AFFX

Affymetrix, Inc. (AFFX)

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Affymetrix (AFFX)

Q1 2011 Earnings Call

April 27, 2011 5:00 pm ET

Executives

Doug Farrell - Vice President of Investor Relations

Kevin King - Chief Executive Officer, President and Director

Timothy Barabe - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Derik De Bruin - UBS Investment Bank

David Clair - Piper Jaffray Companies

Vijay Kumar - Deutsche Bank AG

Jonathan Groberg - Macquarie Research

Quintin Lai - Robert W. Baird & Co. Incorporated

Ramesh Donthamsetty - JP Morgan Chase & Co

Daniel Leonard - Leerink Swann LLC

Marshall Urist - Morgan Stanley

Isaac Ro - Goldman Sachs Group Inc.

Presentation

Operator

Greetings, and welcome to the Affymetrix First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Doug Farrell, VP of Investor Relations for Affymetrix Inc. Thank you, Mr. Farrell, you may begin.

Doug Farrell

Thank you, Scott. Good afternoon, everyone, and welcome to the conference call. At the close of the market today, we released our results for the first quarter of 2011. 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 first quarter. As a reminder, today's call is being recorded, and the audio from the call is being broadcast over the Internet on our homepage at affymetrix.com.

During this call, we may make various remarks about the company's future expectations, plans 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. These risk factors are discussed in Affymetrix's Form 10-K for the year ended December 31, 2010, and other SEC reports. 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.

Now let me turn the call over to Kevin.

Kevin King

Thanks, Doug, and good afternoon, everyone. On our last call, we outlined four business objectives for 2011 that include: a return to revenue growth, including growing revenue and the validation in test markets to 25% of total sales; an improvement in gross margin of 2 points; generating positive cash flow for every quarter; and finally, achieving positive net income for the year.

During today's call, Tim and I will highlight the progress we've been making in Q1 on these objectives. Importantly, the company generated positive net income on roughly $74 million in revenue, as we achieved higher gross margins and lower operating expenses. This is the third consecutive quarter in which we have generated positive net income on a GAAP basis. Total revenue for the quarter was $74 million, down $6 million from last year. Consumables accounted for roughly 85% of Q1 revenues. Our RNA revenue were in line with our forecast of $36.5 million. While RNA array volumes grew over Q1 of last year, revenues were down by 4% due to shift towards lower cost products as well as a 50% increase in our rate plate volumes over last year. We generated year-over-year RNA volume increases and several key product lines, including IVT, gene level, microRNA and reagent products. In Q1, we introduced the new version of our microRNA array that includes this coverage of genome microRNA and allows users who still accelerate their identification of biomarkers and gene expression signatures associated with disease. This new array design doubles the contents of the prior version and offers the broadest coverage of known miRNA in the industry. The contribution from this new product helped increase miRNA revenue in Q1 by about 60% over last year.

During the quarter, a number of key scientific publications and editorial comments highlighted the major role that arrays considered to play in understanding gene function and gene regulation. These scientific papers emphasized array data accuracy, reliability, cost effectiveness and high throughput capability. For instance, a team led by Ron Davis at the Stanford Genome Technology Center, compared a custom Affy exon array to next-generation sequencing for understanding gene expression and Genome 1 identification of alternative splicing as well as infecting coding snips and non-coding transcripts. The performance of the array was examined and compared with miRNA sequencing, or RNA-Seq, over multiple independent replicate samples, and the results were published in February in the proceedings of the National Academy of Science.

To achieve comparable levels of sensitivity, the sequencing experienced cost 10x more than arrays and took much longer to complete. Even at that increased level of effort, the array had higher levels of sensitivity at the exon level. Even deeper sequencing will be required to address low abundance transcripts as well as the array did. The array has already been implemented in a multi-center clinical program involving thousands of samples, and as the author states, this platform is anticipated to have a wide range of applications and high throughput clinical studies. We believe the market for RNA arrays continues to be helping despite financial communities' concerns over potential displacement by new sequencing technologies.

In the DNA segment of our business, revenue was down $2.2 million in Q1 compared to last year, driven by continued softness in the GWAs market. As we've noted, the second wave of GWAs is largely dependent on publicly available information about rare genetic variance with frequencies below 5%. Over the past several quarters, the 1000 Genomes Project and Affymetrix had made this information available to the research community, and with this new content, researchers have begun to define and request funding for new disease and population studies.

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