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Affymetrix Inc. (AFFX - Analyst Report) posted adjusted earnings of $1.9 million or 3 cents per share in the first quarter of 2014 in contrast to a loss of $0.9 million or 1 cent a share in the same quarter of 2013. Adjusted earnings per share beat the Zacks Consensus Estimate by a penny.

Reported net loss was $10.5 million or 14 cents per share compared with a net loss of $15.4 million or 22 cents per share in the first quarter of 2013.

Revenues

Revenues increased 6.4% to $83.0 million from $77.9 million in the prior-year quarter, edging past the Zacks Consensus Estimate of $81 million. After adjusting for the divestiture of the company's Anatrace product line last quarter, total revenue grew by 8.6%. Revenue growth was driven by strong sales in the Genetic Analysis and eBioscience business units as well as improved Expression performance.

Product revenues improved 2.9% year over year to $73.7 million, while Service and other revenues surged 45.2% to $9.3 million in the reported quarter.

Product revenues included consumable revenues of $69.9 million, up 2.6%, and instrument revenues of $3.8 million, up 11.8% from the prior-year quarter. Service and other revenues include field and scientific services revenues of $8.8 million and royalties and other revenues of $400,000.

Business Units

Revenues from Genetic Analysis, which includes both the cytogenetics and genotyping product lines, grew by approximately 36% over the prior year. Cytogenetic revenues increased by more than 25% over the prior year driven by the company’s expanding customer base in all geographies and higher sales in the existing accounts, whereas genotyping products and services augmented by 32% in the quarter.

Revenues from the eBioscience business unit grew 7% in the quarter. Revenue growth was driven by expansion in the eBioscience single-cell analysis portfolio, contribution from new products and strategic investment in the eBioscience sales team.

The Life Science Reagents business unit, which comprises molecular biology and biochemistry product lines, was up 2% over the prior year after adjusting for the Anatrace product line divestiture in the previous quarter.

The Gene Expression business unit delivered healthy performance in the quarter as the shift toward newer growing product lines helped Affymetrix significantly reduce the rate of decline in the Expression business, over the prior year.

Margins

Reported gross profit rose 16.4% to $46.6 million while reported gross margin expanded 480 basis points (bps) to 56.1% in the quarter. Adjusted gross profit rose 10.6% to $50.8 million while adjusted gross margin went up 200 bps to 61% in the quarter.

Selling, general and administrative (SG&A) expenses spiked 9.8% to $38.6 million. The increase was primarily due to high litigation costs, higher variable and stock-based compensation costs as well as some incremental headcounts in the commercial organization.

On the other hand, research and development (R&D) expenses fell 5.0% to $11.6 million in the quarter due to lower costs related to reduced headcount and the timing of certain projects.

Reported operating expenses climbed 5.9% to $55.3 million while adjusted operating expenses rose 8.2% to $47.2 million. The increase was primarily due to higher variable compensation cost and legal costs associated with the company’s ongoing litigation.

Financial Position

Affymetrix ended the quarter with cash and cash equivalents of $57.7 million, which grew 51.1% from $38.2 million as of Mar 31, 2013. The net debt payment of $3.2 million during the first quarter resulted in net debt balance of $36.3 million as of Mar 31, 2014.

Guidance

Affymetrix reaffirmed its previously announced revenue and EBITDA guidance for 2014. The company expects to generate revenues of $335 million, almost in line with the current Zacks Consensus Estimate of $336 million. The company also expects EBITDA margin in the range of 12 to 13%.

Our Take

We are impressed with Affymetrix’s first-quarter adjusted earnings and revenue beat. This was the fourth 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 turned around to report earnings in the second quarter of 2013.

Affymetrix’s strategic restructuring plans to generate consistent growth and sustained profitability are finally paying off as demonstrated by its bottom-line growth. Its businesses are improving in both Europe and North America along with excellent growth in China. However, it continues to face challenges in Japan due to operational hazards.

Zacks Rank

Currently Affymetrix retains a Zacks Rank #2 (Buy). Other players in the biomedical/gene industry include Alexion Pharmaceuticals, Inc. (ALXN - Analyst Report), Gilead Sciences Inc. (GILD - Analyst Report) and Myriad Genetics Inc. (MYGN - Analyst Report). All three stocks sport a Zacks Rank #1 (Strong Buy).
 

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