Lisa M. Cummins - Chief Financial Officer
John Dulchinos – President and Chief Executive Officer
John Nelson – State of Wisconsin Investments
Adept Technology, Inc. (ADEP) F2Q09 Earnings Call February 4, 2009 5:00 PM ET
Welcome to the Adept Technology fiscal 2009 second quarter results conference call. (Operator Instructions). I would now like to turn the conference over to Lisa Cummins, Chief Financial Officer.
Good afternoon everyone and thank you for joining us. As we begin today’s call, let me remind you that during the course of this conference call, we may make certain remarks regarding Adept’s expectations as to future events and future financial and operational performance, plans, and prospects of the company, all of which are based on the company’s position as of today, February 4, 2009.
Any such forward-looking statements involve a number of risks and uncertainties, and the company’s actual results could differ materially from those expressed in any of these forward-looking statements for a variety of reasons including the risks described in our press release and in our annual report on 10-K for the fiscal year ended June 30, 2008, as well as the risks described in the company’s other SEC filings. No one should assume that any forward-looking statements made by the company remain consistent with our expectations after the date that the forward-looking statements are made.
Certain financial information that we review on today’s conference call is presented on a non-GAAP basis. The most directly comparable GAAP information and reconciliation between the non-GAAP and GAAP figures is provided in our Q2 fiscal 2009 press release which has been furnished to the SEC on Form 8-K. The press release and all financial, statistical, or operational information referred to in this conference call including the GAAP reconciliation and explanation discussed above is available on the Investor Relations section of our website. Following our introductory comments, we will open up the call to take your questions.
I would now like to turn the call over to John Dulchinos for some opening remarks.
Before Lisa goes through the quarterly results in detail, I would like to give you a brief update on our business. While we continue to focus on growing our core robotics business in the second quarter, the effects of the macroeconomic environment had a significant impact on our quarterly results. The primary reason for this was a substantial decline in capital spending from our industrial business coming out of Germany, primarily from the automotive industry. This market has traditionally been strong and relatively stable for us. We also experienced a weaker than usual amount of poach revenue as we saw customers shutting their plants down or reducing their utilization late in the quarter in response to weaker demand. At the same time, our business remains steady in the US and France due to continued stable demand from our packaging goods market.
Our packaging vertical continues to be the strength of our business as we are seeing growing demand for automated packaging solutions from the food handling and pharmaceutical industries, and we believe we’ve barely scratched the surface of this opportunity. There is a convergence of four trends that is driving this opportunity for us; the need for safe and secure means of packaging including hygienic handling and package integrity and traceability, the increased labor, liability, and fixed cost of production in the geographies where goods are produced, the proliferation of SKUs and packaged goods and the need for flexibility, and finally the significant increase in packaging robot ROIs driven by high-speed robots such as Quattro and improved system performance provided by integrated software and tracking solutions.
We believe that we are well positioned for this market with a strong brand and a differentiated product line built around our control, vision, and software IP along with our patented Quattro robot which as you know is specifically designed for high-speed manufacturing, packaging, and material handling making it ideal for this vertical.
During the second quarter, we began recognizing the cost synergies in the Quattro manufacturing process, and we were able to bring Quattro production costs down. We expect to further improve the margin of the Quattro as further cost synergies are realized in the near future. In addition to the improvements in production costs, we introduced a new packaging management software system called ACE PackXpert during the quarter. This new software product is specifically designed to assist packing manufacturers in the rapid development and deployment of packing applications reducing the time it takes to integrate and deploy packaging lines. We began selling ACE PackXpert alongside the Quattro in November of last year and expect this product to gain traction in our packaging vertical and to positively impact our overall gross margins.
On the strength of these products, Adept was selected by a major French cheese manufacturer as their high-speed packaging partner on a multiyear program to automate their European factories. We’ll begin to ship against this program in our June quarter and could see consistent unit volume from this program for the next few years. The performance of Quattro and the capabilities of our new PackXpert software reflect the compelling value proposition that Adept and its products bring to the food industry. We see the packaging market as both an important source of continued revenue for the company in the near term and a significant long-term growth opportunity. We are therefore going to continue to invest in marketing and aggressive promotion of our products and solutions into this market, with the goal of making Adept the de facto choice in packaging automation.
Now an update on our solar vertical. Suring the quarter, we continued to experience a pause in the ordering activity of our solar cell manufacturing customers as they were impacted by the difficult macroeconomic environment and adjust to the change in the global demand. We expect this softness to continue until the lending environment improves. The silver lining is that it slowed down the cycle of investment in the solar manufacturing industry provides an opportunity for manufacturers to revisit their automation requirements and plan for the integration of new and improved solutions. In general, we believe such cycles are beneficial to adept as it makes it easier for customers to initiate significant changes in their automation programs.
For a company such as Adept that is early in establishing its footprint in the solar market, we see this as a significant opportunity for us to get our high-speed handling and inspection solutions designed in for the next cycle of investment. As a result, our discussions with solar cells manufacturers have increased over the past quarter as we’ve begun to penetrate a gap that we have not been able to penetrate before. For example, one large solar cell line builder insisted a year ago they were too big to even consider our Quattro solution. Now as a result of the slowdown, we have a Quattro demo sitting on their floor being evaluated for inclusion in solar cell manufacturing lines in the future.
While we believe the slowdown in solar equipment orders will persist until the overall macro environment improves, we had laid the groundwork for long-term growth in the vertical and we continue to believe it represents a large opportunity for the company. Our focus in 2009 is to add more design wins and penetrate the market for high-speed handling and inspection products once the next cycle of investment occurs. We will also continue to invest in solar to ensure we are positioned to capitalize on the long-term potential of this market.
In the second quarter, we showcased our first product exclusively designed for the solar cell market, the new Eclipse system which integrates seamlessly with our Quattro solar cell handling system and has received very positive feedback to date. With initial success of Quattro and with targeted solutions such as Eclipse, we believe we are taking the right steps to enable Adept to emerge as a player in the solar cell manufacturing market, and we will continue to focus our business on building our presence in this large industry while continuing to invest in growing opportunities in our packaging business.
I’d like to wrap up briefly discussing our strategy moving forward. As Lisa will discuss in a few moments, we executed a comprehensive restructuring plan during the quarter as part of an overall initiative to focus on getting back to cash flow positive operations. We took numerous steps to lower our operating costs to offset the lower revenues we are seeing during this difficult economic environment, including headcount reductions. Starting the third quarter, we have implemented across the board employee and management cuts and a 20% reduction in my own salary. Despite these significant cost reductions, we are committed to continue to invest in our packaging and solar vertical, and we remain confident that with our strong balance sheet, we will be well positioned to return to growth once the economy begins to recover.
Now, I’d like to turn the call over to Lisa to go through the quarterly financial results in more detail.
Lisa M. Cummins
Revenues for Adept’s fiscal 2009 second quarter ended December 27, 2008, were $11 million, down 24% year over year from revenues of $14.4 million in the second quarter of 2008 and down 23% on a sequential basis from $14.3 million in the first quarter of fiscal 2009. The decrease in revenue was driven mainly by a decrease in capital spending related to our industrial and automotive business in Germany, which affected both our robotics and services business. As we’ve mentioned previously, our Q2 a year ago did include an unusually large license deal for approximately $765,000.
By business segment, robotics revenues which represent sales of our intelligent robotic systems, vision guidance technology, and third party robotic mechanisms and components were $8.5 million in fiscal 2009 second quarter, down 25% year over year from robotics from robotics revenue of $11.4 million in the second quarter of fiscal 2008 and down 22% sequentially from $10.9 million. In our services and support businesses, revenues were $2.5 million in the second quarter of fiscal 2009, down 17% from $3 million in the second quarter of fiscal 2008 and down 26% from $3.4 million in the first quarter of 2009.
Looking at revenue by region, 38% of sales were from the US in the second quarter of fiscal 2009 and 68% were international. This compares with the second quarter of fiscal 2008 when 28% of the sales were from the US and 72% were international. At $4.1 million in Q2, sales in the US were up 2% compared with the second quarter of 2008, supported by stable demand from the packaging market. European sales of $5.6 million in Q2 were down 26% from year ago levels and reflected a declining capital spending from our industrial business coming out of Germany, mainly attributable to their automotive industry. We continue to see relatively strong demand for Adept products from the packaging vertical in France. Sales in Asia were down as well, reflecting significantly reduced demand from the already depressed disk drive market.
Turning now to gross margins, for the fiscal 2008 second quarter, reported gross margin was 42.2% of revenue compared to 50.4% in the second quarter of fiscal 2008 and 46.2% in the first quarter of fiscal 2009. Gross margin in the year ago quarter was positively impacted by a more favorable mix of products sold as well as the previously mentioned large license deal which was very high margin and which accounted for 5.3% in that period.
Also the weakening of the euro and strengthening of the yen versus the dollar negatively affected gross margin this quarter due to products sold and invoiced in euro as well as products sourced from Japan paid with yen. We expect that gross margins in future period may continue to be negatively affected by the weakening of the euro against the US dollar as a significant portion of our revenues is in euros. However, we also expect that gross margin in future periods will be positively impacted by cost reductions in some of our products, specifically the Quattro, which will be fully recognized in the third quarter of fiscal 2009 as well as the addition of our new packaging software product which carries with it a higher margin.
As reported in accordance with GAAP, operating expenses in the second quarter of fiscal 2009 were $8.8 million, which includes the previously mentioned restructuring charges and write down of service inventory totaling $1.9 million, as well as expenses related to our US headquarters relocation offset by a deferred rent reversal, expenses related to the lease termination dispute and settlement, and increases to bad debt reserves. All of these charges including our restructuring totaled $2.1 million. This compares to operating expense s of $6 million in the same quarter of fiscal 2008 and $7.7 million in the first quarter of 2009. As a result of our restructuring and cost-cutting actions that John mentioned, we expect that our fixed SG&A run rate will be reduced by approximately $700,000 to $1 million per quarter going forward.
Operating losses as reported under GAAP were $4.1 million in Q2 ’09 compared with an operating income of $1.3 million a year ago and an operating loss of $1.1 million in the first quarter of 2009. Adjusted EBITDA loss which excludes interest earned, depreciation, goodwill impairment, amortization, taxes, and stock option expense was $3.2 million in the second quarter of fiscal 2009 compared with positive EBITDA of $2.1 million in the second quarter of fiscal 2008 and EBITDA loss of $8 million in the first fiscal quarter of 2009, both of which excluded similar non-cash items.
Adept recorded a net loss of $4.6 million or $0.57 per share in the second quarter of fiscal 2009, which includes $2.1 million in restructuring and other charges, as well as $500,000 loss from foreign currency exchange related to the strengthening of the US dollar and Japanese yen. This compares to net income of $1.5 million or $0.18 per share in Q2 ’08 and a net loss of $1.6 million or $0.20 in the first quarter of fiscal 2009.
Turning now to the balance sheet, Adept ended the quarter with cash and short-term investments of $11 million compared with $12.3 million at the end of September. Accounts receivables were $9.7 million at the end of December, down $3.2 million compared with $12.9 million at the end of September. Inventory levels were $9.9 million at the end of the second quarter compared with $9.7 million at the end of September.
With regard to our outlook for the remainder of fiscal 2009, the uncertainty arising out of the macroeconomic environment impairs our visibility as to our fiscal 2009 results, and as such we no longer support the fiscal 2009 guidance previously provided, and so it would be imprudent to provide guidance until visibility improves.
Having said that, our focus is to get back to generating cash flow while at the same time investing wisely in our target markets. As a result of lower anticipated revenue, we executed a comprehensive restructuring plan during the quarter. The restructuring plan included a reduction in labor force of approximately 9% of Adept employees, the consolidation of facilities, additional outsourcing of non-core functions, the consolidation of certain operating functions, and the phase-out of certain legacy products including remanufactured robots.
Since then, starting the third quarter, the company implemented a pay cut for all employees of the company as well as a 20% pay cut for our CEO beginning in the third quarter of fiscal 2009. The company anticipates the restructuring actions and additional employee compensation cuts will result in a reduction of operating expenses of $700,000 to $1 million per quarter. Q3 ’09 will be the first quarter in which the full effect of the cost reduction measures will be recognized.
While calendar 2009 will doubtless be a difficult year for everyone, with our leading automation products, lower expense levels, and strong balance sheet, we believe Adept is positioned to drive forward our business strategy in a very difficult environment. Now, we would like to open call for questions.
(Operator Instructions). Our first question comes from the line of John Nelson with the State of Wisconsin Investments.
John Nelson – State of Wisconsin Investments
Could you provide some comments on what’s going on with your competition and why you feel at least in the packaging space why the Quattro is so much superior?
Quattro really has a couple of compelling advantages to the market. One is speed. We have been benchmarked against every other packaging mechanism on the marketing, and it proves to have the fastest cycle time in the industry, and then secondly, it comes with our very well and tightly integrated vision technology which allows us to be able to see objects on a moving belt and track them and pick them at a very consistent and high rate of speed, which gives us performance advantages and applications. We are very excited about this. It also is a patented technology base, so it’s not a set of IP that would be able to come out from other manufactures. That’s all very positive. The market opportunity, we believe, is on the cusp of a very exciting period of time. The food industry and the pharmaceutical industries have been around for a long time, but what’s really driving opportunity now is the convergence of the need for more hygienic packaging. Over the last year, there have been several E. coli and salmonella scares that have occurred that really are negatively enhanced by having people in the packaging rooms, so the drive for safety, the drive for speed and flexibility, and the drive for the cost which is going up in the geographic markets are all making the opportunity for robotic packaging a much more salient opportunity now, and we think we’ve got the best product line and the most differentiated product line in the industry, and we are really going to work hard over the next year to exploit that opportunity.
John Nelson – State of Wisconsin Investments
Can you give us any idea as to how to better assess the potential opportunity that is as far as either construction of new plans or refurbishing and replacing old packaging equipment with new packaging equipment, any kind of cycle that part of the business tends to go through?
It’s hard to give you a measure of that, but let me just characterize it for you. First off, one of the reasons besides a well differentiated product line that we are pursing this market so aggressively this year is it tends to be less affected by economic conditions in other markets. People have to eat and as such it requires full running of the factories independent of where the economy is. The opportunity is really built around replacing historic non-automated lines, so the other thing that’s exciting about is it is it’s not build a new factory and then put a lot of equipment into an opportunity, it’s to take exiting lines that have been running that have not been automated and apply automation to it, so it’s really a cost reduction opportunity, so what’s good about that in an environment like this is that the capital cost to get into it are much lower than if you had to build a whole factory and then provide equipment, and secondly, all manufactures are looking for ways to get their cost down, and this is purely a cost play for manufacturers. It allows them to lower their packaging cost for hopes of reasons including labor and including environmental issues, and therefore we think it’s a good opportunity.
John Nelson – State of Wisconsin Investments
Is this an area where you had to staff up for sales to fully exploit this opportunity or are you just keeping the level of employees in the sales effort stable in this area? I am curious if you’re expanding it or if this is an area that you’re just leaving at current levels.
There are two ways to answer your question. The first is what’s good about it is that we entered this space 25 years ago and established a very healthy brand for this in the market place. We let that erode a little bit in the ‘90s and didn’t invest in products specifically for that market, but we’ve got a very good historical brand in this market, which is obviously a great starting point with a long history of some very good installations with key customers. The second piece is that it really plays to our technology strength. The integration of high-speed vision with robots is a core competency of us. We do it better than anybody else in the world. We’ve been doing it for longer than anybody else in the world, and so that plays really well into the opportunity. Given of course the pressure in terms of trying to maintain our operating expenses, it’s really more a matter of shifting resources onto this initiative as opposed to going out and hiring a whole new sales team, but we’ve been actively engaged in the market from an aggressive promotion standpoint for the past 18 months, and we just expect to start to continue that investment into packaging, and we expect to start to reap the rewards of the product investments we’ve made over the past couple of years in both hardware and software, and so it’s going to be taking advantage of the investments we’ve been making and we’re going to refocus even more of our resources on it from a commercial standpoint.
(Operator Instructions). Mr. Dulchinos, there are no further questions at this time. Please continue with any closing remarks.
I’d like to close by thanking all of you for joining us during the call. We appreciate your support on behalf of Adept, and we look forward to speaking at the next earnings release and continuing to work together here.
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