AFFX

Affymetrix, Inc. (AFFX)

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Affymetrix, Inc. (AFFX)

Q4 2010 Earnings Call Transcript

February 2, 2011 5:00 pm ET

Executives

Doug Farrell – VP, IR

Kevin King – President and CEO

Tim Barabe – CFO and EVP

Analysts

Quintin Lai – Robert W. Baird

Jon Groberg – Macquarie

Ross Muken – Deutsche Bank

Neha Sahni – Morgan Stanley

Brigham Hyde – Cowen & Company

Dan [ph] – UBS

Dan Leonard – Leerink Swann

Jeff [ph] – Goldman Sachs

Evan Morris [ph] – JPMorgan

Presentation

Operator

Greetings and welcome to the Affymetrix fourth quarter conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Doug Farrell, Vice President of Investor Relations for Affymetrix. Thank you, Mr. Farrell. You may begin.

Doug Farrell

Hi. Good afternoon, everyone, and thanks for joining us for the call. At the close of the market today, we released our results for the fourth quarter and fiscal year 2010. Joining me on the call today is our CEO, Kevin King, who will provide a commercial and operational update, followed by our CFO, Tim Barabe, who will provide a detailed review of our financial results for the fourth quarter as well as the full year. As a reminder, today's call is being recorded and the audio from the call is being webcast over our homepage at affymetrix.com.

During this call, we may make various remarks about the company's future plans, expectations, and prospects that constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially for Affymetrix from those projected.

These risk factors are discussed in Affymetrix's Form 10-K for the year ended December 31, 2009 and other SEC reports, including our quarterly reports on Form 10-Q for subsequent periods. We encourage you to review these documents carefully, as forward-looking statements are made as of today's date and we make no obligation to update this information.

So with that, let me turn the call over to Kevin.

Kevin King

Thanks, Dough. And good afternoon, everyone. I’ll begin my comments with an overview of our 2010 operating results and discuss the progress we are making in executing to our growth strategy within the markets of validation and testing. I’ll then turn the call over to Tim for a detailed review of our operating results.

In 2010, we made substantial progress in improving the fundamental of our business as measured by return to profitability for the second half of the year, annual free cash generation of more than $40 million, and double-digit growth within our strategic target markets of routine testing and validation. While we achieved good success in these areas, our overall revenues declined driven by a major slowdown in scientific services and lower than expected sales within the discovery segment of our business. Clearly, our number one priority for the future is driving top line revenue growth.

On the discovery side of the business, we continue to see strong demand for our products from both academic and pharma customers as measured by sustained double-digit volume increases throughout the year. That said, total revenues within the discovery markets were down approximately 5% over the prior year, as the adoption of lower priced products increased as a percent of total mix. This change in mix has occurred in both RNA and DNA and includes increased adoption of our array plate formats.

Despite lower revenues, we did generate higher gross margins in percentage terms and in absolute dollars. This was achieved through a combination of lower manufacturing costs spread across a higher volume base relative to the prior year. Within discovery, we believe that the customer sensitivity to price-volume changes will play well for the business as we focus on continuously improving our cost position and expanding our distribution reach into the marketplace.

As you know, we have been executing to a strategy that diversified our products and revenues into the large and high growth markets as cytogenetics, cancer testing, and the research in clinical validation markets. Our focus on these areas in 2010 resulted in double-digit revenue increases, and approximately 20% of our revenue came from these segments, an increase of approximately 12% over last year.

New product introductions remain an important part of our growth strategy, so now I’ll take a few minutes to give you an update on the trends that we are seeing, beginning with consumables. We’ve significantly expanded the range of our consumable products, beginning with whole genome and targeted assays on our GeneChip technology, spanning down into low plex and single molecule detection systems.

DNA, we had a successful first year of Axiom commercialization with rapid growth of the product to about 40% of our total DNA volumes in both the fourth quarter and throughout the year. Customer demand was driven by the assays’ outstanding performance and a platform’s unique ability to create customized offerings from 50,000 markers to 2.5 million markers per sample. About half of Axiom volumes in 2010 were custom designs.

Axiom is a powerful platform that enables rapid creation of new designs. For example, we recently introduced an important new product in the $500 million per year Ag-bio market. The Axiom BOS 1 Array, which was developed in conjunction with the Affymetrix Bovine Consortium of leading breeders and researchers worldwide, provides 35% higher genetic coverage than current alternative arrays.

Read the rest of this transcript for free on seekingalpha.com