Adept Technology Order May Signal Turnaround

| About: Adept Technology, (ADEP)

(Editors' Note: This article discusses a micro-cap stock. Please be aware of the risks associated with these stocks.)

Adept Technology (NASDAQ:ADEP) recently received a $2.6 million order from Castec International for robotics for semiconductor manufacturing (See Adept 6/18/2013 press release). While revenue from the order is not likely to be recognized until the second half of 2013, combined with other trends it may signal a turnaround for revenue at Adept. If so, investors could look forward to a rebound in the stock price.

Revenue slumped at Adept in the second half of 2012 and the slump continued through Q1 2013:

Calendar quarters Revenue in millions of $
Q1 2012 17.5
Q2 2012 17.0
Q3 2012 11.4
Q4 2012 10.8
Q1 2013 10.9

Market capitalization at 6/27/2013 closing price of $3.88 was $42.2 million, so this is a microcap.

52 week high was $4.69 on 8/29/2012, 52 week low was $2.38 on 12/31/2012. Back in late 2008 ADEP stayed above $8 a share for a while.

Earnings per share have been negative on an annual basis every fiscal year since 2009. Even when fiscal Q3 (calendar Q1) revenues were $17.5 million, in that quarter there was a GAAP net loss of $1.5 million per share.

So why have I made a long-term investment in ADEP? I think this company has a strong (but not guaranteed) chance of growing into a larger and more profitable robotics company. Let's look at why revenue slumped and what the ingredients are for a turn-around.

Calendar Q1 2012 was buoyed by strong demand in Adept's traditional market segments. Automotive and industrial customers in Germany, as well as electronics manufacturers in Asia, led the demand. As 2012 progressed demand fell in Europe due to macroeconomic issues. At the same time excess capacity in the solar industry in China and the normalization downward of the disk-drive capital equipment market in southeast Asia took out key sources of Adept sales.

The good news is that management put the company through a strategic review and restructuring. The breakeven point should be $13.0 million of revenue per quarter, later this year. Gross margin started improving in the March 2013 quarter. Orders also picked up that quarter but there can be longish lead times between orders and revenue recognition.

A lot of the momentum is coming from new and improved robots. The Lynx autonomous mobile robot platform generated orders in the semiconductor space and its first orders in the logistics space in the quarter. The first logistics customer is a large industrial company located in the Midwest of the U.S.

Adept also makes packaging robots for the food industry. After some initial success with a single customer in California these robots are under consideration by larger potential customers in the Midwest. Adept is also looking for partners for the food packaging robot business.

Historically Europe provided 50% to 60% of Adept revenue, so the slump there remains a concern. Given the high cost of labor there it is likely the demand for robots will return as the area's economy revives, whenever that may be.

Investors should watch June and September results closely for potential increases in orders and revenue.

Adept had just $6 million in cash at the end of March, but was debt-free. In this situation, if orders do ramp faster than expected, that might not be sufficient cash to build inventory, but that is a good problem to have.

The market for industrial robots is growing. Adept has shown it can build and sell robots. If orders continue to ramp it is likely Adept Technology will turn profitable in the September or December quarter. The main downside risks are business confidence in Europe and continuing industry-specific issues. A downturn in semiconductor manufacturing capital equipment spending, for instance, would negatively impact Adept.

Disclosure: I am long ADEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.