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Global genetic devices maker, Affymetrix Inc. (AFFX - Analyst Report) posted adjusted earnings per share of 5 cents in the third quarter of 2013, surpassing the Zacks Consensus Estimate of 2 cents and rebounding from the year-ago adjusted loss of 3 cents. Reported net loss in the quarter was $4.2 million or 6 cents per share, narrower than the year-ago net loss of $17.9 million or 25 cents.

Revenues inched up 0.9% to $80.4 million, beating the Zacks Consensus Estimate of $79 million. Product revenues improved 2.9% to $74.8 million, while Service and other revenues dropped 18.8% to $5.6 million in the reported quarter.

Product revenues included consumable sales of $52.1 million, up 3.2%, and instrument sales of $2.8 million, down 39.1% from the prior-year quarter. Revenues from the acquired eBioscience unit increased 13.1% to 19.9 million in the quarter.

Gross margin surged 300 basis points (bps) to 55% from 52% in the third quarter of 2012. However, on an adjusted basis, gross margin increased 100 bps to 61%.

Selling, general and administrative (SG&A) expenses decreased 7.2% to $33.7 million, and research and development (R&D) expenses fell 30.3% to about $11.5 million. As a result, AFFX’s reported operating expenses were down 14.6% to $45.1 million.

On an adjusted basis, operating expenses declined 8.9% to $41.9 million, mainly due to reduced headcount and lower variable compensation expenses following the company’s restructuring initiatives. Moreover, one-time acquisition- and integration-related costs incurred in 2012 led to the year-over-year fall in expenses.

Financial Condition

Affymetrix ended the third quarter of 2013 with cash and cash equivalents of $50.2 million, almost two-fold increase from $25.7 million at the end of 2012. On an encouraging note, the company generated roughly $10.5 million in cash flow from operations due to higher revenues and controlled operating expenses, combined with efficient working capital management. In addition, AFFX reduced senior-secured debt by almost 45% since June 2012.

Recent Developments

In October, Affymetrix divested its Anatrace product line to StoneCalibre. The company used the proceeds as well as cash-on-hand to reduce outstanding senior-secured debt.

In the same month, AFFX also refinanced $48 million of its remaining senior-secured debt on revised terms including lower interest rate margins. As of Oct 25, 2013, the company’s cash-on-hand exceeded the principal amount of its senior-secured debt.

Our Take

This was the second 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 last quarter. AFFX’s strategic restructuring plans are finally paying off as demonstrated by its bottom-line growth.

We believe that Affymetrix is ready for a turn around and the worst days are over for the company. In the face of declining demand for Affymetrix’s flagship GeneChip Expression products, management 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 indeed encouraging. Additionally, the company’s restructuring and debt reduction efforts should boost margins and profitability going forward.

However, we are cognizant regarding AFFX’s flattish top-line growth. A tight U.S. academic funding environment and increasing pricing pressure along with operational hazards in Japan remain potential headwinds. Moreover, declining R&D spending raises concerns over future product development and growth for the company.

Currently, Affymetrix has a Zacks Rank #4 (Sell). While we prefer to avoid AFFX at present, companies like Isis Pharmaceuticals, Inc. (ISIS - Analyst Report), AMAG Pharmaceuticals, Inc. (AMAG - Snapshot Report) and Actelion Ltd. (ALIOF), all carrying a Zacks Rank #1 (Strong Buy), are expected to do well in the Medical-Biomed/Gene industry.

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