet

Affymetrix ended first quarter 2012 with cash and cash equivalents and available for sale securities (short-term) of $119.2 million, up 45.7% year over year. There were no outstanding convertible notes at the end of the quarter.

Our Take

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 holds a leading position in the gene expression products and services market.

Affymetrix is expanding its customer base through new product launches and strategic alliances. Moreover, the company is pursuing a number of strategies (including expansion into new markets) aimed at expanding its top line. The company entered into a deal with pharma services major, Almac Group Ltd.in the reported quarter to distribute Almac’s Xcel microarray products globally.

Affymetrix is shifting its R&D focus from discovery and exploration markets to the faster-growing validation and routine testing markets. The company reckons cytogenetics and cancer research as promising areas for expansion, representing market opportunities of roughly $200 million and $500 million, respectively.

The company has realigned its operation into a number of business units including gene expression, genetic analysis, life science reagents and clinical diagnostics. The structural changes are expected to streamline its decision-making process while improving customer focus and accountability.

Affymetrix has also taken up various steps to stabilize its expression business. Moreover, the company expects its genetic analysis and clinical diagnostic business to grow briskly in 2012, driven by its cytogenetics program and increased traction of its Axiom genotyping platform. The company recently launched its Axiom Exome Genotyping Arrays in the market.

We are also encouraged by the company’s move to buy privately-held eBioscience, a global leader in immunology and oncology flow cytometry reagents. The acquisition will significantly boost its foothold in the fast-growing immunology, oncology and translational medicine markets, representing an annual opportunity nearing $3 billion.

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.

Affymetrix is exposed to a volatile funding environment. The company has been beset by uncertainties surrounding National Institutes of Health (“NIH”) funding. Decline in government research grants may substantially affect the company’s revenues.

 
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