Adept Technology, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript

| About: Adept Technology, (ADEP)

Adept Technology, Inc. (NASDAQ:ADEP)

F4Q09 Earnings Call Transcript

September 2, 2009 5:00 pm ET


Lisa M. Cummins – Chief Financial Officer

John D. Dulchinos – President and Chief Executive Officer


John Nelson – State of Wisconsin Investment Board

Joey Nacurgie[ph] - State of Wisconsin Investment Board


Ladies and gentlemen, thank you for standing by. Welcome to the Adept Technology fiscal 2009 fourth quarter and year end financial results conference call. (Operator instructions) This conference is being recorded today, Wednesday, September 2, 2009. At this time, I’d like to turn the conference over to Lisa Cummins, Chief Financial Officer.

Lisa M. Cummins

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, September 2, 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 fourth quarter and year end 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 Web site. 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.

John D. Dulchinos

Good afternoon everyone. Before we go through the financial results in detail, I will provide you with a brief update on our business during our fourth quarter.

Revenues for the quarter increased on a sequential basis though remain substantially below previous levels. Despite continued weakness in the global economy, we are pleased that the modest growth we have experienced and believer we have seen the bottom of the downturn.

Orders for the quarter increased 30% over the March quarter with growth coming from the packaging and disc drive markets. In addition, we continued to see solid activity within the solar segment, though as we have said in the past, these wins will not translate into meaningful revenue growth until manufacturing spending increases.

The cost-cutting efforts that began in March are now in full effect. During the fourth quarter cash operating expenses declined by the full addition of $1.0 million we had set as our objective for ourselves, which represents a 16% sequential decrease.

For the full year, we reduced our fixed expense space by $1.4 million per quarter through a variety of restructuring activities and this has helped preserve the flexibility to continue to operate and invest for the future in this difficult economic period.

Given the relative strength we are beginning to see, and as the economy improves and revenues increase, we will continue to strategically invest to facilitate growth. However, we believe we will maintain the bulk of these cost savings going forward, improving margins and cash flow.

Lisa will go into more details on this, but I would like to make a few comments on the lower gross margin we are reporting today. While under [inaudible] continued to negatively impact margins, there were also some one-time write-downs of excess inventory which accounted for the majority of the decline. We expect to return to a more normalized gross margin as revenues improve throughout fiscal 2010.

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 the food handling and pharmaceutical industries, particularly in France. The recent global pandemic is a reminder of the importance of sanitary food handling and food manufacturers are intent on finding ways to protect their consumers, and ultimately their businesses.

Pharmaceutical companies also have increased motivation to avoid contamination and move towards automated packaging solutions as the demand for vaccines across the globe increases dramatically.

Sales of our Quattro robot remain strong, our ACE PackXpert software is now shipping with each Quattro, and continues to be a key differentiator for Adept, driving further design wins with packaging manufacturers.

The global packaging market represents an enormous opportunity for us and we are continuing to make strategic investments in order to secure a leading position in this large market.

This fall we have major marketing events planned in the U.S., Germany, and Japan, where we will be introducing a new food wade version of the Quattro robot. In addition, we have strengthened our presence in Japan, aligning with two large, established distribution partners. With these efforts, we expect to drive increased penetration into this market, the world's largest robotics market, and are confident that even with modest success we can generate a healthy growing revenue stream.

While France has tended be the strongest market for us geographically, we are seeing signs of stability in Germany and the U.S. Design win activity with packaging customers is picking up and we believe that the economy when we get to full recovery we will be well positioned to benefit from an increase in demand.

We believe the combination of Quattro and ACE PackXpert uniquely positions Adept to address the specific needs of the packaging market. We see packaging as both an important source of continued revenue for the company in the near term and a significant long-term growth opportunity for the future.

Another indication of possible economic strengthening is our recent announcement regarding a $2.5 million order from a leading international consumer electronics manufacturer who use our robots for precision handling and assembly operations. This order is expected to be fulfilled and recognized in our first fiscal quarter ending in September.

As a whole, the solar market continues to be in a retrenching phase of its economic cycle, and thus order activity from our solar manufacturing customers remains suspended. We continue to aggressively pursue the solar market through customer demonstrations and marketing activities and have secured design wins that will become active as the economy picks up.

While revenues currently remain low in this segment, we believe our solar business will ultimately benefit both from a stronger economy and from the current downturn that is providing solar manufacturers an opportunity to revisit their automation requirements and plan for the integration of new and improved solutions.

It is much easier to initiate significant changes in manufacturing programs when activity is slower and the market is less demanding. As a result, our discussions with solar cell manufacturers regarding a potential design in to the tool sets has continued to increase over the last quarter. And we are beginning to penetrate accounts that we have not been able to penetrate before.

To put this in perspective, during the last solar market investment cycle in 2008 our robots were designed into three equipment manufactures tools. Today, our Quattro robot is designed into ten different equipment manufacturers tools and just three weeks ago we formally signed a global supply agreement with one of the largest solar equipment manufacturers in the world to use Quattro as the automated handling solution for their solar cell process tools.

As a result of these activities, we believe we are very well positioned to grow when the solar market gains its momentum.

Looking ahead, our primary objective is to return to profitability and to become cash flow positive from operations by growing revenues in our verticals of packaging and solar and leveraging our new reduced operating expense base. Despite continued softness on a relative basis, we believe that as we enter the new fiscal year, we are taking the appropriate steps to achieve these goals.

We are encouraged by the improved activity in our markets and geographies and are confident that we are strengthening our position to enable growth once the economy begins its full recovery.

I will now turn the call back over to Lisa for a review of financial results.

Lisa M. Cummins

First I will review the results of our fourth fiscal quarter ended June 30, 2009, then move on to the full fiscal year.

Revenues for Adept's fiscal 2009 fourth quarter were $8.6 million compared to $7.7 million in the third quarter of 2009 and to $16.7 million for the same period last year.

As John mentioned earlier, we are encouraged by the sequential increase in revenue and order activity, which was driven by strength in our packaging business. The decrease when compared to last year is attributable to the drop in capital spending related to the weak macroeconomic environment.

By business segment, robotics revenue, which represents sales of our intelligent robotic systems, vision guidance technology, and third-party robotics mechanisms and components was $6.8 million in the fourth quarter compared to $5.9 million in the third quarter of 2009, and $12.6 million in the fourth quarter of 2008.

Looking now at our services and support businesses, revenues are $1.7 million in the fourth fiscal quarter of 2009 compared to $1.7 million in the third quarter and $4.0 million in the fourth quarter of 2008.

Looking at revenue by region, European sales were 61% of total revenues in the fiscal fourth quarter of 2009, with strength primarily coming from France. Asian sales in the fourth quarter were 13% and U.S. sales were 24% of revenues in Q4 2009.

Turning now to gross margins. The fiscal 2009 fourth quarter reported gross margin was 31.7% of revenue compared with 38.2% in the third quarter of 2009 and 48.5% in the fourth quarter of fiscal 2008.

Our gross margin was negatively impacted by lower volumes, which caused under-absorption in fixed manufacturing expenses. In addition, during the quarter we wrote down $782,000 of excess inventory. We expect that overall gross margins will begin to return to more normalized levels as our revenues improve throughout 2010.

As John indicated earlier, cash expenses decreased by $1.0 million from the third quarter of 2009, which excludes non-cash items of $659,000 for the write-off of intangible assets and goodwill related to the acquisition of Cerebellum [Automation SAS].

Including these non-cash items, we reported operating expenses of $6.0 million for the fourth quarter. Excluding these non-cash write-offs operating expenses would have been $5.4 million, down from $6.4 million last quarter and $8.0 million in the same quarter of fiscal 2008. The significant cash savings is attributable to cost-cutting measures that executed in the second half of fiscal 2009.

Operating loss for the quarter was $3.3 million compared with an operating loss of $3.5 million in the third quarter of fiscal 2009 and an operating profit of $116,000 in the year ago quarter.

For the fourth quarter we reported a GAAP net loss of $3.3 million, or $0.40 per share, which compared to a net loss of $3.5 million, or $0.42 per diluted share, in the third quarter and a net income of $900,000, or $0.10 per diluted share in the fourth quarter of fiscal 2008.

Adjusted EBITDA, which excludes interest earned, depreciation, amortization, taxes, and stock option expense, was $1.5 million in the fourth quarter compared with adjusted EBITDA loss of $2.6 million in the third quarter of fiscal 2009 and $1.4 million in the fourth quarter of fiscal 2008.

Now on to the full fiscal year.

Revenues for fiscal year 2009 were $41.5 million compared to $60.8 million for fiscal 2008. By business segment, robotics revenue, which represents sales of our intelligent robotics systems, vision guidance technology, and third-party robotics mechanisms and components, were $32.2 million in fiscal 2009 compared to $46.7 million in fiscal 2008 as both production activities and capital investments slowed as a result of the weak global economic environment.

For our services and support businesses, revenues were $9.4 million in fiscal 2009 compared to $14.1 million in fiscal 2008, reflecting lower sales of remanufactured robots for disc drive and consumer electronics manufacturers in the U.S. and Asia, as well as lower demand from the automotive electronics and industrial markets in Germany.

European sales were 54% of total revenues in fiscal 2009, reflecting decreased demand from the automotive, electronics, industrial and solar markets in Germany, partially offset by a robust market in France with packaging applications. Asian sales in fiscal 2009 were 12% and sales from the U.S. were 31% of revenue.

Gross margin for the full fiscal year 2009 was 40.7% of revenue compared with gross margin of 49.5% in the previous year. Margins were driven down by several factors, including lower volumes, which caused under-absorption of fixed manufacturing expenses and less favorable product mix, primarily as a result of lower sales volumes in Europe and favorable currency impact on both the revenue and cost lines and the inventory write-downs totaling $782,000 in the fourth quarter.

All of these factors are partially offset by increased product margins from our Quattro robots.

Operating expenses in fiscal 2009 came in at $28.9 million compared to $27.3 million in fiscal 2008. As John mentioned, restructuring actions were executed during the year, resulting in a $1.4 million quarterly reduction in fixed operating costs from Q2 to Q4 of fiscal 2009.

Operating loss in fiscal 2009, as reported under GAAP, was $12.0 million compared with an operating income of $2.8 million in fiscal 2008. GAAP net loss for the fiscal year was $13.1 million, or $1.60 per diluted share, of which compares with net income of $3.6 million, or $0.44 per dilutes share, for fiscal 2008.

Adjusted EBITDA, which excludes interest earned, depreciation, amortization, taxes, and stock option expense, was a loss of $8.1 million for the fiscal 2009 year compared with adjusted EBITDA of $6.2 million for fiscal 2008.

Turning now to the balance sheet, Adept ended the quarter with cash and short-term investments of $7.5 million, compared with $8.7 million at the end of March. Accounts receivable were $7.0 million at the end of June compared with $7.7 million at the end of March. Inventory levels were $8.1 million at the end of fourth quarter compared with $10.3 million at the end of March.

With that, I will now turn the call over for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Nelson – State of Wisconsin Investment.

John Nelson – State of Wisconsin Investment Board

I was wondering if you could us some additional information on what kind of drivers spark the use of your particular robotic equipment versus the traditional packaging equipment.

John D. Dulchinos

Really what it comes down to is packaging is done really one of two ways. One is by hand, where you physically have to pick something up, look at it, and place it into some kind of wrapping machine or some kind of carton or some kind of box. And if all of that is very standardized, like an Oreo cookie, then you can use a machine to do that and the machine will slide and push the product, like Oreos, into a roll that will then get split into a wrapping machine.

A lot of products can't be handled that way. They have to actually have to be physically picked up, oriented, and placed and that's really where robots come in. And as the market is moving towards more and more flexibility in packaging, it's moving towards more green packaging, as the number of SKUs expand, there is a tremendous amount of pressure now on food manufacturers to be able to have a lot of flexibility in their packaging.

And to do that, they are kind of forced into the scenario where they either have to do it by hand or the only alternative to that is robots. And that's a real exciting driver right now. And what really had changed the landscape over the last few years is products like Quattro, which are twice as fast as traditional robots. So if you would think of cost justifications, a Quattro robot will deliver twice the packaged goods out of the same amount of factory space as a traditional robot.

And that's been a real driver. We continue to make very good progress on our Quattro robot in penetrating the packaging market and I think that trend is just going to continue as we move forward here.

John Nelson – State of Wisconsin Investment Board

Since so much of various types of production is moving offshore and so much of global growth is either in the south central America or Asian markets, what are you doing to address those opportunities in that part of the world?

John D. Dulchinos

First off, there is an economic driver as to what makes sense to move offshore and what doesn't make sense to move offshore. And it really ultimately comes down to certain industry segments have moved offshore and other industry segments have not moved offshore and if you kind of thing about areas that have, very low value items, things like kids' toys, plastic cutlery, disposable cups, textile, some of that stuff just has so little value that that's it's been a popular thing to move to markets like China and other geographies.

And then the other thing has been consumer electronics. It's been a real concentration over the last ten years, cellular phones, disc drives, iPods, and all sorts of consumer electronics that have been concentrated in southern China as a manufacturing site.

We have got two initiatives really that kind of speak to this. One is certainly we're concentrating on markets like the food, pharmaceutical, and certain consumer markets that have enough regulation or enough need to stay in geographies where they won't move to Asia, so that's really why we've had such a strong push into the packaging market.

Secondly, we've also concentrated on product lines like solar cell manufacturing, that when they do get moved to China, the value proposition is such that the scrap associated with handling those products by hand will require automation to be a key part of the equation.

And it depends on your time fence. If your time fence is one year, certainly offshore manufacturing in China has made a dent in our markets, but if you look forward five years or ten years out, there is no doubt in my mind that mechanization and robots are going to win. I mean, people are just are not machines and they just are not built to run the consistency and the high throughput levels that machines can do. So there's no doubt in our minds that robots will win.

That's one of the reasons we've been pushing hard into—we have established a distribution entity in India, we established a Korean distributor last year, we've established a new distributor in Taiwan and we've established new distributors in Japan, all in an effort to build a better presence in those Asian markets for when they do start to invest in automation.

John Nelson – State of Wisconsin Investment Board

You would say in general that for your key areas like food, pharmaceuticals, and solar that a number of those Asian markets aren't yet ready to invest significantly in automation, they're still geared towards the do-it-by-hand method?

John D. Dulchinos

Let me restate the question and the answer a little bit differently. I think first off, you have to look at from a geographic standpoint. The U.S., and certainly the consumer electronics market, have been pretty aggressive to move to Asia. If you go to Europe, Europe has been much more focused on maintaining a manufacturing capability in Western Europe and that's one of the reasons over the last few years we've had such a strong growth in Europe, because they are continuing to manufacture aggressively in Europe and are not offshoring at the rate that the U.S. is.

And then if you look at specific products and markets, like pharmaceutical products, food products, the financial equation or the regulatory environment doesn't justify moving those to less regulated markets or far-away markets. And so I don't see a day where food will all come from China. I think food factories are going to China to service the China market but it doesn't make sense to produce a Twinkie in China and ship it all the way to the U.S. The equation doesn't make sense. So there will always be a strong need for equipment here.

And I think the last thing I will say relative to the U.S. manufacturing base, there was a great article in Time back in May that highlighted that the world's largest manufacturer today is the United States. It's getting the press, the stuff that's getting offshore to China, but what happened if the big naval plant twenty years in automotive have been shrinking but what has been created is a lower-volume, smaller, niche-oriented U.S. manufacturing base and I think as that manufacturing base grows up, they're going to need automation to remain competitive. And at those kind of volumes and mix levels, robots are going to be the only choice to be able to automate those factories. So we feel really good about the long term, and the U.S. coming back as a very strong market for us in terms of our robotic sales.


Your next question comes from Joey Nacurgie[ph] - State of Wisconsin Investment Board.

Joey Nacurgie[ph] - State of Wisconsin Investment Board

You talked about the normalized gross margins next year moving up and where are you thinking normalized gross margins can go in fiscal 2010? Is it more in the mid-40s?

Lisa M. Cummins

That's exactly what we're thinking, somewhere in the low-to-mid 40s.

Joey Nacurgie[ph] - State of Wisconsin Investment Board

And is it just a question then of revenue increases that's going to do this?

Lisa M. Cummins

Yes. As revenues increase, our margins should hopefully increase as well.

John D. Dulchinos

I will add one other comment. It's not only just revenues. One of the things that has certainly happened in this downturn that's had an effect on our gross margins is service revenues are down because companies aren't running their factories at full capacity, and our Cobra volumes are down, and Cobras are one of the real margin generators for the business. So as the general market starts to come back, that will have a heavier predominant focus on Cobras which will help to drive gross margins up as well, beyond just the revenue increase.

Joey Nacurgie[ph] - State of Wisconsin Investment Board

You services and support revenues, they have kind of stayed flat sequentially. What are you seeing, very recently, in terms of service and support?

John D. Dulchinos

Actually, service and support revenues are up modestly from Q3 to Q4 and we expect them to modestly trend upwards as we move forward over the course of the fiscal year. That's one of the somewhat leading indicators as to whether the kind of traditional markets are coming back to capacity is those service members because it kind of defines, you know, as they turn factories back on there's going to be larger need for services and spare parts and that will be a good leading indicator for that the general market is starting to come back.

Joey Nacurgie[ph] - State of Wisconsin Investment Board

And I think you spoke about orders increasing about 30% sequentially. How quickly can those translate into revenues?

John D. Dulchinos

Quickly. I think one of the things that's very clear about the current economic environment is that nobody is giving you long-term commitments so in a good economic cycle we would get orders that would spread over, someone gives a blanket order for the next year and we would book it all in one quarter and play it out over the course of a year.

In this environment, no one is thinking that way. Everyone is thinking just immediate, near-term business. So when you look at a 30% increase in orders, that almost undoubtedly translates into the next quarter, all those orders shipping. So it's just kind of indicative of the current environment.

Joey Nacurgie[ph] - State of Wisconsin Investment Board

And then from a capex perspective, is there any big needs coming up?

Lisa M. Cummins

No, our anticipated capex is relatively flat.


There are no further questions in the queue.

John D. Dulchinos

I would like to thank all of you for joining us today. It's obviously been a very challenging and difficult environment over the past fiscal year and the entire management team and employee base is very thankful for your support. We are looking forward to a strong fiscal year 2010 and continue to make progress against our objectives. We look forward to seeing you on the next quarterly conference call.


This concludes today’s conference call. If you would like to listen to a replay of today's conference, please dial 1-303-590-3030 or 1-800-406-7235 and enter an access code 4141768 followed by the pound sign.

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