Lisa Cummins – VP of Finance and CFO
John Dulchinos – President and CEO
John Nelson – State of Wisconsin Investment
Adept Technology, Inc. (ADEP) F3Q09 (Qtr End 03/28/09) Earnings Call Transcript May 6, 2009 5:00 PM ET
Ladies and gentlemen, thank you for standing by. Welcome to the Adept Technology fiscal 2009 third quarter results conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Wednesday, May 6th of 2009. At this time, I’d like to turn the conference over to Lisa Cummins, Chief Financial Officer of Adept. Please go ahead, ma’am.
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, May 6, 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 fiscal 2009 third quarter 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 explanations discussed above, is available on the Investor Relations section of our website. Following our introductory comments, we will open the call to take your questions.
I would now like to turn the call over to John Dulchinos for some opening remarks.
Thank you, Lisa. Thank you, everyone, for joining us today. Before we go through the quarterly results in detail, I would like to give you a brief update on our business. Obviously, the effects of the macroeconomic environment had a significant impact on our third quarter results, especially in the months of January and February. We saw our customers idle their plant in response to the lack of demand and delayed capital programs that are not mission critical, both of which had a significant impact on our sales.
The slowdown in the third quarter was broad, affecting all of our geographies and markets. The good news is that customer order activity began to recover in March and has continued into April. So we believe that our business has reached the floor and beginning to stabilize. We are encouraged by the improved activity in our key markets and geographies over the last couple of months and also by the continued feedback we are receiving from the market about our products.
Given the uncertainty that still remains in the macroeconomic environment, we took steps in the March quarter to further strengthen our financial position and implemented a second phase of restructuring, which should provide an additional $1 million per quarter in operating expense savings. Additionally, we have secured a line of credit of $5 million from Silicon Valley Bank, which provides with additional liquidity.
With our strong balance sheet and with our realigned cost structure, we feel confident that we have sufficient cash to weather this economic storm. And equally of important with our strong product portfolio in packaging and solar and design win activity in these key markets, we are confident we are well positioned to return to growth and profitability once the economy begins to recover.
Now let me go through our key markets in a little more detail. Our packaging business continues to be our strongest market as we are seeing continued demand for automated packaging solutions from food handling and pharmaceutical industry. And we believe we have barely scratched the surface of this opportunity. Some of the driving forces behind the move towards automation and packaging solutions is the need for safe and secure means of packaging, including hygienic handling and packaging integrity and traceability. It seems like there is a food scale potential pandemic popping up every couple of weeks in the news, and as such, food manufacturers are intent in finding ways to protect their consumers and ultimately their businesses.
With some [ph] addition to increased label, liability and fixed cost, as well as a proliferation of SKUs in package goods is driving the need for flexible, safe and secure automated packaging solutions. We believe Adept is perfectly positioned to penetrate this market with our strong brand in differentiated product line built around our control, vision, and software IP, in which as the centerpiece our patented Quattro robot, which is specifically designed for high-speed manufacturing, packaging, and material handling, making it ideal for this market.
In November of last calendar year we began selling Quattro along with a new packaging management software product called ACE PackXpert. This new software product is specifically designed to assist the packaging manufacturers in the rapid development and deployment of packing applications, reducing the time it takes to integrate and deploy packaging lines. With ACE PackXpert to fully differentiate Adept’s packaging solutions, Quattro robot orders were up 29% quarter-over-quarter and 73% year-over-year, showing our continued success building design wins in our packaging market.
Also we mentioned last quarter a major French cheese manufacturer selected Adept as their high-speed packaging robotics partner on a multi-year program to automate their European factories. We will begin shipping against this program this summer and could see consistent volumes from this program over the next few years.
The performance of Quattro and the capabilities of our new PackXpert software reflect a compelling value proposition that Adept and its products bring to the food industry. In a recent study by PMMI, the Packaging Machinery Management Institute, packaging companies cited throughput and maintainability as the top two requirements in selecting robotic systems for their packaging applications.
We believe the combination of Quattro and ACE PackXpert uniquely positions Adept to address these important needs. 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 therefore 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 standard in this important market.
Now I’d like to update you on our solar business. As well documented in press and recent earnings report, the solar power market is in the midst of a slowdown in global demand and resulting over-capacity manufacturing. As a result, we continue to see a suspension in the ordering activity from our solar manufacturing customers that we experienced in the second quarter.
We expect this softness to continue until the lending environment improves and demand returns. The passing solar manufacturing industry provides an opportunity for manufacturers to revisit their automation requirements and plan for the integration of new and improved solutions. It is much easier to initiate significant changes in their programs when activity is slower and the market is less demanding.
For companies such as Adept that are early in establishing a 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 cell manufacturers (inaudible) a potential design in to their toolsets have continued to increase over the past quarter, as we continue to penetrate accounts that we have not been able to penetrate before.
An example of this is a recent design win in Taiwan where our Quattro robot and inspection products were selected in place of alternative solutions from Germany on a multi-year program and it’s expected to ramp over the next two to three years. In the domestic market, our major US-based solar equipment OEMs qualified the first tools using our Quattro robot and vision inspection technology. We expect this program to ramp once the market begins to reinvest in capacity.
Last quarter we showcased our first product exclusively designed for the solar cell market, the new Eclipse solar cell inspection system, which integrates seamlessly with our current Quattro solar cell handling system and received very positive feedback to date. We have been very active in demonstrating Quattro together with Eclipse as a completely automated solar cell handling inspection solution at all the premier photovoltaic industry shows such as the ones we recently attended in Europe and Japan.
Our focus in 2009 is to continue to add more design wins to penetrate the market for high-speed handling and inspection products once the next cycle of investment occurs. We continue to invest in solar to ensure that we are positioned to capitalize in a long-term potential of this market. With initial success of Quattro and a targeted solution such as Eclipse, we believe we have taken the right steps to enable Adept to emerge as a player in this market when it returns.
On the distribution front, we are excited to announce that we have signed two new distributors in Japan to focus on selling our automated packaging and solar solutions in Japan. As a reminder, Japan represents the largest robotics market with one-third of the world’s demand, and we’re excited about the opportunity that exists there for Adept with our innovative Quattro robot.
In our traditional European business, industrial business, demand was very low in the third quarter, as the automotive market in Germany was impacted by the same cautionary environment as elsewhere in the world, and automotive sales, production and distribution slowed. This has traditionally been a relatively stable market for Adept, we believe, again, once the economic conditions have improved.
I would like to wrap up briefly discussing our strategy moving forward. As Lisa will discuss in more detail, in addition to the comprehensive restructuring plan we executed during the second quarter, we took additional steps this quarter to further reduce our operating cost and to focus on managing our resource to successfully emerge in this economic downturn.
At the same time, we are continuing to invest in our packaging and solar businesses, as we see these two markets have significant growth opportunities for Adept and its automated solutions. We remain confident that with industry-leading products and a strong balance sheet, we will return to growth and profitability 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.
Thanks, John. Revenues for the fiscal 2009 third quarter ended March 28, 2009 were $7.7 million, down 52% year-over-year from revenues of $16.1 million in the third quarter of 2008 and down 30% on a sequential basis from $11 million in the second quarter of fiscal 2009. The decrease in revenue was driven by a significant drop in capital spending in January and February of this year as well as the shutting of some of our manufacturing customers operations during the first two months of the calendar year, which affected both our robotics and services business.
By business segment, robotics revenue, which represents sales of our intelligent robotic systems, vision guidance technology, and third-party robotics mechanisms and components, were $5.9 million in the fiscal 2009 third quarter, down 55% year-over-year from robotics revenue of $13 million in the third quarter of fiscal 2008 and down 31% sequentially from $8.5 million. In our services and support business, revenues were $1.7 million in the third quarter of fiscal 2009, down 45% from $3.1 million in the third quarter of fiscal 2008 and down 32% from $2.5 million in the second quarter of 2009.
Looking at revenue by regions, 34% of sales were from the US in the third quarter of fiscal 2009 and 66% were international. This compares with the third quarter of fiscal 2008 when 22% of sales were from the US and 78% were international. US sales at $2.6 million were down 28%, while sales to just drive [ph] solar in other markets were impacted. Demands in the US packaging market remained stable.
European sales of $4.3 million in Q3 were down 55% from year-ago levels and reflected a declining capital spending from our industrial and automotive businesses coming out of Germany, as well as declines in capital spending in our packaging and solar markets. Demand from the packaging market in France was stable. Overall, our packaging market, which includes food, cosmetics and medical, showed the most strength in the quarter.
Turning now to gross margins, for the fiscal 2009 third quarter, reported gross margin was 38.2% of revenue compared to 46.3% in the third quarter of fiscal 2008 and 42.2% in the second quarter of fiscal 2009. Gross margin was negatively impacted by under-absorption given our lower revenue.
On a positive note, our Quattro product margins remained steady throughout the quarter as a result of cost reduction programs we put in place several months ago. We expect the gross margin in future periods will continue to be positively impacted by cost reductions in our Quattro product as well as by the addition of our new packaging software product, which carries with it a higher margin and of course increased absorption of our products.
As reported in accordance with GAAP, operating expenses in the third quarter of fiscal 2009 were $6.4 million, which includes restructuring charges totaling $149,000. This compares to operating expenses of $6.6 million in the same quarter of fiscal 2008 and $8.8 million in the second quarter of 2009. Operating losses, as reported under GAAP, were $3.5 million in Q3 ’09 compared with an operating income of $886,000 a year ago and operating loss of $4.1 million in the second quarter of 2009.
Adjusted EBITDA loss, which excludes interest earned, depreciation, goodwill impairment, amortization, taxes, and stock option expense, was $2.6 million in the third quarter of fiscal 2009 compared with positive EBITDA of $1.6 million in the third quarter of fiscal 2008 and EBITDA loss of $3.2 million in the second fiscal quarter of 2009, both of which excluded similar non-cash items.
Adept recorded a net loss of $3.5 million or $0.42 per share in the third quarter of fiscal 2009, which includes $149,000 in restructuring and other charges as well as the $95,000 loss from foreign currency exchange. This compares to net income of $983,000 or $0.12 per share in Q3 ’08 and a net loss of $4.6 million or $0.57 per share in the second quarter of fiscal 2009.
Turning now to the balance sheet, Adept ended the quarter with cash and short-term investments of $8.7 million compared with $11 million at the end of December 2008. Accounts receivable was $7.7 million at the end of March, down $2 million compared with $9.7 million at the end of December. Inventory levels were $10.3 million at the end of the third quarter compared with $9.9 million at the end of December.
With regards to our outlook for the remainder of fiscal 2009, the uncertainty arising out of the current macroeconomic environment continues to impair our visibility as to our fiscal 2009 results, and therefore we feel 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.
In Q2 ’09, we implemented a significant restructuring plan. 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.
We also 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. These restructuring actions and employee pay cuts resulted in a reduction of operating expenses of $750,000 this quarter. In light of the ongoing worldwide recession and the significant slowdown we experienced in January and February, we implemented further cost containment measures during the third quarter, which will result in additional quarterly savings of approximately $1 million. We will see a significant impact to these additional measures in the fourth quarter and the full effect beginning in the first quarter of fiscal 2010.
While the economic situation continues to challenging, with our leading automation products, lower expense levels, and strong balance sheet, we believe Adept is positioned to continue to drive forward our business strategy even in this very difficult environment and further penetrate our key growth markets.
Now we would like to open the call up for questions.
Thank you, ma’am. (Operator instructions) And our first question comes from the line of John Nelson with State of Wisconsin Investment. Please go ahead.
John Nelson – State of Wisconsin Investment
Hi. I’d like to see if you can comment at all on the competitive landscape and if there has been any change looking over the last – either over the last quarter or prior year as far as – and more specifically for your particular products.
Sure. Hi, John.
John Nelson – State of Wisconsin Investment
(inaudible) have to back on the call again. I think – the market has been pretty stable in terms of competitive landscape over the past – certainly over the past couple of quarters and over the past year. I think in our world, the most significant thing that we’ve done was the introduction of Quattro, which brought us into a new market area in both packaging and solar with a patent-protected technology. And we’ve just been getting the beginning of starting to experience the benefits of that technology in that product line. So we are – I believe we are in a very good competitive position.
If I look at the two areas we focused on, packaging and solar, our products have the best differentiation that we do in any of our markets. The size, the speed, the performance characteristics of Quattro, along with our vision technology and our new ACE PackXpert and solar software give us a really unique product offering. And I think the key thing is we are just starting to get to our stride when the markets go up [ph]. So, from a competitive standpoint, I feel very good about our position. I feel like we are very well poised to penetrate these markets when they start to reinvest in capital equipment. Does that answer your question?
John Nelson – State of Wisconsin Investment
Yes. Just as a follow-on, because I think a lot of the listeners probably don’t know is – who are your leading competitors in the packaging area and then in the solar area?
Sure. We have levels of competition. In packaging, our largest competitor is – quite frankly, our largest competitor is doing it by hand. So the biggest opportunity for us in packaging is to take manual packaging lines and convert them to automation. If you then go down a segment and say what’s the next level of competition, then it would be to you some kind of machinery to package your products, which offers high speed, but doesn’t offer the flexibility or the delicate handling that we can offer. And then if you get down a level further, then ultimately it’s the large robot companies like FANUC and ABB and others. But really for us, the most significant opportunity for us in packaging is to replace manual packaging with robotic.
In solar, our biggest competition is – has been Ingrain Solutions [ph]. So we got to market a little bit late in the last cycle with Quattro just because of the development cycle. And what we found with a number of entrenched solutions that were in design wins that couldn’t be displaced because of the market activity that was going on. So what actually this downturn has done is that it forwarded [ph] up the opportunities to go into some of these legacy design wins and these customers now have been (inaudible) Quattro. And as we talked about, with this design win in Taiwan as well as the one in the US here, those are some of some recent design win activity that is showing that we are able to start to penetrate these opportunities. Now, it won’t bring huge revenue in the near-term as companies will start buying, but when the market returns, more than design win choice and have the opportunity to get the ramp in revenues and growth in unit volumes.
John Nelson – State of Wisconsin Investment
Okay. Very good. Thank you.
Thank you. (Operator instructions) And I’m showing there are no further questions in queue. I’ll turn it back over to the management for any closing comments.
Great. Well, thank you, everybody. 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 with you at the next earnings release and continuing to work together here. Thank you very much and good night.
Thank you, sir. Ladies and gentlemen, if you’d like to listen to a replay of today’s call, please dial 303-590-3030 or 1-800-406-7325. The passcode is 4066204. Once again, the numbers are 303-590-3030 or 1-800-406-7325, and the passcode 4066204. Thank you for your participation. You may now disconnect.
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