Affymetrix Sees Turnaround Quarter but Earnings Miss

Global genetic devices maker, Affymetrix Inc. (AFFX) posted adjusted earnings of $2.2 million or 2 cents per share in the fourth quarter of 2013 in stark contrast to a loss of $1.3 million or 2 cents a share in the same quarter of 2012. However, earnings failed to meet the Zacks Consensus Estimate of 7 cents per share.

Reported earnings were $9.4 million or 10 cents per share in the quarter compared with a loss of $12.3 million or 17 cents per share in the fourth quarter of 2012. The turnaround result was caused by increase in revenues and decrease in costs and expenses during the quarter.

Revenues increased 9.8% to $92.6 million, beating the Zacks Consensus Estimate of $86 million. Product revenues improved 7.5% to $82.1 million, while Service and other revenues surged 32.1% to $10.5 million in the reported quarter.

Product revenues included consumable sales of $57.6 million, up 8.5%, and instrument revenues of $4.0 million, down 23.1% from the prior-year quarter. Revenues from the acquired eBioscience unit increased 13.3% to $20.5 million in the quarter. Service and other revenues include field and scientific services revenues of $4.6 million and royalties and other of $600,000.

Full Year Earnings and Revenues

For full year 2013, Affymetrix revealed adjusted earnings of $7.4 million or 10 cents per share compared with a loss of $15.0 million or 21 cents per share a year ago. With this, earnings per share lagged the Zacks Consensus Estimate of 14 cents. Revenues in the year went up 11.8% to $330.4 million, surpassing the Zacks Consensus Estimate of $323 million.

Product revenues grew 13.7% to $302.6 million. It included consumable sales of $210.0 million, which was almost flat year-over-year; and instrument revenues of $14.4 million, down 21.7% from the prior-year. Revenues from the acquired eBioscience unit more than doubled to $78.2 million in the year.

Margins

Reported gross profit rose 21.8% to $55.0 million while reported gross margin rose 500 basis points (bps) to 59% in the quarter. Adjusted gross profit rose 5.3% to $54.0 million while adjusted gross margin went up 100 bps to 62% in the quarter.

For full year 2013, reported gross profit rose 10.7% to $181.0 million while reported gross margin was flat at 55%. Adjusted gross profit rose 10.7% to $196.0 million while adjusted gross margin was also flat at 60% in the year.

Selling, general and administrative (SG&A) expenses increased 2.7% to $39.1 million. The increase was attributable to higher variable compensation, partially offset by lower headcount related compensation costs and IT spending. For the full year 2013, SG&A expenses slid about 1.0% to $141.4 million (including $36.8 million for eBioscience) due to lower costs related to reduced headcount, lower facility costs and decreased spending on consulting, partially offset by higher variable compensation costs.

Research and development (R&D) expenses fell 17.1% to $12.0 million in the quarter due to lower costs related to reduced headcount, lower IT costs and reduced spending on supplies and consulting, along with timing on certain projects. For the full year, R&D expenses dropped 17.6% to $47.7 million, driven by low spending of supplies, consulting, IT facilities, and lower headcount related costs.

Reported operating expenses declined 6.0% to $51.1 million, while adjusted operating expenses slipped 1.3% to $47.9 million mainly due to lower headcount following the restructuring announced on Jan 11, 2013 and due to non-recurring acquisition- and integration-related costs in 2012, partially off-set by higher variable compensation expenditure. For the full year, reported operating expenses fell 4.4% to $193.6 million while adjusted operating expenses dipped 4.5% to $175.5 million.

Financial Position

Affymetrix ended 2013 with cash and cash equivalents of $57.1 million, which more than doubled from $25.7 million as of Dec 31, 2012. The net debt payment of $33.8 million resulted in net debt balance of $39.5 million as of Dec 31, 2013. Cash flow from operation was $65.4 million in the year.

Guidance

In 2014, Affymetrix expects to generate revenues of $335 million, which is higher than the current Zacks Consensus Estimate of $330 million. The company also expects EBITDA margin in the range of 12 to 13%.

Recent Developments

In January, Affymetrix received 510(k) clearance from the U.S. Food and Drug Administration (:FDA) to market its CytoScan Dx Assay. The CytoScan assay is intended for the postnatal detection of DNA copy number variants in patients who required chromosomal testing. It is designed to help physicians diagnose children's developmental and intellectual disabilities more comprehensively by enabling a high-resolution genome-wide analysis of genetic aberrations.

In the same month, Affymetrix also entered into collaboration with the University of Bristol in U.K. to design a wheat genotyping array and to analyze the data from experiments, aimed at understanding wheat genetics and breeding with a goal of ensuring guaranteed sustainable production.

Our Take

We believe that Affymetrix is ready for a turn around and the worst days are over for the company. This was the third consecutive quarter in which Affymetrix was able to maintain its earnings momentum. The company had been posting losses since the first quarter of 2011, until it reported earnings in the 2013-second quarter.

AFFX’ strategic restructuring plans are finally paying off as demonstrated by its bottom-line growth. Its businesses are improving in Europe, China and North America, while Japan remained challenged due to operational hazards.

Currently, Affymetrix has a Zacks Rank #2 (Buy). Other players in the biomed/gene industry include Alexion Pharmaceuticals, Inc. (ALXN), Biogen Idec Inc. (BIIB), and Cambrex Corporation (CBM). All of these carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ALXN
Read the Full Research Report on AFFX
Read the Full Research Report on BIIB
Read the Full Research Report on CBM


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