Affymetrix Down despite Q2 Earnings and Revenues Beat

Affymetrix Inc. (AFFX) posted an impressive 75% rise in adjusted earnings per share to 7 cents for the second quarter of 2014 from 4 cents in the same quarter a year ago and also surpassed the Zacks Consensus Estimate of 3 cents.

Adjusted earnings grew 85.1% to $5.2 million from $2.8 million in the second quarter of 2013. On a reported basis, Affymetrix posted a net loss of $0.9 million or a penny per share, significantly narrower than the year-ago loss of $6.1 million or 9 cents per share.

However, the results failed to impress investors as shares of the company fell roughly 2.4% post the earnings release to close at $8.39 in the last trading session.

Affymetrix, Inc - Earnings Surprise | FindTheBest

Revenues

Second-quarter revenues spiked 7.5% to $85.4 million and edged past the Zacks Consensus Estimate of $83 million. The upside was driven by strength in the company’s Genetic Analysis business unit.

Product revenues improved 2.3% year over year to $75.9 million, while Service and other revenues surged 80.4% to $9.6 million in the reported quarter.

Product revenues included consumable revenues of $72.6 million, up 3.7%, while instrument revenues of $3.3 million were down 21.4% from the prior-year quarter. Service and other revenues include field and scientific services revenues of $8.6 million and royalties and other revenues of about $500,000.

Business Units

Revenues from Genetic Analysis, which includes both the cytogenetics and genotyping product lines, grew nearly 45% over the prior-year quarter. Cytogenetic revenues increased approximately 14% driven by the company’s expanding customer base across all geographies and higher sales in the existing accounts. Meanwhile, genotyping products and service revenues escalated 75% in the quarter.

Revenues from the eBioscience business unit grew about 5% in the quarter. The revenue growth was driven by expansion in the eBioscience flow cytometry based single-cell analysis portfolio and contribution from new products.

The Life Science Reagents business unit, which comprises molecular biology and biochemistry product lines, reported revenues in line with the prior-year level after adjusting for the Anatrace product line divestiture in Oct 2013.

The Gene Expression business unit revenues declined approximately 16% during the quarter. Gene Expression revenues represented about 20% of the total revenue, lower than 26% in the second quarter of 2013.

Margins

Adjusted gross profit rose 8.3% year over year to $52.0 million while adjusted gross margin went up 100 basis points (bps) to 61% in the quarter.

Selling, general and administrative expenses spiked 8.2% to $36.3 million. The increase was mainly due to high litigation costs, higher variable and stock-based compensation costs as well as some incremental headcounts in the commercial organization.

Research and development expenses rose 7.7% to $12.9 million in the quarter owing to costs associated with the development of Affymetrix’s next-generation instrumentation.

Adjusted operating expenses climbed 9.9% to $46.2 million. The increase was primarily due to higher variable compensation and legal costs associated with the company’s ongoing litigation filings.

Consequently, adjusted earnings declined 3.0% to $5.8 million whereas adjusted operating margin contracted 80 bps to 6.7% from 7.5% in the second quarter of 2013.

Financial Position

Affymetrix ended the quarter with cash and cash equivalents of $51.5 million, down 9.9% from $57.1 million as of Dec 31, 2013. Senior debt stood at $25.0 million, down 36.8% from $39.5 million as of Dec 31, 2013.

Guidance

Affymetrix upgraded its previously announced revenue and EBITDA guidance for 2014. The company expects to generate revenues of $340 million, in line with the current Zacks Consensus Estimate. The company also projects EBITDA margin in the range of 14 to 15%.

Our Take

We are impressed with Affymetrix’s second-quarter adjusted earnings and revenue beat as well as raised revenue and EBITDA guidance for 2014. Affymetrix’s strategic restructuring plans to generate steady growth and sustained profitability are finally paying off as demonstrated by its top and bottom-line growth.

Consistent performance across the business and strong growth in the Genetic Analysis business unit continue to boost revenues. Affymetrix also exited the quarter with a strong financial position as indicated by reduced outstanding debt.

However, the company needs to contain its operating expenses and litigation costs which impacted operating earnings and margins considerably during the second quarter.

Currently, Affymetrix carries a Zacks Rank #3 (Hold). Better-ranked stocks in the biomedical/gene industry include Actelion Ltd. (ALIOF), China Biologic Products, Inc. (CBPO) and Enzo Biochem Inc. (ENZ). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ALIOF
Read the Full Research Report on AFFX
Read the Full Research Report on ENZ
Read the Full Research Report on CBPO


Zacks Investment Research