Affymetrix, Inc. (AFFX)
Q2 2010 Earnings Call
July 21, 2010 5:00 PM EST
Doug Farrell – VP, IR
Kevin King – President and CEO
Tim Barabe – EVP and CFO
Good afternoon. My name is Chanel and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.
Mr. Farrell, you may begin your conference.
Thank you, operator. Good afternoon, everyone, and welcome to the conference call. At the close of the markets today, we released our results for the second quarter of 2010.
Joining me on the call today is our CEO, Kevin King, who will provide a commercial and operational update. After that, our CFO, Tim Barabe, will provide a detailed review of our financial results for the second quarter.
As a reminder, today's call is being recorded and the audio from the call is being webcast on the Internet at our homepage at affymetrix.com.
During this call, we may make various remarks about the company's future expectations, plans and prospects that constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially for Affymetrix from those projected.
These risk factors are discussed in Affymetrix's Form 10-K for the year ended December 31, 2009 and other SEC reports, including our quarterly reports on 10-Q for subsequent periods. We encourage you to review these documents carefully as forward-looking statements are made as of today's date and we make no obligation to update this information.
So, with that, let me turn the call over to Kevin.
Thanks Doug, and good afternoon, everyone. I’ll begin my prepared remarks by providing additional details related to the July 7
press release and I’ll give you a brief commercial overview and highlights on several new products.
Revenue for the second quarter was approximately $72 million, below our original guidance of $80 million to $82 million and in line with the updated guidance we provided on July 7
. We identified three primary factors that accounted for the variance from our initial second quarter revenue target.
The first factor is related to instrument revenue, which accounted for the largest portion of the variance. In early June, we began to experience a general lengthening of the purchase cycle and delays for instrumentation that were expected to close in the second quarter. These dynamics were largely associated within academic accounts, particularly in Europe.
Within Europe, our market intelligence indicate that plant spending has slowed in response to economic uncertainties and our analysis of the US and European academic markets now indicates that research markets are more competitive than anticipated as relative spending has been reduced as a result of budget cuts by endowments and by private foundations.
Further, within the US, industry feedback and surveys indicate that about 50% of labs do not expect stimulus funding for the year. While only 29% of labs have or are expecting stimulus funding during the year. The second quarter instrument opportunities that we didn’t convert remain in our pipeline as we continue to develop even more opportunities for the future.
The second contributor to revenue variance was related to the sales of consumables. Two-thirds of this variance was related to our QuantiGene and pro carda products and the remaining third was related to the GeneChip sales associated with delayed instrument placements.
Our QuantiGene and pro carda product lines have been steadily growing since the acquisition of Panomics in December of 2008. These low-to-mid flex products address growing industrial, academic and clinical markets that exceed $1.5 billion per year. Sales channel expansion is key to achieving continued growth within these segments. And in the first quarter of this year, we initiated expansion plans that included the integration of our Panomics sales channel into our global GeneChip channel.
In the process, we made significant changes to our US and European territory management structures, account responsibilities, and we provided several weeks of product training that in total have temporarily disrupted the dynamics of the business. We’re moving aggressively to get this back on track as quickly as possible.
The third factor contributing here was related to the further deterioration in European currencies, which resulted in an incremental $1 million in negative foreign exchange. Despite the market and commercial challenges that impacted our revenue during the second quarter, we remain confident in our strategy of expanding the business in the large and growing validation and routine testing markets.
Now, I’d like to spend a few minutes talking about our GeneChip RNA and DNA business and speak briefly about the recently announced QuantiGene View product release. Total array volumes in Q2 grew on both the year-over-year and a sequential basis. Adoption of our new array formats is progressing nicely with new peg formats representing about 25% of our total array shipments during the quarter.
On the RNA side of our business, market research among large US academic and industrial labs points toward continued expansion and demand for RNA microarrays. In our RNA business, volumes were up. And as we’ve previously discussed, there is a trend toward low prices as our product mix changes with new lower cost products making up a larger percentage of our total sales.
Our customer base continues to move from bio marker discovery to bio marker validation and there was an increasing trend toward the use of our arrays for clinical applications related to cancer, targeted drug therapy and response and custom applications. With the recently launched GeneAtlas system, our sales channels are now focused on developing the RNA microarray market beyond our traditional customer base. Initial customer response to GeneAtlas is favorable and we placed several instruments in the quarter.
In the second quarter, our DNA business was up 7% over the prior year. There was an increasing awareness of the importance of GWAS studies that are based on both common genetic variance as well as rare variance with frequencies as low as 1%. We believe that this interest in expanded genetic content bodes well for the future growth of our DNA business.