Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Doug Farrell - Vice President of Investor Relations

Frank Witney - Chief Executive Officer, President and Director

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

Analysts

Travis Steed - Macquarie Research

David C. Clair - Piper Jaffray Companies, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Jeff Ares - Goldman Sachs Group Inc., Research Division

Daniel Brennan - Morgan Stanley, Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Daniel L. Leonard - Leerink Swann LLC, Research Division

Daniel Arias - UBS Investment Bank, Research Division

Bryan Brokmeier - Maxim Group LLC, Research Division

Unknown Analyst

Derik De Bruin - BofA Merrill Lynch, Research Division

Affymetrix (AFFX) Q1 2012 Earnings Call May 3, 2012 5:00 PM ET

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, Doug Farrell, Vice President of Investor Relations for Affymetrix. Thank you, Mr. Farrell, you may begin.

Doug Farrell

Thank you, operator. Good afternoon, everyone. Welcome to the conference call. At the close of the market today, we released our operating results for the first quarter ended March 31, 2012. 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 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, 2011, and on 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.

With that, let me turn the call over to Frank.

Frank Witney

Thanks, Doug, and good afternoon, everyone. I'm happy to tell you that our hard work has begun to pay off. We're making steady progress in stabilizing the business and we're seeing growth in important new product lines. In the first quarter, we did a good job of controlling our expenses and overall, we are on track towards our goal of returning the overall business to growth in 2012.

Before discussing the core Affymetrix business in the first quarter, I'd like to take a minute to give you an update on the status of our previously announced acquisition of eBioscience. Despite working diligently on this acquisition over the last 4 months, I'm disappointed to tell you that we have not been able to reach an agreement with eBioscience that would allow us to complete the merger. We have an ongoing discussion, and we'll let you know when we have clarity on the status of the acquisition.

The positive news is that our core business is improving and we have roughly $170 million in cash that provides us significant flexibility going forward. We continue to focus 100% of our attention on our core business.

I'll begin with some more general, commercial and operational update before providing more color on each of our business units. As a reminder, our primary operational goals in 2012 include: stabilizing our expression business; increasing our market share in genotyping, particularly targeted human and Ag-Bio applications; building critical mass towards a market-leading position in cytogenetics; and maintaining the growth in our life science reagents business.

From a geographic perspective, Europe and Asia performed well in Q1, while our North America sales lagged particularly for academic customers. Late last year, we changed our global commercial leader, as well as the leadership in both Europe and Japan, and this is reinvigorating our commercial efforts in those markets, and we're seeing that in the numbers. We recently recruited an industry veteran to head up sales and marketing for North America, and I expect that the performance in this critical region will improve under his leadership.

We're also driving hard to further penetrate emerging markets like China, Brazil and Mexico. During the first quarter, we approved investments in these important markets that included the addition of a number of sales reps and a local office in Brazil. We should begin to see the benefits of this investment in the second half of the year as we bring new staff on board.

Now I'd like to discuss our core business. As you're aware, in the fourth quarter of last year, we completed an internal reorganization into 3 business units, including expression, genetic analysis and clinical applications, and life science reagents. I'd like to walk you through the dynamics of each of these business units and their impact on our first quarter results..

I'll begin with our expression business unit, which represents the largest component of our total revenue. This business unit includes all of our array-based expression products, as well as our QuantiGene and Procarta family of RNA and protein expression products. Expression constitutes about 50% of our total revenue and we're making steady progress in stabilizing this business. We're doing this by reinvigorating our commercial efforts to better support our IVT revenue, as well as to augment these more mature products by adding new products to our array-based expression portfolio, including new Panomics mid-plex cell and tissue assays.

As we told you on our last call, our goal is to reduce the rate of decline in this business to between 5% and 10% in 2012. In the first quarter, our expression revenue was down 20% year-over-year, but it is only down 4% sequentially. Our IVT sales exceeded our expectations for the quarter, showing a 7% sequential decline, well within our stated targets for the full year.

We've returned to a dedicated sales force for our Panomics products at year end, and I'm happy to tell you that revenue for these products has returned to double-digit growth and is tracking positively against our forecast.

We recently launched our QuantiGene ViewRNA ISH product, where we can identify 2 low copy RNA targets in fixed tissue samples, which has both translational medicine and diagnostic potential.

On a regional basis, we exceeded plan in both Europe and Asia in expression, where we're behind plan in the Americas. In the latter region, we're working hard to regain momentum in our expression array business.

Turning to genetic analysis. Our genetic analysis and clinical applications business is roughly 30% of our revenue and, as we have talked about, represents our most significant growth opportunities. As we outlined in our year-end call, we expect this business unit to grow 20% or more in 2012, driven by our cytogenetics products and increased market penetration with our Axiom Genotyping platform.

I'd like to take a moment to update you on the progress we've made in the first quarter into 2 major components of this business unit. We continue to make significant inroads into the cytogenetics market. Our research-use-only CytoScan HD continues to gain commercial traction, showing strong revenue growth across all major geographic regions. At meetings such as the American College of Medical Genetics and the American College of Cytogenetics' conference recently held in San Antonio, customer interest was outstanding. We continue to conduct a number of proof-of-principle studies and have won some important customers from competing array platforms. We are on track to grow our cytogenetics business to about 10% of our total revenue in 2012 as we convert customers from traditional microscope-based approaches and take share from other commercial array platforms.

On the clinical side of the business, we started our clinical trials protocols for the diagnostic approval of CytoScan. We adjusted our clinical protocols to reflect request from the FDA. And we now expect to make our regulatory filings with the FDA in the later part of 2012.

The other major business segment within genetic analysis is genotyping. Genotyping projects tend to be driven by consortium of researchers and, therefore, have a longer sales cycle and require a dedicated team to coordinate between the various participants. Since moving to a more specialized sales structure in late 2011, we are seeing improved traction. We currently see a solid pipeline of opportunities within the targeted genotyping portion of the market. This includes ethnic-focused genotyping panels that allow customers to utilize cost-effective, population-specific arrays and increase the potential for finding informative snips in various ethnic groups.

Customers tell us that having the ability to study a more targeted set of markers over a much larger number of samples is a very attractive value proposition. We're winning competitive bids because of this advantage. For example, during the quarter, we completed an agreement for a major study of colorectal cancer across Hispanic and Latino populations.

This increasing demand for targeted genotyping products includes a number of plant and animal applications. During the quarter, we signed an agreement to provide custom Axiom Genotyping arrays for a group that will be genotyping salmon and trout, and we're in discussions in several other ag opportunities covering both crops and livestock. I think this underscores just how broad the opportunity is that's emerging across the Ag-Bio market, working hard to build out a market-leading portfolio of products for genotyping plants and animals.

During the first quarter, we also partnered with The Ovarian Cancer Consortium, which will be using our Axiom platform to genotype a large cohort of patients. The OCAC is a group of investigators that conducts case control studies of ovarian cancer with the aim of identifying genes that may be related to the risk of ovarian cancer. The aim of this group is to combine data from many studies in order to provide a reliable assessment of the risks associated with these genes. This group will use our recently launched Axiom Array, which provides the highest coverage of any commercial array for studying coding variants and indels, which are considered to be increasingly important.

Our third business unit, life science reagents, is primarily comprised of products developed and manufactured by the former USB team. Since the acquisition of this business in 2007, we have consistently seen annual growth in our life science reagents unit, which now makes up about 13% of our -- life science reagents unit now makes up about 13% of our product sales.

Despite consistent results over the last several years, our revenues in Q1 decreased by 8% or about $700,000 compared to the same quarter last year. There are 2 main reasons: One, we observed what we believe is a temporary slowdown in our industry-leading membrane extraction detergent. We expect to rebound the balance of the year for these unique products. Two, we have changed from a distributor to direct sales strategy for our ExoSAP-IT PCR Clean-Up reagent. We anticipate it will take a few quarters to regain our momentum. We anticipate this BU will be flat in Q2 and then return to more typical growth profile in the back half of the year.

In summary, we believe that we're off to a good start in 2012. And the changes we've made to organizational structure and management team are starting to pay off. Our business unit priorities are clear. Our commercial organization is now fully staffed with proven industry veterans around the globe, and we continue to have a high level of attention on our operational metrics, such as quality, inventory management and customer service levels. Strategically, we are aligned in our focus on customers and translational science, clinical application and ag opportunities.

Now I'd like to turn the call over to Tim to review our operating results for the first quarter.

Timothy C. Barabe

Thank you, Frank, and good afternoon. I'd like to review our operating results for the first quarter of 2012.

As we previously announced, we completed a tender offer to repurchase our 3 1/2% senior convertible notes at par during the first quarter of 2012. In total, we repurchased a total of aggregate principal amount of $91.6 million, or $92.1 million in cash, including $0.5 million in accrued interest. We also accelerated the amortization of the remaining $300,000 in debt issuance costs associated with the convertible notes.

In the first quarter of 2012, the company reported total revenue of $65.2 million, as compared to $73.7 million for the same period last year. Revenue was down 11.5% from the prior year, driven primarily by lower consumable sales. This $65 million result represents our fourth consecutive quarter of generating revenue in the mid-$60 range and indicates our business is stabilizing.

Turning to the detail. First quarter product revenue was $58.4 million, as compared to $67.5 million for the first quarter of 2011, representing a decrease of 13.3%. Consumable sales were $53.8 million, down 14.4% from $62.9 million in the first quarter of 2011. Instrument sales for the quarter were $4.7 million compared to $4.6 million in the prior year. Lastly, service and other revenue was $6.8 million compared to $6.3 million in the first quarter of 2011.

Looking at the results from the business unit perspective, revenue from our expression unit experienced a decrease of $8.3 million or 20% during the period as compared to the prior year period. More importantly, expression revenue was down only 4% sequentially due to its increased focus on the commercial opportunity, as Frank outlined earlier. As an example, our non-array Panomics products increased more than 15% year-over-year, while the sequential growth was in excess of 20%, indicating our strategy of specialized sales forces is paying dividends.

The genetic analysis revenue increased by about $1 million or 4.6%, primarily due to higher sales of our research-use-only cytogenetics products. This product line continues to exceed our budget, and customer feedback is very encouraging. The increase was partially offset by a decline in sales of our SNP 6.0 arrays and a tough year-over-year comparison to a large genotyping project in the first quarter of 2011.

Revenue from our life sciences -- science reagents unit was down about $700,000 or 8%, due to the reasons that Frank discussed earlier.

Turning to gross margin. Our product gross margin was 60% in the first quarter and our total gross margin was 58%, which was a decrease of about 5 points over the first quarter of 2011. The primary driver for the decreased gross margin was the lower volume of sales, which also resulted in lower cost absorption. This was partially offset by a decrease of excess and obsolescence costs in inventory, as well as lower warranty expense. The consolidated gross margin for the quarter was 5 points better than the fourth quarter of 2011 and above our guidance for the full year due to higher-than-expected sales of array expression products and the very low excess and obsolete and warranty expense mentioned above.

Total operating expenses for the first quarter were approximately $41.3 million versus $43.5 million incurred for the same period last year. While we're targeting a run rate of about $42.5 million per quarter, our first quarter expenses included about $1 million in acquisition and associated legal costs, offset by some cost savings due to delays in research and development projects and the timing of new hires in sales and marketing.

First quarter 2012 R&D expenses were $13.3 million, down 18% from the $16.3 million for the same period last year, primarily driven by decreased compensation and benefits due to the reduction in headcount that occurred in the fourth quarter of 2011, as well as lower variable compensation expenses.

SG&A expenses of $27.9 million for the first quarter of 2012 increased slightly compared to the same period of 2011, up $27.2 million. SG&A included $700,000 in severance and $1.6 million in primarily acquisition-related expenses. Adjusting for these items, SG&A would have been down about 6%.

Interest expense and other net was approximately $1 million in the first quarter of 2012, due primarily to the accelerated amortization of the debt issuance costs associated with our convertible notes buyback. This compares to an interest expense and other net of $2.8 million in the prior year quarter that included $1.3 million in currency losses.

In the first quarter, we recognized an income tax benefit of approximately $100,000. Our income tax benefit for the first quarter was primarily driven by intra-period tax allocations benefit, offset slightly by foreign taxes.

During the first quarter of 2012, we generated a loss of $4.2 million or $0.06 per diluted share. This compares to a net income of less than $100,000 over the same period in 2011.

To facilitate the analysis of the company's core operating results, I would like to summarize non-core adjustments to our net income for the quarter and their impact on pretax earnings per share. In aggregate, these adjustments amounted to a net $1.4 million or about $0.02 a share decrease in GAAP net loss and include within gross margin $450,000 or roughly $0.01 per share in the amortization of acquisition-related intangibles and operating expenses, $900,000 or $0.01 per share in acquisitions-related intangibles amortization.

I'll just take a moment to summarize our balance sheet. We ended the first quarter of 2012 with total cash and available-for-sale securities of approximately $170 million, as compared to $265 million at the end of the fourth quarter of 2012. The decrease is primarily due to the convertible notes buyback that we completed in the first quarter of 2012, where we paid out $92 million in cash. The current net cash position is $166.2 million, which represents a year-over-year increase of $17.8 million. In the first quarter, the company had net use of about $1.3 million in cash flow from operations, and that was driven by reduced accounts payable. Capital spending was about $1.4 million for the quarter, resulting in a net use of cash of $2.7 million for the quarter. In addition, we incurred a licensing charge of roughly $1 million. Depreciation and amortization was approximately $7.2 million, including the amortization of acquired intangible assets. Operating expenses for the first quarter included $2.4 million of stock compensation expense, compared to $2.6 million in the first quarter of 2011. Accounts receivable were $44.8 million, up slightly from $44 million at the end of 2011. Net inventory for the quarter was $41.5 million or down $1.3 million compared to the fourth quarter of 2011. Year-over-year inventory is down by over 15%.

To summarize, during the first quarter, we continued to stabilize the business, generating our fourth consecutive quarter in the mid-$60 million revenue range. Product gross margins increased to 60%. Our operating expense of $41.3 million was below our targeted run rate, and we ended the quarter with net cash of about $166 million.

In summary, our business continues to improve. We're stabilizing our revenues. Our gross margin improved, and we continue to keep rigorous controls on our operating expenses.

Now I'd like to turn the call back to Frank for closing remarks.

Frank Witney

Thanks, Tim. We believe this quarter demonstrates that we're making steady progress versus our 2012 goals. On the positive side, we're pleased with the outstanding adoption of our -- the continuing and outstanding adoption of cytogenetics products, growth in our Panomics business, and better than planned results for IVT products. For challenges, we were disappointed by the shortfall in our life science reagents business. And while the prospects were improving, we still need better market penetration in our Axiom Genotyping line. We're very excited about our global commercial team, many of which are new, and pleased by the regional performances in Europe and Asia. We still have a work to do. We feel like this quarter is another step in the right direction.

At this point, we'd like to open up the call for any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jon Groberg from Macquarie.

Travis Steed - Macquarie Research

This is actually Travis on for Jon. I wanted to get a little more color on [indiscernible] that you filed. It sounds like [indiscernible] effectivity period has been extended and if there are other interested parties?

Frank Witney

Yes, I really can't say too much about that. We continue to talk with them and try to find a path to a combination. But beyond that, I really can't say much.

Travis Steed - Macquarie Research

Okay. Is there anything you can say on -- or can you get us more comfortable [indiscernible]? Are you still expecting low single digit growth for the year?

Frank Witney

I'm sorry, I have a little trouble hearing your question. Are you still expecting -- I think you said double...

Travis Steed - Macquarie Research

Low single digit growth for the year. I'm sorry, I had my headset on.

Frank Witney

Yes. We -- at this point, we -- if you look at our first quarter results and how we've started out the second quarter, we still are optimistic that we're going to see net gross for the year.

Operator

Our next question comes from the line of Bill Quirk from Piper Jaffray.

David C. Clair - Piper Jaffray Companies, Research Division

It's actually Dave Clair here for Bill. First question from me, I was just hoping to get some additional details on cytogenetics. I know you targeted 10% of revenue as we exit the year as kind of expected in this product line, but where are we now? And what kind of growth did we see in this product in the quarter?

Frank Witney

Yes, we're -- I would say that the cytogenetics program is tracking almost exactly as we planned, just slightly better than we planned. We don't see anything that -- we're continuing to gain based on the -- really on the configuration and the quality of our product and the performance of our product plus our really strong commercial efforts. We believe that we're going to achieve -- certainly, achieve our goals of 10% and potentially do slightly better than that. We're looking at a lot of opportunities in markets outside the U.S., in which are potentially very large opportunities. I would say it's really a very, very positive outcome for us and certainly meeting, if not exceeding, our expectations.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And a quick one for Tim here. Just on gross margin, how should we think about that going forward? Obviously, it was pretty good in the quarter. And then I think in your remarks, you said $42.5 million per quarter is kind of the way to look at OpEx. It sounds like there is, what, $1 million in acquisition-related costs in there this quarter. So I'm thinking that -- I mean is there some timing that we should think about? Or R&D is going to ramp a little bit more?

Timothy C. Barabe

Yes, let's tackle it -- let's answer that one. We expected to spend more specific on cytogenetics going forward. So the quarter was light -- the first quarter was light, and we expect more and more spending in the R&D area. In addition to that we've brought in a number of people who started during the first quarter. We're pretty much ramped up by now. Most of the hiring is complete. But as the year goes on, as we see a little bit more hiring, we'll see a little bit of an add to operating expenses as well. I would say with respect to gross margins, we are pleasantly surprised by the first quarter gross margins, and we expect to trend better than we had indicated guidance-wise. I wouldn't say that we're going to be able to stay in the 60% product and 58% total gross. And obviously, sales -- it's very heavily sales dependent. At this point in time, the signs are that we should do better than what we had told you. I just don't -- I can't guarantee those to stay where they are right now.

Operator

Our next question comes from the line of Peter Lawson from Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Frank, have you got more positive on the business versus the last quarter?

Frank Witney

I'm feeling there is -- we're -- I would say that we are extremely positive about cyto and think it may be even bigger than we thought. So yes, I would say, I'm even more encouraged about our cytogenetics business. Our expression business, we had a better-than-expected result with our traditional IVT product. And we're seeing nice response in our Panomics products for the first time in a few years. So yes, I'm feeling optimistic about the business. We've got -- we've made a lot of changes in the 6 months with a lot of new -- a lot of people in new positions, particularly in the commercial organization and our business unit leaders and their research and marketing groups underneath them, which are coalescing well. There's a lot of focus. We're -- my philosophy has always been 2 inches wide and 2 miles deep and we're seeing that type of focus. So yes, I'm feeling -- Peter, I'm feeling good about the business right now.

Peter Lawson - Mizuho Securities USA Inc., Research Division

The weakness in consumables, was -- do you think that's just pushed out to Q2? Or do you think you have lost market share or lost customers there?

Frank Witney

Again, it's -- in terms of tracking towards our plan, I think the -- we were virtually on our plan in both of our -- in both the genetics unit, as well as the expression unit and slightly weak in the life science reagents. I do think there is some pushout for sure and there is some general weakness in spending on consumables that other companies have noted, but I'm still feeling that we're in reasonable shape versus the plans we've laid out.

Timothy C. Barabe

I think -- just to add on that comment, we've been in the $64 million, $65 million range for 4 quarters in a row now. So I think we're seeing stability on that -- of that business. Year-over-year, yes, clearly, there was a consumables weakness year-over-year. But I think, sequentially, we're seeing a stabilization.

Operator

Our next question comes from the line of Isaac Ro from Goldman Sachs.

Jeff Ares - Goldman Sachs Group Inc., Research Division

This is Jeff in for Isaac. Coming off some of the comments on the consumables questions specifically on life science reagents, have you guys planned for it to be as weak as it was in the quarter? And what are your thoughts on that getting better as we approach the second half of the year when arguably, the funding environment should get worse?

Frank Witney

Again, these are not things that we can control. We're focusing very much on our own market and sales programs, on the launch of new products. And in particular in areas -- in certain areas like cyto, we're not seeing any funding weakness. We're not seeing people saying that there's a funding issue in areas like cyto. And in fact, we're seeing -- we saw a much better than expected results with our classical IVT product. So these aren't really things we can control, and we're staying very focused on the things that we can control.

Jeff Ares - Goldman Sachs Group Inc., Research Division

I guess, let me ask the question differently. It's 13% of your business. I was just trying to get a picture of -- if this is how you thought it would track during the year. And do you need it to improve to hit your guidance?

Frank Witney

Are you talking about life science...

Timothy C. Barabe

He's talking about life science.

Frank Witney

In particular?

Jeff Ares - Goldman Sachs Group Inc., Research Division

Yes.

Frank Witney

Yes, okay. So that, we have 13% of the business. We certainly expect to see improvement in the membrane extraction reagents. That, we think, is a timing issue. The part about the ExoSAP-IT is a -- was a change in the distribution strategy. That may take a little bit longer to correct. So that will probably not improve until later in the year and -- but on the other hand, that particular team is looking in extremely hard to look at approaches to fill in the gap for that particular product. And we don't see that it will have a material impact on our guidance.

Jeff Ares - Goldman Sachs Group Inc., Research Division

Then just lastly, on the operating expenses, I know you mentioned a little bit about the R&D, but I mean, I might be wrong. I believe this is the last least you've spent on R&D in over 10 years, I think, going back to 2000. Can you talk about what was maybe cut from the budget, understanding some things were temporarily shifted forward? There has to be in a few things that were permanently cut? And what does the sustainability of this level is going forward?

Frank Witney

Well, as you remember, we took -- we made significant R&D cuts in Q4 in order to focus our efforts in a more limited set of areas but go deeper in those areas. We're not short of R&D people. We have -- we're working very hard on our IVT -- FDA filing. We're working very hard on a number of expression products and other products in the genotyping and mutation scanning area. And we feel we're sufficiently staffed in R&D to maintain a good product flow.

Jeff Ares - Goldman Sachs Group Inc., Research Division

And then lastly, on the Cytoscan product in particular, I mean, you talked about some competitive takeaways there. Can you maybe provide a little bit more color on what about the product, the customers are interested in? What have been some of the reasons they've switched to actually from the competitors?

Frank Witney

Yes, I think the there is really 2 -- maybe there's 3 reasons. One. Is the products performance is outstanding? Secondly, people are realizing the importance of having copy number and snips on the same array. And in that particular situation, versus the market leader, Agilent, we have more real estate and we just simply have more coverage. And finally, it is really -- it is about coverage and density and, we cover every gene and have the ability to give people an extremely high-resolution look at the chromosome complement of the cell. So we think it's really our -- it's the -- again, the configuration of our product. We've also done other things, like package. It's a very nice complete package with reagents and software. And we feel that -- and we're focusing pretty heavily on certain set of applications in the postnatal area, but we have many other applications that we ultimately can look at and as we extend that product line. So we feel we have a technical competitive advantage where our marketing efforts are very strong, and we've got a very robust R&D pipeline for the -- for cytogenetics in general.

Operator

Our next question comes from the line of Dan Brennan from Morgan Stanley.

Daniel Brennan - Morgan Stanley, Research Division

Sorry for the background noise here. I'd kind of hop on a little bit late here. Regarding eBio, can you just give us any color about what the key holdups are there? Is there anything you can say whether there may be another bidder? Or is it price or financing or just, I mean, anything you can provide there?

Frank Witney

At this point, I really can't. Our discussions are confidential and they're ongoing. And when we're in a position to reveal additional information, we'll do that as soon as possible.

Daniel Brennan - Morgan Stanley, Research Division

Okay, that's fair. Are you willing to discuss at all if in fact you're not able to execute on the deal kind of how we should think about your -- how you are going to prioritize the use of cash going forward?

Frank Witney

We have many options. We've given guidance on what we would consider appropriate acquisitions. We've presented that in the past, what the threshold is for a corporate acquisition. But we've been so busy with focusing on the core business and the -- and our discussions with eBio that we really haven't given any serious thought to any additional uses of the cash.

Daniel Brennan - Morgan Stanley, Research Division

Okay, great. And then maybe into the academic end market. What are you assuming in terms of your full year growth outlook? Obviously, cyto and targeted or -- and Panomics are the key growth drivers. But within academic, what does the business actually do in the quarter and kind of what's your assumption for the full year off of that market for you?

Frank Witney

I think we've seen a lot of the trends that others have, but North America and academic has been challenging. I think that the products that we sell are in the sweet part of -- sweet spot of where the demand is. And despite some challenges with the NIH funding, it's still a $28 billion budget and funds an awful lot of the research out there. So I think our view is fairly consistent with a lot of our peers have said, that while it's become more challenging, it is a very large opportunity and one that's important to the tools space.

Daniel Brennan - Morgan Stanley, Research Division

Okay, and then I again just got one more and about China. In terms of the new product, the GeneChip that got approved over there, could you give us any color how big China is for you today? And what kind of impact that could possibly have over the next year or few?

Frank Witney

Well, China, relative to the opportunity, it's relatively small for us. We are -- our scanner was approved during the quarter, as many of you are aware, and we did a press release on that. I recently -- I was in China just a week ago and talked to several groups about some of the extremely interesting opportunities for us across our product line, genotyping, cytogenetics and expression. We are adding -- as we mentioned in the prepared comments, we're going to invest additional sales coverage in China. So we think the opportunity is large. It's hard to quantify at this point. But we're certainly -- we're identifying those opportunities. We have a hybrid structure there, where we're direct, as well as working with distributors. And we continue to refine and to mature the -- mature our organization in China to exploit some of these opportunities. But I can tell you that there are some really large opportunities and not the least of which is in the cytogenetics area, where the product -- where our products could be widely adopted and we may have more to say about that over the ensuing quarters.

Operator

Our next question comes from the line of Quintin Lai from Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

A lot of my questions have already been answered. Tim, did you mention what the FX impact on revenues were on the quarter?

Timothy C. Barabe

Quintin, I didn't. It was slightly negative but not appreciable -- negligible.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

All right. And Frank, in the press release, you talked about a global distribution agreement with Almac. Could you maybe give a little color on what's the strategy behind that?

Frank Witney

So Almac is a large CRO organization that has taken our product -- our IVT product and has refined it for the purposes of identifying clinically relevant biomarkers, particularly from formalin-fixed, paraffin-embedded samples. And so we think that product -- we'll sell that through our channel as a tool that we believe is state of the art for identifying -- I mean, there's a lot of technical information behind it. But to make it simple, we essentially doubled the number of identifiable RNA molecules, which greatly increases your ability to identify stable RNA signatures that could have clinical relevance. So it's a great product. It's an extension of our product line. It will drop into our channel and will -- we believe will contribute. It's being used in other applications for disease-specific arrays by Almac -- or derivatives of that product for disease-specific arrays. So we're pretty excited about it. And I think it's part of this -- it's part of the what we think very much of a partnership between next gen sequencing on the discovery side and arrays on the validation side, which we're hearing more and more as people work through the complexities of the mass amounts of data and then need validation. So I would say this is in that -- the realm of our strategy of developing tools that have -- that are reasonably priced, relatively simple to use and can help us with our validation.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

And then, I guess, we should think of this is as one of the initiatives to help shore up the gene expression side?

Frank Witney

That's right, Quintin. Exactly.

Operator

Our next question comes from the line of Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

First, just to clarify one thing. I believe, back in March, you had publicly indicated that you had released eBio from the no shop. Is that correct? Is there any change to that?

Frank Witney

No, that's still in place.

Doug Schenkel - Cowen and Company, LLC, Research Division

So there's no exclusivity right now?

Frank Witney

At this point, there is the possibility of competitive bids.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. So also related to eBio, many investors, with whom I've spoken over the last several months, were expecting the eBio deal to afford you an opportunity to get a bit more aggressive in rationalizing expenses. To what extent are your ongoing discussions with eBio putting you in a holding pattern in terms of making any changes to the business that you might make if eBio weren't in the picture?

Frank Witney

Fair question. We had -- we have some plans for integration, plans for revenue synergies, plans for consolidation, but obviously, those are suspended until, if and when, we are able to complete the transaction.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And then if at some point, I guess, you would make it official if it's not going to happen, at that point, that would be the point where you would outline your plans for any operational changes on a standalone basis. Is that fair?

Frank Witney

That's correct.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And maybe a philosophical question about your business, which I think people will really appreciate the answer given your experience in this space, Frank, across different organizations. Let's assume eBio doesn't happen and then let's assume that you can get the headwinds and the growth opportunities that you have at Affymetrix to an equilibrium where, let's say, you're driving low single digit revenue growth on a regular basis and you're operating profitable. Is that enough? I guess what I'm getting at is, do you believe, let's say, a viable long-term plan to be a $200 million to $300 million standalone revenue business in this space? Or long term, do you need to get bigger or do you need to sell?

Frank Witney

Yes. There's a number of components to your philosophical question there, but that's a good one. My sense is, and I felt that way since I joined the company last July and continue to feel that way, that Affymetrix for me is a 2-pronged project. Project number one is to get the business stabilized, drive the cytogenetics business to its full potential, get genotyping to its potential and stabilize our expression business and keep our reagents business going and create an operating model from an organizational perspective that's sustainable and can grow. And I think we're making good progress on that. I don't think it's enough, however, for us to be at what you described. And so there is a second phase. eBio could or would have been part of that second phase as it would give us another entire growth line and an extension into cell biology. In the absence of an eBio, I think we still have -- it's premature to answer your -- to say definitively to your other alternatives. But I'm not personally satisfied nor do I think I was brought to the company solely to become a relatively $200 million to $300 million, a relatively slow growing company. I don't think that's what we would ultimately intend to be.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay, that's really helpful, very interesting. One last one, just a housekeeping question, and I apologize if I missed this, was -- did you have an extra day in the quarter? And if so, what was the impact on revenues in the quarter?

Frank Witney

To be honest, I'm not sure.

Timothy C. Barabe

I mean, we might had an extra day from February. We don't think there was necessarily any impact on the quarter. We saw just steady, steady performance throughout the quarter.

Frank Witney

I mean, it's -- I've only -- this is only my fourth quarter here, but our -- we're working very hard on linearity and trying not to backload the quarters as much as has been historic at Affymetrix. And I think we are making progress in seeing better linearity. And we certainly saw better linearity in Q1. And so far in Q2, we're seeing the same type of thing in which we're getting business in the door -- done business in the door earlier than has been historic. And we're pushing on that very, very hard that the day the quarter starts is the day you better get out there selling and not try to pull everything in late in the quarter. So I really don't know if we had an extra day to be honest, but I do know that we are working very, very hard on linearity throughout our organization.

Operator

Our next question comes from the line of Dan Leonard from Leerink Swann.

Daniel L. Leonard - Leerink Swann LLC, Research Division

First off, how are you thinking about the size of the market opportunity for Axiom arrays?

Frank Witney

Well, Axiom arrays seem to have a very large market. It's -- in terms of numbers of arrays, the price point is very -- it's very competitive. And so I think there is a very large market based on the properties of that particular array and the value of that array. However, the -- we're all a little bit concerned at the price in which those products are being made available to our customers. So -- but it is -- we're very proud of our products. It has great coverage, great flexibility, custom-ability -- that's the word, as well as the ability to do indels. So we think we have a compelling package and we're starting to get traction, but the price point is -- it's very competitive from a price perspective.

Daniel L. Leonard - Leerink Swann LLC, Research Division

Okay. And then my follow-up, you guys, I would say, reinvigorated your effort to get involved in ag livestock about or to be more involved in ag livestock about 1.5 years ago, and you're talking about it a bit on the prepared remarks on this call. Are you taking share there? Or is that market growth?

Timothy C. Barabe

Both.

Frank Witney

I think it's both. I mean, we're still early on in ag, and there are some things that we're doing in R&D that are premature to talk about. But I think, we have -- we're paying a very high level of attention to that market, both through specialized sales teams, as well as internal R&D, or the sales teams feeding information into R&D. And the market is very -- I think everyone understands, the markets are very large. It is a market that's price sensitive based on the value of what you're testing. But we're working very, very hard to understand and to have the right products in that market.

Operator

Our next question comes from the line of Dan Arias from UBS.

Daniel Arias - UBS Investment Bank, Research Division

I guess just a couple on instrument placements. It sounds like Panomics and the mid-plex products are playing a bit of a role in the stabilization of the expression business there. Is that coming from new system placements at all? Or is that mainly new applications in workflows on existing installed systems?

Frank Witney

Those products were on Luminex. They are multiplex assays that run on Luminex bead systems. So that's kind of -- and there's a very, very large installed base at Luminex. So that -- those are reagent sales.

Daniel Arias - UBS Investment Bank, Research Division

Okay. And then, I guess, Frank, you touched on gene Axiom and GeneAtlas. Can you just comment a bit on uptick there? For gene Axiom, what do think might be needed for an inflection point for that platform? And then on GeneAtlas, anything noteworthy or encouraging from what you're seeing from the distribution agreement with Thermo?

Frank Witney

We're not -- let's take the GeneAtlas first. We're not seeing too much encouraging from the Thermo agreement. We're pushing more through our own system, driven primarily by -- we launched a very large number of model organism arrays that are driving some sales. We're doing reasonably well outside the U.S. and starting to look at ways to improve our distribution of Atlas in the U.S. But that's really -- it's for us building up the application based on GeneAtlas, well, which we're doing. Although we're still not -- we're not satisfied yet with the GeneAtlas, we are extremely satisfied with the performance of the product. It performs extremely well. It's a plug-and-play, no service issues whatsoever. But in terms of uptake, we're thinking about some creative applications to drive sales. And in the meantime, we're really pushing through model organisms. Our Axiom platform, we're extremely proud of. We're getting more and more publications. We're getting more and more people on podiums saying things that are about high throughput, about the quality of the assay. And we do need to increase our placements of GeneTitans, in which the platform runs on. And I think we -- one of the things that we certainly can point to is the -- is now, our entire installed base of GeneTitans have been upgraded and are now quite stable and running well, which is a great sign. And we're -- through our retooled commercial organization, it's focusing 100% of their time on GeneAtlas -- sorry, on Axiom. We're starting to get into the opinion leaders and into the consortia, but there's going to be a little bit of a lag time there. And in the first quarter, the first quarter was a little bit difficult for us in certain areas of the world with Axiom. But it's -- I think we're doing the right things. We have a stable platform. We've got -- we have a very flexible ability to make targeted arrays, both for ag and human, which is where we think the growth is, as well as having the right team focused very heavily on this particular market.

Daniel Arias - UBS Investment Bank, Research Division

Okay, great. I appreciate that. And then, I guess, as a general question, maybe just to get a sense of product usage, do you think you could give us a rough idea of what percentage of array usage at this point is taking place in support of a sequencing study versus dedicated expression or genotyping work? Is that something that's tracked and answerable?

Frank Witney

It's something that we are trying to get our arms around. I don't have a quantitative number for you. Qualitatively, I think it's pretty well accepted from -- certainly, customers that I talk to -- excuse me, customers that I talk to informationally get back from the field. More and more people are linking, sequencing and arrays both in the genotyping space as well as in the expression space. But in terms of the percentage of our arrays that are used for that particular purpose, I'm going to guess, it's relatively small at this point, but I don't have a specific number.

Operator

Our next question comes from the line of Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group LLC, Research Division

Why didn't you begin the clinical trial until May? I thought you're planning to launch it -- or to begin in the first quarter and that was going to cause R&D expense to be a little bit higher, which is why they're below what I expected.

Doug Farrell

Yes, this is Doug. We actually had some ongoing dialogue with FDA about the things that were important to them as part of the protocol. And based on that, we pushed up the start time a little bit to meet their requests and get everything in order, so a relatively minor delay we're now in the process of running samples. And again, we're planning to file late this year.

Bryan Brokmeier - Maxim Group LLC, Research Division

Right. And in addition to that, you're spending less on R&D -- or was your spending on less R&D also going to potentially impact your planned first quarter 2013 launch of the OncoScan?

Frank Witney

No. We are spending against OncoScan. There -- and we're still on track for a Q1 launch of that particular product.

Bryan Brokmeier - Maxim Group LLC, Research Division

Okay, great. And with your instrument revenue, it's very strong in the quarter. So what end markets and geographic markets did you place most of those instruments in?

Frank Witney

Well, we were particularly strong in instruments in Europe and in Asia-Pacific. And that's where the majority of the instruments were placed.

Bryan Brokmeier - Maxim Group LLC, Research Division

And where -- do you see a lot of the placements for the -- being used for clinical user with the CytoScan for research?

Frank Witney

Certainly driving a fair number of the placements are -- is the adoption of our cyto product.

Bryan Brokmeier - Maxim Group LLC, Research Division

Great. And is there a cyto part on this one particular -- is there -- do you see a greater utilization of instruments in those labs as opposed to being -- when they're being used for research?

Frank Witney

I think that it's less lumpy. These are samples that are coming in routinely as opposed to project based. So I would say that -- I mean, I don't have statistics in front of me, but I would say the usage cycles are higher for our cyto labs than for our -- that are in systems that are in traditional research laboratories.

Operator

Our next question comes from the line of Tycho Peterson from JPMorgan Chase.

Unknown Analyst

[Audio Gap]

for Tycho. I guess, Frank, can you help us think about the R&D that you were planning for the year? Maybe think about that by the 3 business units, what percent would be in each?

Frank Witney

Yes. So by far, the heaviest R&D is in our genetics and genotyping business unit. The -- it's roughly 30% of sales based on really 3 major areas: genotyping, the clinical products and cyto and OncoScan. Next would be our expression business unit, which has, as a percentage of sales, roughly 10%, that -- which are split between Panomics and arrays. And then we have a relatively small maintenance and it's in the order 4% or 5% in our life science reagents. So the spending is really heavily -- is heavily skewed in towards where we aligned with our growth opportunities.

Unknown Analyst

Okay. And then for Tim, can you talk about the working capital dynamics and if you expect to be cash flow -- or generate cash for the year?

Timothy C. Barabe

Yes, we definitely expect it to generate cash for the year. In fact, the main reason we didn't generate cash in the first quarter was accounts payable. Accounts payable were high at the end of 2011 and exceptionally low in 2012. So it was a major, major use of cash in the quarter to the tune of $9 million. And that's the only reason why we were a couple of million negative. We expect to be strongly cash flow positive for the year.

Operator

Our next question comes from the line of Derik De Bruin from Bank of America.

Derik De Bruin - BofA Merrill Lynch, Research Division

The first one is around Europe and Asia. During the prepared remarks, you mentioned that these geographies were performing well, and I guess some of that is attributed to leadership changes there. Can you talk a little bit more about the strategies being employed in those geographies and what should we work in and maybe some of the areas that you're still looking to improve?

Frank Witney

Yes, it really is around leadership. We have a new leader in Europe, who is very metric driven. He's driving his team to a very high standard of performance and coverage, account visits per day, quality of visits. There was an extremely strong performance, for example, on expression in Europe beyond our expectation. And this was going to back in reenergizing and visiting labs that maybe we haven't visited for a while. So we're still working on certain things. We're trying to upgrade our old global marketing. We're trying -- we're doing a lot of things with trying to get our visibility higher, but maybe that's more global than regional. But I think in Europe, we have 2 things that happen: One, we have a new leadership team. Secondly, we filled all the positions. And so we're fully staffed in Europe and that really, really helps. And we've also done some level of segmentation with specialists around the expression business, expression around the clinical business and expression around the genotyping business. So we have new leader, we have full staff, and we have a new approach. In Asia, we are direct in Japan and then have primarily distributors in Asia outside of China, where we have a hybrid model. We have a new leader in Europe -- in Japan, who I just spent several days with. They had a really strong first quarter and actually achieved their budget for the first time that's been achieved for a long time in Japan. And that team is completely energized, again, had a great expression at quarter and worked very, very hard on the account management side. Then we have a very strong distributor network. We have strong management of our distributors in Asia. We are investing more people that are Affymetrix employees to support our distributors in some regions and go more direct in others. And that's a strategy that we will continue to employ. We're -- in many cases, we're doing a lot of the work and then turn that work over the distributor, who gets essentially a fee from us or we pay a tax, if you want to think about the other way. So we're really trying to -- sort of in alignment with cost, with expense controls, trying to make investments in our Asia, as well as our Latin America organization, where we think we can get leverage. There, I think, the -- so I think -- and there, I think we've got a pretty good plan and we started to implement that plan in Q1 and are in the higher into those regions as we speak. So pretty heavy emphasis on trying to build our global commercial organization out with a strong leadership, as well as people, the right people in the right places.

Derik De Bruin - BofA Merrill Lynch, Research Division

I had another question on CytoScan. You've mentioned some changes in the -- I guess the FDA was looking for -- need some changes in the clinical protocol. Can you provide a little more detail on what these changes were?

Frank Witney

We wouldn't get into the details about our conversations with FDA. These were things that they thought were an important part of the protocols, and we agreed and we made changes.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay. And one housekeeping, any chance you can provide the DNA, RNA and other revenue breakout?

Frank Witney

Since we've got to the business unit structure, we're not breaking them out in that -- and not break out anymore the revenues. The B structure is really -- we've now got the ERPs and everything completely aligned to report the business in that structure going forward.

Operator

Our next question is a follow-up question from the line of Bryan Brokmeier.

Bryan Brokmeier - Maxim Group LLC, Research Division

Yes, just a quick one for Tim. How -- I know there's a lot of PP&E. Are you planning to sell? How quickly do you think that you might be able to sell that? Is it a priority? And based on what you're seeing, do you expect to generate a profit or loss on those assets?

Timothy C. Barabe

Really, the only PP&E we have is our West Sacramento facility. And we're pretty close -- I mean, you never close until the deal is finalized, but we have interest in that facility and that interest could be realized by the end of the year. It would be a meaningful addition to cash. We won't -- we're unlikely to make a gain or loss on that. We wrote the facility down in the fourth quarter of last year. But we also do have an investment that will mature next year in the first quarter. So there may be some cash in the first half of next year in the $5 million range, up to $5 million, probably less because that investment is securities in some closely held companies that we might not be able to liquidate. But there's a fair amount of cash sitting there that could come our way over the next year.

Operator

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

Doug Farrell

Thank you very much 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 about 5:00 p.m. Pacific Time today. To access that replay, domestic callers should dial (877) 660-6853. International callers, please dial (201) 612-7415. The passcode for both is the same, 387472. Alternatively, an audio replay will be available on the Investor Relations section of our website at affymetrix.com. So thank you again for joining us. Have a great day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Affymetrix's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts