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Executives

Frank Witney - Chief Executive Officer, President and Director

Doug Farrell - Vice President of Investor Relations

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

Analysts

Bryan Brokmeier - Maxim Group LLC

Zarak Khurshid - Wedbush Securities Inc.

William Quirk - Piper Jaffray Companies

Dane Leone - Macquarie Research

Nandita Koshal - Barclays Capital

Ross Muken - Deutsche Bank AG

Quintin Lai - Robert W. Baird & Co. Incorporated

Ramesh Donthamsetty - JP Morgan Chase & Co

Daniel Arias - UBS Investment Bank

Daniel Leonard - Leerink Swann LLC

Sung Ji Nam - Gleacher & Company, Inc.

Isaac Ro - Goldman Sachs Group Inc.

Doug Schenkel - Cowen and Company, LLC

David Ferreiro - Oppenheimer & Co. Inc.

Affymetrix (AFFX) Q2 2011 Earnings Call July 27, 2011 5:00 PM ET

Operator

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

Doug Farrell

Thank you. Good afternoon, and welcome to the conference call. At the close of the market today, we released our operating results for the second quarter. Joining me on the call today is our President and CEO, Frank Witney; as well as our CFO, Tim Barabe. As a reminder, today's call is being recorded and the audio from the call is being webcast over the Internet on our home page 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 the 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, 2010, and other SEC reports including our prior period quarterly report on Form 10-Q. 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 introduction, let me turn the call over to Frank.

Frank Witney

Thanks, Doug, and good afternoon, everyone. I'm very excited to be back at Affymetrix and to have this opportunity to speak with all of you today. I've had the pleasure of getting to know many of you over the years, and those that I haven't, I look forward to getting to know you.

I'd like to start off by saying I've only been the CEO here for a few weeks now, so it would be premature to lay out all the details of our strategic plan and thinking. Over the next couple of quarters, I intend to detail our goals, milestones and overall vision. For today, I'll provide you with some of my initial perspectives on the company. As you know, we preannounced that our second quarter revenue fell meaningfully short of expectations. These results combined with other recent misses requires to take a long hard look at how we are operating our business to identify how we can improve our visibility and predictability and quickly implement the appropriate changes. We need to focus on execution from concept to customer in a timely manner that allows us to compete effectively in our markets and return to growth.

This is obviously an important time for the company and it's important that you know more about my background and why I'm so excited to be here. For those of you that have already Googled me, I'll be brief. I spent my entire career working in this space more than 30 years now, and I really love this space. I have a PhD in Molecular and Cell Biology and did postdoc work at the NIH, National Institutes of Health, where we studied chromosome structure in mammals in what were essentially the dark ages of genomics. My first job in the industry was with Bio-Rad Laboratories where I worked for 10 years in R&D before joining the commercial team and eventually became Group Operations Manager for Life Sciences. It was a time of fantastic growth and commercial expansion. During that time period, the Life Science business grew organically from a relatively small business to roughly $300 million in revenue, and continues today to be a major player in life science tools. I left Bio-Rad to become President and Chief Operating Officer at Packard BioScience, a position I held until we were acquired by PerkinElmer. In 2002, I became CEO of Genospectra, which many of you know later became Panomics. In 2008, Affymetrix acquired Panomics and I became Chief Commercial Officer here. This is when I really got a chance to know some of the people, the technology and the customers first hand. In 2009, I made the decision to leave Affymetrix to become CEO of Dionex, an industry leader in liquid chromatography that is located just 5 minutes from Affymetrix. It was an incredible opportunity. I learned a lot about running a complex global public company in my time there. We grew revenues and profits aggressively during that period through organic growth in one relatively small acquisition. Dionex was acquired by Thermo Fisher Scientific in a transaction that closed in May, which created the opportunity to rejoin the team here at Affymetrix. I believe that all these experiences helped give me a unique perspective on the challenges and opportunities that Affymetrix is facing.

Let's first talk about some opportunities. We have a lot of good things going on here at Affymetrix. The company has a proud tradition of innovation and full suite of tools for genetic analysis. It spans from the detection of single RNA molecules and single cell genome-wide tools to study both RNA and DNA, covering a wide variety of important growing applications. The market for gene expression and genetic analysis products is growing in nearly every category and there's absolutely no reason that we can't grow given our suite of technologies, products and customers. The team has done a lot of hard work here over the last few years to streamline the company and realize operating efficiencies. We are well positioned to leverage top line growth into increased operating income. Over the last couple of years, we've introduced a number of new technologies and products in the market, such as our Axiom GWAS and Targeted Genotype platform, GeneAtlas Personal Microarray line, bDNA-based QuantiGene products for single and multiplex RNA analysis, as well as unique single-cell transcription profiling. Our microRNA, we also introduced our microRNA array for non-coding RNA analysis and others. We'll talk about our Cytoscan HD, our new set of genetics product in a few minutes. We can and need to drive the adoption of these products which are already on the market.

Our number one goal is to return the company to revenue growth and sustained profitability, so we can create value for our customers, employees and shareholders. We have a clear vision of our opportunities and intense focus on our customers and a clear sense of urgency to make this happen.

After meeting with some customers and reviewing the market opportunities ahead of us, I am more convinced than ever that there is significant potential for growth in each of our end markets. We'll talk about a couple of examples here. First, I'm excited to tell you that Kaiser Permanente in University of California San Francisco consortium has completed running 100,000 patient samples as part of a landmark study of genetics environment and environmental factors. This is one of the largest genetic studies that has ever been conducted and the population of San Francisco Bay Area where volunteers were recruited is amongst the most diverse in our country. Affymetrix is now offering these 4 new state-of-the-art population-optimized arrays that were developed to support this project, which includes the Axiom Genome-Wide European, East Asian, Latino and African-American Arrays. The first array, Axiom Genome-Wide European Array is available for -- is now available for order. The other arrays will be available later this year. We believe these new arrays expand the potential market for the Axiom platform because they provide more informative solutions for researchers who are investigating complex diseases in more diverse -- complex diseases in more ethnic groups.

Second, our prospects in translational clinical medicine where we have absolutely sustainable competitive advantage. Perfect example is cytogenetics. We've just introduced the state-of-art product for cytogenetic analysis, Cytoscan HD. This product was designed from the ground up to exceed the latest guidelines in American College of Human Genetics for cytogenetic analysis and represents the most comprehensive gene level coverage of both copy number changes and SNPs. In addition, Cytoscan HD offers more than 10x the genetic content of kind of our primary competitor in the market. Customers tell us it's a killer app. We continue to work closely with the FDA to find the appropriate regulatory path for Cytoscan, and we intend to file this product for marketing clearance.

Third, we are gaining momentum with certain of our products for analysis of cancer samples including our OncoScan product for copy number and genotyping analysis from FFPE samples, QuantiGene ViewRNA products and other products that we have in development.

Finally, we believe that we are well positioned with our array products to leverage discoveries from NGS. Data is being published to demonstrate that as a practical matter for large-scale clinical studies. Array-based approaches are a perfect complement to the discovery of transcriptome elements. You'll hear more about this from us in the next couple of quarters. The challenges and opportunities ahead of Affymetrix are pretty well known to all of you. Molecular and cell biology research, translational medicine and molecular diagnostics technologies are changing at lightning speed. The competition for the customers is high and spending by both government and commercial accounts is uncertain. We've been slow to respond to technological changes, as well as the way we present our various technology and products to the customer. For example, how our products fit in current workflows. On the other hand, as the few examples we discussed a few minutes ago, we believe that our current and new offerings address growing market needs for translational medicine and molecular diagnostics products often leveraging incredible rate at which new genomic information is being discovered. Naturally, we're in the process of reassessing our strategy and operating focus, and we do have a sense of urgency about that task. We have the technical, financial and human resources to succeed in our core markets. I look forward to updating you on the specifics of our plan over the coming quarters. At this point, I'll turn the call over to Tim for a detailed review of our financial results from the quarter.

Timothy Barabe

Thank you, Frank. I'll begin my remarks by reviewing our financial results for the second quarter of 2011 and then close with an update on our balance sheet. For the second quarter, the company reported total revenues of $64.7 million compared to $71.7 million for the same period last year. Total revenue was down 10% from the prior year, driven by lower consumable and instrument sales. Turning to the detail, second quarter product revenue was $58.1 million compared to $65.1 million for the second quarter of 2010, representing a decline of 11%. Consumables sales were $54.3 million, down 10% from $60.6 million in the second quarter of 2010. DNA and other revenue was $19.4 million compared to $22.1 million or down 12% from the same period last year. And RNA revenue was $29.6 million versus $33.9 million in 2010, down 13%. I recognize that these numbers are different than those we provided in the past, so I'll be happy to give you a revised historical figures for comparative purposes after the call.

Additionally, instrument sales for the quarter were $3.8 million compared to $4.5 million in the prior year. Service revenue came in at $5.3 million compared to $4.7 million in the second quarter of 2010. And royalties and other revenue were $1.3 million, down from $1.8 million in the second quarter of 2010.

Turning to gross margin. In the second quarter, total gross margin was 60.1%, representing an increase of about 4 percentage points over the second quarter of 2010. This was driven by lower excess in obsolescence expense that we outlined on our last couple of calls, as well as a favorable mix shift toward higher margin consumables. These improvements were partially offset by lower cost absorption in quarter 2 2011 as compared to the second quarter of 2010. For the year, we expect our total gross margins to be about 60%. During the second half of the year, we expect to see a product mix shift toward more instrumentation and services, which have lower gross margins.

Total operating expenses for the second quarter were approximately $42 million, down 9% from the $46.2 million for the same period in 2010. Second quarter 2011 R&D expenses were $15.3 million, down 14.1% from the $17.8 million for the same period in 2010. SG&A expenses in the second quarter were $26.7 million compared to $28.4 million in 2010 or down 6%. During the third quarter, we'll be closing an R&D and pilot manufacturing facility located in California, and we expect to incur a one-time expense of approximately $2 million. So we anticipate that total operating expenses will bump up to around $45 million for the third quarter.

This closing will provide additional savings in our operating expenses in 2012 and beyond.

The substantial improvement in gross margins, combined with continued operating expense control, enabled us to reduce our operating loss to $3.1 million for the second quarter compared to a loss of $5.7 million in the last year.

Turning to other income and other expense. The company recorded a net interest and other loss of approximately $400,000 in the second quarter compared to a net income of $142,000 in the prior year quarter, with the prior year's quarter containing a gain on repurchase of convertible notes of $1.7 million.

In the second quarter, we recognized income tax expense of approximately $100,000. Our income tax expense for the second quarter is principally driven by foreign income taxes. For the second quarter, we generated a net loss of $3.7 million or $0.05 per diluted share. This compares with a net loss of $5.5 million or $0.08 per diluted share in the second quarter of 2010.

To facilitate the analysis of the company's core operating results, I would like to summarize noncore adjustments to our net income for the quarter and their impact on pretax earnings per share. In aggregate, these adjustments amounted to a net $1.5 million or about $0.02 per share increase to -- or a reduction and a net loss and include, within gross margin, $533,000 or roughly $0.01 per share in the amortization of acquisition-related intangibles; and in operating expenses, $1 million or $0.01 per share, again, in the acquisition-related intangibles amortization.

Let me take a moment to summarize our balance sheet. We ended the second quarter of 2011 with total cash and available-for-sale securities of approximately $256 million compared to $244 million at the end of the first quarter of 2011. Our current net cash position is $160 million, which represents an increase of approximately $50 million over the same period last year. In the second quarter, the company generated $13.9 million in cash flow from operations. Capital spending was about $2.3 million, and the resulting number for free cash flow was a positive $11.6 million for the quarter. Contained in that number was depreciation and amortization of approximately $8.1 million, which includes the amortization of acquired intangible assets. Operating expenses for the second quarter included $1.8 million of stock compensation expense compared to $2.7 million in the second quarter of 2010.

Accounts receivable were $44.6 million, down 15% from $52.4 million last year.

Turning to inventory and other balance sheet items. Net inventory for the second quarter was $47.9 million compared to $49.1 million at the end of the first quarter. And year-over-year, inventory is down about 13%.

To summarize, on a revenue base that fell $7 million short of last year's quarter, we reported product gross margin increases of 4%; operating expenses 9% lower or more than $4 million; and improvement in operating income of $2.5 million; and cash flow from operations of $14 million; and net of capital spending, free cash flow of almost $12 million; and again, we ended the quarter with about $160 million in net cash.

Frank Witney

Okay, thanks, Tim. In summary, we're excited about the opportunities ahead of us. We are committed to returning the company to growth and sustained profitability. I look forward to meeting with many of you in the coming months to share the details of our strategic plan and operational milestones. Thanks again for joining us today. And at this point, we'd like to open the call for any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ross Muken from Deutsche Bank.

Ross Muken - Deutsche Bank AG

Frank and Tim, as you sort of think about, obviously, when you were considering your position that you subsequently took, you sort of, can you walk us through the thought process. I mean, obviously, you have a history here, you look at the asset, about the types of things that you thought from your prior experience and vis-à-vis sort of the opportunities that you saw in front of us, what you thought you could sort of bring to the table and some of the initial things maybe you're going to focus on with the business. I know you haven't been there long so I'm not looking for specifics, but sort of big picture kind of from a repositioning or kind of revolution perspective. What are the things we should be thinking about or that are top of mind for you in the context of what brought you here and what you intend to sort of focus on in the near to medium term?

Frank Witney

Sure. Again, this is going to be a little bit high level because it's only 25 days into the mission here. I think from my perspective, thinking about Affymetrix, you have the elements of a great opportunity here. It's a company that's contributed mightily to what people understand about modern biology. You've got a lot of core technologies and great people with the company. I think the opportunity here is really -- it's very much an execution play. I think that there are many aspects in the company that are underperforming, that are in markets that are growing and that are bland [ph]. I think that with the proper focus on the commercial side of it, I think there are a number of assets that can grow and can contribute both on the genetic analysis, as well as the expression side. So I think that when I look at the asset base here, I'm not insecure about our ability to grow. I also think that we have, because of some great work done by the team, we're in a position to leverage that growth into profitable growth. I think a lot of hard work went into that. So I see, first of all, I see growth opportunities. Second, I think the cost basis and the ability to generate very strong gross margins make this an area that a company that can, with top line growth, can leverage that into profitability. And then finally, I think that the space is a space that is going to continue to contribute to health care and to our knowledge base. So I sort of look at the human assets, technical aspects, the market and the position that the company is in on a financial basis and see this as a very interesting opportunity.

Ross Muken - Deutsche Bank AG

And maybe just in terms of the balance sheet, I mean it's obviously one of the advantages now of the business. You've accumulated quite a bit of cash. I mean, how should we think about sort of in-house focus versus maybe inorganic opportunities for the business, just in terms of where you're going to spend your kind of initial time?

Frank Witney

To be candid, the initial time is going to be spent heads down, evaluating the internal assets, the things that we need to change as we roll. As I've said in my comments, we are going to have to change the way we operate. We're going to be very internally focused here for a couple of quarters. We have a nice balance sheet. We're generating cash and so there are opportunities out there. But my focus and the team's focus is going to be very much internal on our operational approach and leveraging the assets we have. Over time, we'll start to look at opportunities. But the near term is really going to be heads down and really internally focused, how do we take the assets we have and match that with customer needs in an aggressive way over the next few quarters.

Operator

Our next question comes from Quintin Lai from Robert W. Baird.

Quintin Lai - Robert W. Baird & Co. Incorporated

So the weakness that you saw in Q2, is it -- was it on all products or can you differentiate between microarrays versus the consumables business like USB and Panomics?

Timothy Barabe

Tim here, Quintin. I would say that Panomics has begun to recover and so we did see modest growth in Panomics and we also saw decent growth in USB, so I would say the weakness was primarily microarray based.

Quintin Lai - Robert W. Baird & Co. Incorporated

So Frank, as you kind of look at the business, I mean, again, tempting for us to continue to ask these types of questions. And I know you've only been there a few weeks, but is that how you would break it out, as the consumables business that you have, microarray, research versus diagnostics, as opportunities for you?

Frank Witney

Yes. When I look at -- when I think about, for example, the Panomics business, which I've pretty heavily invested in, those are products for the measurement of expression of genes and proteins. And I see that part of our expression franchise and I think there are opportunities in expression. Clearly, NGS is having an impact. It's drawing a lot of attention and money, but it's also creating lots of opportunities for us to do certain things in and around the types of information that's being generated through the NGS experiments. On the genetic analysis side, we launched our Cytoscan product. We're relatively early on in our Axiom strategy. We're still confident of our ability to grow in genotyping. As Tim pointed out in his comments, we had a tough quarter both in our DNA and RNA business. And those are just facts, but these are platforms, both on the expression and the genetic analysis side that have assets. We have the Axiom platform, the Cytoscan platform and others that, as I said in Ross's question, certain products that we have for other genetic analysis applications that we think are underleveraged. So, I guess, the USB products, the life science research products -- reagents products, it held its own well in the quarter. We're pretty happy with that. And so I look across the product line and feel optimistic that these are products that if we do the appropriate things, we can get growth out of them.

Quintin Lai - Robert W. Baird & Co. Incorporated

Great. And then, with respect to gross margins, Tim, how much of that is a function of lower instrument sales and how much of it is a function of maybe peg-based arrays versus conversion from pegs from cartridge?

Timothy Barabe

Well, I think, there's another factor as well and that's the overall sales level. So obviously, the gross margins will be lower on lower sales because we get lower absorption of our factories. So that's certainly one factor. But there's no question that the peg-based products have the highest margins of all of the products that we offer. And clearly significant, well, much higher than the cartridge-based products and the reagents in general. And to the extent that the quarter was more peg based, we end up with a higher corresponding gross margin. As we sell more instruments and we do more services, and services tends to be on the lower end of the margin spectrum, we'll see a corresponding drop-off. And also the absorption, factory absorption, MVAR, what we call MVAR, so manufacturing variances will play a role as well volume wise.

Operator

Our next question comes from Bill Quirk from Piper Jaffray.

William Quirk - Piper Jaffray Companies

A couple of questions for me. Frank, first off, thanks for commenting on cytogenetics. I confess though we've been hearing about kind of the ongoing discussions with the FDA in the pathway approach here for a little while. So I guess to try to, I guess, pin this down a little bit more, should we think about or is it reasonable to assume we might get a filing by the end of this year? Or at least for that matter, maybe clarity on the pathways. We've got a game plan heading into 2012?

Frank Witney

Yes. And we're still fairly early on in that process with the FDA, so I think it'd be premature to comment on any specifics at this point. But we're clearly going down that path. We feel very, very good about our technology and our products and our competitive position. The early -- we did extensive voice of customer, we've done extensive testing in real-world situations and the feedback has been extremely positive about our product. The sales team is primed and ready to go. And we're very focused on the FDA filings as well. But it would be premature to give you specifics at this point until we hear some comments back.

William Quirk - Piper Jaffray Companies

Okay. So in other words, a couple of FDA meetings minimum to go before we can really elucidate the strategy?

Frank Witney

We'll comment on that as events unfold.

William Quirk - Piper Jaffray Companies

Okay, understood. And then secondly, Tim, recognizing that we're going to get a reconciliation here after the call, could you just give us a quick, I guess, impetus on the reclassification for the 2 the categories. I guess kind of what moved and why?

Timothy Barabe

Yes, no question. What we did, if you recall, we had a restatement in the last quarter on a year-over-year basis. We actually mapped all of those products back. So we went -- these products relate to the USB products that we acquired back in 2008. So we went back and mapped every single one of these products during the quarter to classify them properly. We had been making estimates in the past, and last quarter's estimate was slightly off versus what it turned out to be once we actually went through the whole process.

Operator

Our next question comes from Dan Leonard from Leerink Swann.

Daniel Leonard - Leerink Swann LLC

Two questions. Do you have any further insight into the role the timing might have played in the Q2 results and maybe perhaps different sales incentives towards the end of the quarter? And how much business may have pushed into the third quarter?

Timothy Barabe

I would say that we don't -- I didn't understand the first part, timing?

Frank Witney

About timing, yes.

Timothy Barabe

Timing? What do you mean by timing?

Daniel Leonard - Leerink Swann LLC

Well, if somebody maybe was planning to buy a product in the last week of the quarter and they didn't get the discount they were hoping for, but they still need the product, so they buy them the first week of the next quarter, et cetera.

Timothy Barabe

Yes. I think that always happens. I mean, that's something that...

Frank Witney

And I wasn't here during the quarter, but in the effects in the quarter, it was a di minimis effect. There was nothing out of the ordinary.

Timothy Barabe

Yes, I would say that, that's something that we normally expect. So really, we're having to dig deep and hard to understand why these areas are underperforming.

Daniel Leonard - Leerink Swann LLC

Okay. And Frank, as far as unveiling your new execution strategy, what should we expect as far as the timeline on that?

Frank Witney

I would say towards the -- I mean, the first 90 days is really an inventory and merging the inside with customers and understanding where we position. I would say that we would start to get more granular towards the end of the year and in early, potentially early in January, around JPMorgan time.

Operator

Our next question comes from Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen and Company, LLC

Frank, another high-level question. And if it's too early to answer, you can just say so. But in your prepared remarks, you talked about the need to improve the company's visibility, and I think probably more importantly, returning the company to growth. You spent a lot of time talking about the opportunities that exist with some new products and the opportunity that exists with getting some of the underperforming areas to grow better along with their markets. But I think to many it seems like these opportunities are far outweighed by the company's participation in declining businesses in mature areas. And I think to be fair, competitively, Affy has been losing share in many areas. Again, you focused a lot on returning the company to growth. I mean, do you have some concern that with the portfolio that you walked into that it's going to be a while until you can actually not only grow, but stop the decline that we've seen in many quarters over the last few years? And what's on the table? Would restructuring be on the table? Would you move out of certain areas? How should we think about this at this point?

Frank Witney

It is too early to answer that question with any level of detail. But I do believe that the product portfolio that we have on both the expression and the genetic analysis side have growth opportunities. There are many product lines that have competitive advantages, that if appropriately positioned and potentially with some relatively small levels of R&D to fill in some gaps can be competitive. There are, you know -- everyone on this call knows well the competitive situations around expression and the competitive situations around genotype in both market as well as competition. So those are well known and the results over the quarters have to speak for themselves. So this is not easy. There is no magic answer to the problems. But on the other hand, we have good technology, we have good people, we have loyal customers, and these are areas that are at a macroscopic level are growing. And so, yes, it would be not reasonable to say this will be an easy task for the company. But it's also one that we believe is a doable outcome.

Doug Schenkel - Cowen and Company, LLC

Okay. I don't think you guys have spoken about how different end markets held up, academic versus pharma, and how you did in different geographies. I know specifically, I think you called out Europe last quarter as being particularly weak. Any chance you'd comment on those dynamics?

Frank Witney

Yes. So we were challenged in both our commercial and our academic markets this quarter. The academic markets were hit harder for us than the commercial, but we struggled in both. And we probably -- we're a little stronger in Europe than we were in the Americas. And probably, I guess, Asia was sort of in between those 2.

Timothy Barabe

Asia is in between. Yes, Americas was off the most and Asia in between Europe.

Frank Witney

But I would say that it was difficult when you look at our end markets as well as our regions.

Doug Schenkel - Cowen and Company, LLC

Okay, and last one. I think I spoke with at least you, Tim, inter [ph] quarter. It sounded like things were going to plan, I would say midway through the quarter, maybe even as late as the beginning of June. Was there anything that happened in any particular end market or geography towards the end of the quarter that really surprised you, if my characterization of how the quarter was progressing is in fact correct?

Timothy Barabe

I think that's essentially correct. We did not see the end result coming. And we're in the process of a very, very deep review of every region and even within the regions, every district and every territory to determine what went wrong and where and what we need to do to rectify the situation.

Doug Schenkel - Cowen and Company, LLC

Okay. So with that in mind, it's fair to conclude that the weakness towards the back half of the quarter was pretty broad based?

Timothy Barabe

It was broader based in Americas as we've said. So the weakness was more in Americas and it did catch us by surprise. Frank wasn't onboard, so it's me who was caught by surprise. And we're doing a deep dive to try to get to the bottom of it and isolate exactly what we need to do to fix it.

Operator

Our next question comes from Jon Groberg from Macquarie Group.

Dane Leone - Macquarie Research

This actually Dane in for Jon. So not to beat a dead horse here, but looking at the quarter, total revenues, we haven't seen that level for Affy since 2001. Is there any area or any end market that we can point to that actually grew this quarter or was weakness completely broad based across every segment?

Timothy Barabe

Well, I think again, what we said before, Panomics and USB grew. So those 2 product areas grew. So that's the bright spot in a very disappointing quarter.

Dane Leone - Macquarie Research

And what percentage of sales is Panomics and USB again?

Timothy Barabe

Yes, we broke it out when the companies were acquired and they've since been integrated so it's harder to piece that out. It was a collective just $35 million to $40 million at the time of the acquisitions, total.

Frank Witney

A little over 15 -- right around 15%.

Dane Leone - Macquarie Research

Okay, great. And then just -- I know it's early days, but in terms of looking internally at the company, for those of us that followed Affymetrix for a number of years now, the problem originally stemmed from not developing technology or missing a technology cycle years ago. And obviously, we see the consequences of that. What can actually be changed internally at Affymetrix to frankly turn the company around. It seems to, I think, a lot of us that there's just a fundamental technology issue that's going to cause the company to continue to be in secular decline for years to come. Is there something that how you kind of saw looking at the company externally that could be changed internally, whether it's management or whatever, just fundamental processes of R&D to kind of turn the direction of the business around?

Frank Witney

I really think it's -- I really think there's maybe 2 parts to the answer. I would say in the near term is defined over the next year or 2, that it really has to do with the ability for us to appropriately present the technologies that we have to a rapidly evolving marketplace. In terms of missing a technology cycle, well, yes, that's a fact. On the other hand, there are a number of -- there's a number of assays that our applications around our core technologies that can take us in different areas, with our existing core microtechnology, for example, cytogenetics. We have products in the pharmacogenetics space. There are plenty of things that we can do in expression that are in and around NGS, for example. So I think at least from my perspective, it's an oversimplification to simply say that we missed the technology cycle, therefore, the company can't grow. Now that doesn't mean that we don't have to think very hard and be very good at presenting how we fit in to current work flows or applications that are appropriate for our current technologies. So I think that's sort of the near-term focus as defined at the next year or 2. I think the longer-term R&D pipeline has to be addressed, and we are thinking very hard about what is -- what kinds of other things that we do, should we get into over time. But in terms of the near-term focus, I really believe it's stepping up our ability to be commercially successful with a number of technologies that are currently in our line of sight. For example, the Cyto products. We've been in cytogenetics for a long time and now we have, what we believe, is a breakout product. It can take significant market share, to other assets that we think are commercially very viable, even in this landscape of things moving in very rapidly in some very broad directions.

Operator

Our next question comes from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc.

Zarak Khurshid at Wedbush. First on the cytogenetics side. Was there weakness in cytogenetics in addition to the overall DNA business?

Frank Witney

The DNA business was most hit -- we were hit the most hard on GWAS and we just launched our Targeted Genotyping fairly recently, so that was really where the hit was the hardest. We saw, even with our current products inside of genetics, we saw some modest growth in that area.

Zarak Khurshid - Wedbush Securities Inc.

Okay. And then I was curious if you could just characterize the funding environment, the challenges that you're facing there, any feedback from customers as far as how things have changed over the last quarter.

Frank Witney

I'm not sure, maybe it's that high resolution over the last quarter. But clearly, for example, in the expression area, NGS is drawing a lot of funding. There's a lot of systems being placed and a lot of experiments are being done by NGS. That is a reality for us. I would say, other than that, I don't -- we didn't observe any macro trends other than the competition for dollars is pretty high right now on the expression side.

Operator

Our next question comes from Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC

I guess first, you just mentioned modest growth in cytogenetics. Any particular products where they are growing? Or is that a little bit too much detail than you want to get into within cytogenetics?

Frank Witney

Well, I would just say the current products that we have that have -- the SNP 6.0, for example, that is used in cytogenetics, grew in that application and was challenged in the genotyping application.

Bryan Brokmeier - Maxim Group LLC

You introduced a couple of Ag-Bio products, have you been able to penetrate that market at all and do you anticipate any new arrays in that in the near term?

Frank Witney

Well, we've introduced 2 products in Ag in the last quarter or 2, I guess, and it's still early days. We anticipate -- we think they're good products and we're going to put some marketing muscle behind those, but it's still early days.

Bryan Brokmeier - Maxim Group LLC

And you also just mentioned about the R&D pipe, the long-term R&D pipeline needs to be addressed, which I think could include acquisitions or potential investments in your partners. With Frank having just joined, how quickly would you be in a position to determine if there -- what an attractive acquisition might be?

Frank Witney

Again, as I've said earlier, this is a heads down period for us until we get our current product portfolio in shape and commercially successful. So I would say no timeline there. Obviously, we have the financial flexibility to do it through some very hard work by the team here, but it's not something we're going to be focusing in the near term.

Bryan Brokmeier - Maxim Group LLC

Okay. And then just lastly, you talked about -- you kind of gave your big picture outlook for the business. But previously, as in before you joined, Frank, and before you preannounced these results, Tim had kind of given a little bit of broad-based guidance about having positive cash flow in every quarter of the year and positive EPS for the full year. Is that changed at all or is that still possible?

Timothy Barabe

Well, the positive cash flow for the year and every quarter, I'd still feel is certainly achievable. Clearly, we've generated positive cash flow on a very, very disappointing and tough quarter for the second quarter. So I think we've got things under control. Inventory was down in a quarter that saw a year-over-year sales decline of 10%. So I mean from a manufacturing operation standpoint, we're doing the right things. You saw the margins, they held up as well. So a lot of good stuff going on here. Clearly, profitability depends on the sales number. We are in shape to really leverage sales, so it's all sales dependent. There's no doubt about it. And I can't, I just can't provide any guidance for the back half of the year at this point in time.

Operator

Our next question comes from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc.

First off, Frank, I just want to ask maybe if you look at the core install base of microarray instruments that the company has today, do you still view that as a growth business as it's currently constituted or is it really more about transitioning expeditiously onto the other platforms?

Frank Witney

Well, certainly, our genotyping products will be totally on our new platform. I think there are other applications that will leverage our existing install base and our 510-K approved of scanner -- current scanner, those would be products, our cytogenetics products, our OncoScan product. We're going to be coming out with some expression products that you'll hear about in the next period of time. And again, we'll leverage our install base, so we're trying to be pragmatic about that. And it's a great product that has served people extremely well for a long time. And we will leverage our cartridge-based scanner where appropriate and we'll leverage our high throughput scanner system when appropriate.

Isaac Ro - Goldman Sachs Group Inc.

Okay. And then could you maybe comment on how the distribution partnership with Thermo went this quarter with regards to gene analysis, status side [ph] of the performance there and what's your expectation going forward for the back half?

Frank Witney

Yes, it's early days. We have line of sight on several customer installations through the Thermo Fisher channel, but it's still early days.

Isaac Ro - Goldman Sachs Group Inc.

Okay, great. And then just lastly, maybe if I could ask qualitatively, I know it's still very early in your tenure, but if you look back on your past experiences, in sort of early days in those institutions, what are maybe some of the most important lessons you have taken with you in terms of near-term opportunities to improve operations and how to use capital, themes that you think you could carry with you here at Affy. I think it'd be helpful to get some sort of insight on your thoughts around what are some of the key dos and don'ts.

Frank Witney

Well, I think that specifically, Affymetrix, even in my short time here, I'm very, very impressed with many of the fundamentals that are in place here from an operations perspective, financial perspective. I think there's a lot of really good foundations here that we can grow from. I think the one thing that I've certainly learned over my years is that opportunities are very, very hard to find. It's hard to find really interesting end markets, and we have a number of those there but we simply can't drop the ones that we have. We have to go deep in the areas that we're in. This industry and no industry that I've been in my 30 years can you sort of skim over the top. And so one of the things that I've certainly learned is that if you're in an area and you're in it deeply, and we have several areas here that I personally believe, given even our current technologies and the assay, the applications we can build around those that if we go deep enough, we certainly can win our customer's business.

Operator

Our next question comes from Dan Arias from UBS.

Daniel Arias - UBS Investment Bank

Just a question on Cytoscan. Wondering if you can give maybe a cursory view of how much of the opportunity there that you see being related to customers using and subsequently switching from Affy SNP Arrays versus new customers using other platforms?

Frank Witney

Well, certainly -- we certainly intend to build the business by winning market share from our competitors. Everything that we have seen from our extensive beta testing, proof of principle experiments and deep evaluation from our customers have been very, very positive. So our current SNP Array customers are going to convert to this product and hopefully even use -- even go deeper in what they're doing, but we believe that we are in a position to be very, very competitive with this product and build market share over the next year or 2. We also -- this product is very appropriate for cancer cytogenetics as well. And so we'll be aggressively moving into that space with essentially the same product. So we see lots of opportunities out there with this product. We think it's state-of-the-art and that's the feedback we're getting from our people who have gotten to really look at the product.

Daniel Arias - UBS Investment Bank

Okay, great. And are you still making efforts to track grants related to stimulus funding? And if you are, does there appear to be anything left in the tank there from users seeking to make use of some new variant chips that are now available?

Frank Witney

At this point, I think, at least from our perspective, that's wound down.

Operator

Our next question comes from Sung Ji Nam from Gleacher & Company.

Sung Ji Nam - Gleacher & Company, Inc.

Frank, I mean, or Tim, I guess assuming, I know you guys are not probably providing guidance, but assuming kind of the end market outlook does not change for the remainder of the year, kind of maybe could you talk about qualitatively kind of where you could go in terms of the top line growth in the near term? Is the second quarter level kind of a more normalized level going forward or can there be upside or further downside, I guess, from these levels?

Frank Witney

I think as Tim pointed out, and we'd like to change this over time, but at this point, we're not in the position to provide guidance.

Sung Ji Nam - Gleacher & Company, Inc.

Okay. And then, I guess, my last question is then could you give us more color in terms of how OncoScan FFPE did -- how large is that business today and how that business performed in the quarter and kind of outlook for going forward?

Frank Witney

So we're in build mode with that product. It's relatively small. It's extremely exciting. We're talking to a lot of heavy hitters in the space that see the potential of that technology. We've got some very good work going on here to understand its current and future potential. We think it's in a very, very competitive position to other technologies that are used for retrospective genotyping of cancer patients, but it's still early days.

Operator

Our next question comes from Ramesh Donthamsetty from JPMorgan Chase.

Ramesh Donthamsetty - JP Morgan Chase & Co

I just wanted to ask first on array pricing if that was a contributor to the shortfall in the quarter. That is the first question.

Frank Witney

Our array pricing on the genetic mouse side held up pretty well. It was effectively flat. We did see some weakness in our expression array pricing.

Ramesh Donthamsetty - JP Morgan Chase & Co

Okay. And then In terms of some of the growth areas that you had seen in the past year, you talked about Cyto but in areas like microRNA, for example, that have seen -- showed dramatic growth, maybe off of a smaller base. Could you talk to the trends there in the quarter, that would be great?

Frank Witney

The microRNA products or non-coding RNA products did very well in the quarter. And we're going to do other things in and around that product line that we think make sense. It's an exciting area. It's a discovery area, and we'll continue to refine that product line and build applications around it.

Ramesh Donthamsetty - JP Morgan Chase & Co

And then just lastly on sort of instrument, you talked about product mix potentially changing in the second half. If you guys can kind of think about new products and where you see those coming out in peg versus old cartridge and things being on the old platform versus the newer ones, is there any way you guys are thinking about GeneTitan versus Atlas in terms of how you're going to think about positioning products? That would be great?

Frank Witney

Again, we're going to be practical about which platforms that we use. We're building out our menu on GeneAtlas. That's still a little bit in the early days and we're trying to get customer feedback on that one. Certainly for the genotyping, the Axiom platform is exclusively Titan. And in some of the other areas like OncoScan and Cyto, that will be done on our current array platform.

Operator

Our next question comes from Nandita Koshal from Barclays Capital.

Nandita Koshal - Barclays Capital

Frank, I'm curious if you've had a chance to meet with some of the major Affy customers and what is the feedback that you've got around actions that can be taken in the near term? Any examples would be great.

Frank Witney

To be honest, I've only met a few at this point. I think that -- and some of them have been relatively specialized, for example in the Cyto area, or the OncoScan area. I've met with a couple of Core Lab directors. And to me, if I sort of signal to noise, the feedback is people still feel very good about the company and the technologies. I think that the people are sort of, at least on the expression side, the next-gen revolution has created a lot of opportunities. We're going to have some things that we're going to be talking about later in the year that I think were pretty exciting around how we fit into next-gen sequencing and in the workload. And on the genotyping side, certainly, we have a pretty well-publicized Kaiser Permanente-UCSF relationship. I've met with those customers and they are extremely happy with what we could produce together. And we're leveraging the work. We had a press release recently that we've launched 4 arrays that are population-optimized genotyping arrays that came out of that particular relationship. So I think that from my perspective, I think Affymetrix has a long tradition of working closely with key opinion leaders and many important people in the industry, and we'll continue to leverage that. But I think the mood in general is positive with our customers, and we just have to work very, very hard to keep their business and to expand it.

Nandita Koshal - Barclays Capital

Okay, great. And then maybe an initial take on the time horizon that you're looking at in terms of major opportunities that you're realizing on the top line. Any color there would be helpful.

Frank Witney

Again, I'd like to defer that until later in the year when we get our feet on the ground a little bit more.

Operator

We have time for one last question. Our last question comes from David Ferreiro from Oppenheimer.

David Ferreiro - Oppenheimer & Co. Inc.

Just one, considering your comments earlier on competition from NGS for dollars, how do you expect to turn the tide, especially in a declining funding environment?

Frank Witney

I think that the way to turn the tide is to make sure that people understand when one would run a microarray and how it fits into the workflow. People do lots of different experiments and have different needs at different times. And again, we'll be talking in a relatively near future about some very interesting opportunities in the expression side, how we would fit, for example, in translational medicine or large clinical studies that are in and around NGS. It's not -- there's different tools for different applications. And we're not insecure about our ability to fit into workflows as people do, as people try to understand genetic information in different ways. So we'll put a lot more meat around the bones. And you'll see specific actions that we're going to take around that concept of where we fit in workflows over the next couple of quarters.

Operator

I'll now turn the floor back to the speakers for any closing comments.

Doug Farrell

Thank you, everybody, for taking the time to join us on the call today. If you did miss any portion of the call, a phone replay will be available for the next 7 days beginning at around 5:00 Pacific Time today. To access that replay, domestic callers should dial (877) 660-6853. International callers, please use (201) 612-7415. The passcode for both is the same, it is 375254. Alternatively, an audio replay will be available on the Investor Relations section of our website at affymetrix.com. So thanks again for joining us. Have a great day.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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