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Global genetic devices maker, Affymetrix Inc.’s (AFFX - Analyst Report) reported earnings for the first time since the first quarter of 2011. The company posted adjusted earnings per share of 4 cents in the second quarter of 2013 versus the Zacks Consensus Estimate of a loss of a penny and the year-ago adjusted loss of 13 cents.

AFFX’s strategic restructuring plans are finally paying off as demonstrated by the bottom-line growth. Moreover, the acquisition of eBioscience has opened new avenues for Affymetrix and turned its focus away from the beleaguered Gene Expression business.

Reported net loss in the quarter was $6.1 million (or 9 cents per share) versus a net income of $23.6 million (or 33 cents) in the previous-year quarter.

Revenues

Revenues increased 19.7% year over year to $79.5 million (including the eBioscience acquisition). eBioscience, which AFFX acquired in Jun 2012, contributed $18.8 million to total revenue in the second quarter. Revenues were almost in line with the Zacks Consensus Estimate.

On a combined pro forma basis (including eBioscience), revenues from products were down 1.7% year over year to $74.2 million in the quarter. Product revenues included consumable sales of $51.2 million, down 3.9%, and instrument sales of $4.2 million, up 10.5% from the prior-year quarter.

Revenues from the acquired eBioscience unit increased significantly to $18.8 million in the quarter compared to $1.4 million in the year-ago period. However, Services and other revenues plunged 32.9% to $5.3 million in the quarter.

Margins

Gross margin for the second quarter declined 500 basis points (bps) to 53% from 58% in the second quarter of 2012. However, on an adjusted basis, gross margin increased 100 bps to 60%.

Selling, general and administrative (SG&A) expenses decreased 17.3% to $33.5 million, mainly due to the company’s restructuring plans, headcount reduction and lower IT spending. Research and Development (R&D) expenses fell 11.8% to about $12 million, due to reduced headcount and variable compensation expenses along with lower spending on supplies and consulting.

Operating expenses were $45.1 million in the quarter, down 16.6% from the year-ago level of $54.1 million. Adjusted operating expenses were down 12.8% to $42.1 million, driven by restructuring and headcount reduction. Reported loss from operations was roughly $3 million, significantly down from a loss of $15.4 million in the prior-year quarter.

Financial Condition

Affymetrix ended the second quarter of 2013 with cash and cash equivalents of $43.7 million versus $25.7 million at the end of 2012. On an encouraging note, the company generated roughly $10.3 million in cash flow from operations in the quarter due to higher revenues and reduced senior-secured debt by 25% year over year.

Recent Developments

In the quarter, Affymetrix launched a new product, Axiom 384HT Genotyping Format, a high-throughput platform capable of genotyping 384 samples simultaneously and run on the GeneTitan Instrument. The company also made changes in its top management with the appointment of Gavin Wood as the Executive Vice President and Chief Financial Officer.

Our Take

We are impressed with Affymetrix’s strong second-quarter results, following a dismal first quarter. Following the announcement of the results, the company’s share price surged 16.3% to close at $4.42 on Friday, Aug 2.

We believe that Affymetrix is ready for a turnaround and the worst days are over for the company. In the face of declining demand for Affymetrix’ flagship GeneChip Expression products, management's strategy to transform AFFX into a company with a broad reach in the high-growth markets for translational medicine, molecular diagnostics and applied markets is encouraging.

Despite a tight U.S. academic funding environment, new products and strategic agreements should propel growth, going forward. Additionally, the company’s restructuring and debt reduction efforts should boost margins and profitability.

Currently, AFFX has a Zacks Rank #1 (Strong Buy). Other companies like Biogen Idec , Gilead Sciences (GILD - Analyst Report) and Actelion (ALIOF), all carrying a Zacks Rank #1 (Strong Buy), are also expected to do well in the Medical-Biomed/Gene industry.
 

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