Adept Technology (ADEP), a maker of industrial robots, reported results for the June quarter (fiscal Q4 2013) on August 27 and held an analyst call on August 28. The results, while basically just reaching break-even, show that Adept has executed well on its turnaround plan. The stock rallied to close up 26.9% to $4.15 on August 27, resulting in a market capitalization of $45.2 million.
Adept is a micro-cap stock, so the usual caveats about micro-caps apply.
A look at revenue and GAAP EPS for the past five quarters shows why a break-even quarter could be evidence of a turnaround:
|Revenue, $ millions||EPS $|
On the negative side, June 2013 revenue of $13.7 million was substantially below the $17.0 million of June 2012. June 2012 revenue was almost flat from June 2011 revenue; it was not a hard-to-beat anomaly. Problems emerged in the September 2012 quarter when global cuts in capital spending began, with orders still weak at the end of the quarter. In particular the solar manufacturing capacity glut killed a key application for Adept's robots.
On the positive side, even at a $17 million revenue run rate, Adept was losing money on a GAAP basis. The shock of falling orders resulted in cost cutting and a turnaround plan.
While the June 2013 quarter represents a tentative improvement, it does show demand for Adept's robots is returning and the company has a much lower cost structure than one year earlier. Gross margin expanded to 46.0% from 42.7% in the March quarter. Part of this was due to an improved mix, as differing lines of robots pull in varying margins.
In early 2012, Adept had some success with one client for new food-processing and packaging robots, but then it took a long time to sign new clients. In the June quarter, two new American food-processing clients were signed, and Adept has taken feedback to improve that line of robots to appeal to more customers. It was not disclosed when the first robots will actually ship to these new clients.
Non-mobile industrial robot sales are ramping as well, with one significant order being from a smartphone manufacturer.
Lynx mobile robots for material handling are an exciting product. GlobalFoundries, a semiconductor fabrication company and existing customer, placed an order for 10 new Lynx robots, which should be worth over $1 million in total. A new client is a U.S. pharmaceutical manufacturer that ordered its first Lynx, as did an unidentified warehouse company. Interest in Lynx is high because compared to the competition Lynx is intuitive and integrates with other systems seamlessly. Lynx can navigate a changing environment with a minimal amount of teaching.
While Adept Technology is a small-cap, it has been in business since 1993 and has installed over 57,000 automation systems.
How was the turnaround achieved, aside from cost-cutting? The key elements were paying more attention to what larger customers want from robots, keeping in constant touch with clients through the services division, and improving integration with customers' systems, including software.
Because robots are large-ticket items and Adept sells them in relatively small numbers so far, revenue and profits are likely to remain lumpy from quarter to quarter.
For investors, Adept offers some obvious risk as well as obvious growth opportunities. In the long run the stock price depends on future profits, but ADEP has not shown profits yet. With an annual revenue run rate apparently headed towards over $50 million per year, we can hope for perhaps a market capitalization that matches annual sales, until it is easier to project forward profits. Market cap already is approaching that (at $45 million) after today's run up, so the stock has limited potential short term. I believe ADEP remains attractive long term (2014 and beyond), but I am assuming that revenue will continue to ramp, gross margin will remain in the vicinity of 45%, and operating margins will grow. As soon as (or if) ADEP shows a couple of quarters of meaningful profits (above $0.05 per share), I'll have more confidence in its long-term prospects.