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Affymetrix Hits GAAP Profitability for FY 03 And Promises an Even Better Year in FY 04

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Affymetrix last week announced a record year financially, hitting GAAP profitability while recording $300 million in total revenues for the fiscal year ending on Dec. 31, and then saying that it expects FY ‘04 to be even better.

“2003 was a transformational year: In less than a decade after founding the company, we achieved record product and product-related revenue,” Steve Fodor, Affymetrix chairman and chief executive officer, said in last week’s conference call announcing the results. “We remain focused on growing the business and increasing profits.”

Wall Street responded positively: On Monday, the company’s stock hit a 52-week high of $32, continuing an upward trend that began on Thursday, Jan. 28.

Affymetrix is the nascent microarray industry’s pacesetter by any yardstick — revenues, products sold, mind-share, leadership — and its revenues are the linchpin for any measurement of the industry. As such, the company’s optimism on the year ahead bodes well for the industry as it nears a milestone of a projected $1 billion in aggregate revenues for 2004.

Greg Schiffman, Affymetrix’s chief financial officer, said that the company expects to see an 18- to 20-percent increase in product and product-related revenue in 2004. In a statement, the company provided guidance of total revenues of $345 million to $350 million for FY ‘04, and product and product-related revenues of $330 million to $335 million. For the year, the company had total revenue of $300.8 million, compared to $289.9 million for 2002. Product revenue came to $280.8 million, compared to $248.5 million for 2002. Schiffman said the company is projecting total revenues of $77 million and product and product-related revenues of $73 million for the first quarter.

To reach the low end of these 2004 estimates, Affymetrix will have to average total revenues of $86 million per quarter, and product and product-related revenues of $82.5 million per quarter.

Schiffman said the company, which introduced 20 new products in 2003 including its single chip whole-human-genome GeneChip product, sees its revenues increasing in the second half of 2004.

“This is really an exciting time for the company,” Schiffman told investors at the PiperJaffray Healthcare Conference in New York last week, citing the company’s significant growth in product and product-related revenue for the year in a “pretty tough environment.”

For the fourth quarter of 2003, the company reported net income of $16 million, compared to $2.9 million for the same quarter in 2002. For the year, net income was approximately $14.3 million, compared to a net loss of $1.6 million for 2002.

For the fourth quarter, Affymetrix reported total revenue of $89.2 million, of which $1.5 million was related to the sale of products and wafers to its Perlegen Sciences spinoff. For the same quarter in 2002, Affymetrix had total revenue of $78.3 million, $5.1 million of that from sales of products and wafers to Perlegen.

Product and product-related revenue for the fourth quarter was $85.3 million, compared to $69.7 million for the same period in 2002. These revenues included $42.5 million in revenue from sales of GeneChip microarrays, and instrument revenue of $21.5 million, a third consecutive record quarter, Affymetrix said. For 2002, the company reported fourth-quarter GeneChip revenues of $42.3 million and instrument revenue of $10.8 million. Reagent sales increased to $5.4 million in Q4 ‘03 from $3.8 million in the same period in 2002. For the quarter, Affymetrix said it sold 41 GeneChip systems, 79 scanner upgrades, 65 of its 48-chip autoloaders, and a combined 134 fluidics stations and upgrades.

Affymetrix reported cash and cash equivalents of $276 million on hand at the end of the quarter, and a $17-million spend on research and development in the period, compared to $19 million for the year-ago period. The company said that it has shifted its Santa Clara, Calif., fabrication facility to R&D, which will mean the reallocation of $6 million of fixed costs from manufacturing to R&D in 2004.

The company reported its installed base at 970 systems, compared to an installed base of “nearly 800” it reported at the end of the fourth quarter of 2002 (see BAN 2/07/2003). Additionally, the company said that the addition of five new authorized service providers in the fourth quarter has created a network of 30 outfits providing analysis services on its platform.

Going forward, Schiffman said at the PiperJaffray conference that the company plans to release a microtiter-plate based product that will contain a whole genome in each well of a 96-well plate. This follows Affymetrix’s September 2003 introduction of the its GeneChip high throughput array system that uses off-the-shelf automation.

“We believe that [the microtiter-plate array] is going to speed the access into the high-throughput marketplaces, including compound profiling, molecular toxicology, and clinical trials,” said Schiffman. Thus far, two pharmaceutical customers and the National Heart Lung and Blood Institute are using the system.

But given that its array sales were flat year-over-year in Q4 of 2003 and 2002, the company’s growth may come outside the gene-expression arena as it attempts to gain traction in the DNA analysis market it entered in the second half of 2003.

“We see it as a great growth driver going forward,” said Schiffman. “It’s every bit as big as the expression marketplace, and a place where we have never had any revenues really until the second half of last year.”

Additionally, the company is also looking to expand its efforts in custom resequencing, planning to introduce a second-generation product that will cut [research] costs by a factor of 75 percent, Schiffman said.

“We think it is a breakthrough product we will be releasing and we are going to generate a tremendous interest and excitement in the marketplace,” he said.

— MOK

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