Investors who enjoy companies that are consistent with guidance may have some interest in Affymetrix
On Thursday, lower-than-expected fourth-quarter and full-year revenues were reported. Total revenue for 2005 was $367.6 million, well off from the already-lowered estimate of $380 million the company gave in October. The lower revenues caused gross margin to suffer as it fell from 74.4% in the fourth quarter last year to 71.0% in this year's fourth quarter.
The company's main revenues come from sales of its GeneChip system components, which includes gene arrays (also known as chips). These disposable chips are used in a wide variety of biological experiments, including genetic analysis and drug discovery. The newest chip the company produces is the 500K Mapping Array Set, the highest density arrays the company now produces. A higher-density chip means less work and more options for researchers, making it easier to run more complex experiments faster and more efficiently.
The main issue confronting the company continues to be poor manufacturing yields for these new arrays. The lower volumes prevented timely shipments and, most likely, disappointed a number of customers. The problem is being addressed through upgrades to its manufacturing facility in Sacramento. By the end of the quarter, yields had improved -- something that was said last quarter, too. But now, in order to meet the demand, it must accelerate its plans for a new manufacturing plant in Singapore and bring it online by the second half of 2006.
With management's inability to properly assess the situation, which most likely led to the poor guidance, I find it difficult to believe management's guidance for $420 million in revenues for 2006. Not only will the manufacturing difficulties be a huge hurdle to overcome, but instrument sales are expected to drop from $62.6 million in 2005 to $50 million this year. Since the company anticipates little growth for the first half of the year, I expect $180 million would be a good first half for the company. That would require 23% growth in second-half revenues to provide the $240 million needed to meet guidance for the year. That high growth rate hasn't been seen since 2002.
At this point, I'd rather take a seat on the sidelines and see how the manufacturing situation plays out. An increased tax rate in 2006 could put further pressure on the price, giving investors more time to assess the situation before a possible bargain passes us by -- something that happens quite often with companies like Affymetrix. The current situation may be a sign of serious distress, but it could be a simple bout of growing pains, too. Either way, it will be an excellent barometer for measuring the long-term health of the company. It provides insight into how management will handle these situations in the future. Although I'm not sold on the company right now, it's definitely worth keeping an eye on. The technology is proven and, most likely, has many undiscovered applications that we're just now starting to see.
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