Adept Technology Inc. F1Q10 (Qtr End 09/26/09) Earnings Call Transcript

Adept Technology Inc (ADEP)

F1Q10 (Qtr End 09/26/09) Earnings Call

November 4, 2009 5:00 pm ET

Executives

Lisa Cummins - CFO

John Dulchinos - President and CEO

Analysts

John Nelson - State of Wisconsin Investment

Benjamin Burditt - Special Situations Fund

Gerard Cohen - JM Cohen and Company

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Adept Technology reports first quarter 2010 results conference call. In today’s presentation, all parties 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, November 4, 2009. I would now like to turn the conference over to Lisa Cummins, Chief Financial Officer. Please go ahead.

Lisa 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, November, 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, 2009, 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 first quarter 2010 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.

John Dulchinos

Thank you, Lisa and good afternoon, everyone. Before we go through the financial results in detail, I will provide you with a brief update on the business during our first fiscal quarter. Revenues increased 36% on a sequential basis, driven by strength in our packaging and disc Drive businesses which grew substantially during the quarter.

In addition, we are seeing a return to our growth in our services segment, especially in Europe, reflecting increased factory utilization. Despite continued weakness in the global economy, we believe our first quarter results indicate increasing momentum in our business, validating our growth strategy and our ability to execute on that strategy.

The results of the quarter also demonstrate the leverage in our financial model and our ability to deliver improved financials as our revenues rebound. The 36% growth enabled us to improve gross margins from 31.7% to 45.5% reflecting increased absorption of factory expenses to return to adjusted EBITDA positive of $693,000 and excluding the temporary increase in accounts receivable which comes from increasing revenues, run the business to cash flow positive.

Operating expenses were reduced by an additional $0.5 million in the quarter as we realized the full effects of our major cost-cutting efforts put in place in fiscal 2009. While we are in the midst of our seasonally weaker half of the fiscal year, we continue to make strategic investments in order to drive revenue growth in the future. We are confident that we can achieve incremental improvements and leverage in the model throughout 2010.

Now, let me go through our key markets in a little more detail. Our packaging business continues to be our strongest market, growing 41% over last quarter. We continue to see solid demand for automated packaging solutions from the food handling and pharmaceutical industries, particularly in Europe. As the flu season approaches, the severity of which is compounded dramatically by the global pandemic of the H1N1 virus, sanitation has become an issue of critical importance. This is true whether in handling food or in pharmaceutical industry, where companies are moving towards automated packaging solutions as demand for vaccines across the globe is increasing dramatically.

During the quarter, we also announced the launch of our USDA product, the Quattro s650HS, which is a first for the food industry. It is the only parallel robot with USDA acceptance for primary food handling and provides us with exclusive access to the protein segment of the packaging market which includes meat, poultry and fish products. During the quarter, orders for our Quattro robot reached their highest level to-date, reflecting the continued market penetration we’re getting in packaging. The addition of our ACE PackXpert software which enables users to easily coordinate the efforts of an entire line of robots continues to be a key differentiator for Adept.

We are committed to securing a leading position in the packaging market as it represents an enormous opportunity for Adept and as such we continue to make strategic investments. For example, we have been demonstrating our products in multiple global industry conferences including Pack Expo, the largest US packaging event. The Japan International Packaging Machinery Show, Asia’s premier packaging event and FachPack 2009 in Germany.

These venues represent an excellent way for us to demonstrate the compelling performance and advantages of our products to potential customers and positions Adept as spot leaders in our market space. In terms of geographies, this quarter we saw increased strength in Europe and in the US. In addition, Asia driven by the technology sector showed excellent improvement. We fulfilled the first phase of our $2.5 million order from a leading international consumer electronics manufacturer. The technology sector represents a good growth area for Adept over the next year and we expect to see additional orders from this customer in market sector throughout 2010.

Switching to Solar, as the whole of the solar equipment market continues to be in the retrenching phase of its economic cycle and thus order from our solar manufacturing customers remain suspended. However, we continuously solve design activity within the segment and today our Quattro robot is designed into ten different solar equipment manufacturer's tool, as compared to three during the last up cycle in the market.

As the results of these activities, we believe we are very well positioned to grow when the solar market regains it momentum. In summary, the results of this quarter demonstrate how business is stabilizing. Due to the continued weakness in the global economy, we don’t believe we can completely say that we are out of the woods yet. However, we are pleased with the progress we’ve made to-date. In addition, this quarter validates the strength of our business model.

36% revenue growth drove improvements across the Board including a 13% plus increase in gross margin, positive EBITDA results continue to control and even declines in our operating expenses in cash flow positive operations if we exclude the impact of the increase in account receivables.

We’ve taken the right steps to position ourselves for future growth. We recently appointed a new head of global sales marketing on investing in marketing programs including attending major industry events all over the globe and expanding our investment in our Japan sales and distribution channel. We believe these efforts will pay out throughout 2010 and incrementally as the global economy improves.

I’ll now turn the call to Lisa for review of our financials. Lisa?

Lisa Cummins

Thank you, John. Revenues for Adept’s fiscal 2010 first quarter were at $11.7 million compared to $8.6 million in the fourth quarter of 2009 and the $14.3 million for the same period last year. We are very encouraged by the sequential increase in revenue and order activity which was driven by strength in our consumer electronics and packaging businesses. The decrease when compared to last year was attributable to the drop in capital spending related to the weak macro economic environment.

By business segment, Robotics revenue which represents sales of our intelligent robotics system and vision guidance technology and motion control software with 9.5 million in the first fiscal quarter compared to 6.8 million in the fourth quarter of 2009 and 10.9 million in the first quarter of 2009.

Looking now at our services and support business, revenues improved to 2.3 million in the first fiscal quarter of 2010, compared to 1.7 million in the fourth quarter and 3.4 million in the first quarter of 2009. This sequential growth was driven by the service and support of existing equipment in Europe. Looking at revenue by region, European sales were 44% of total revenues in the fiscal first quarter of 2010 with strength primarily coming from Germany. U.S. sales were 28% of revenues in Q1 and Asian sales in the first quarter grew to 26%.

Turning now to gross margin, for the fiscal 2010 first quarter, recorded gross margin was 45.5% of revenue, compared with 31.7% in the fourth quarter of 2009 and 46.2% in the first quarter of fiscal 2009. This quarter, our gross margin rebounded to a more normalized level as sales volume increased and fixed costs were absorbed. We have finally realized the full benefits of cost cutting measures that began last year as we started to see the first signs of the economic downturn.

We reduced our operating expenses to 5.5 million in this quarter from 6 million for the fourth quarter and 7.7 in the first quarter of 2009. Included in our cost cutting measures were temporary salary cuts for our employees. Operating loss for the quarter decreased dramatically to 210,000 when compared with an operating loss of 3.3 million in the fourth quarter of fiscal 2009 and an operating loss of 1.1 million in the year ago quarter.

For the third quarter, we narrowed our GAAP net loss to $82,000 or $0.01 per fully diluted share, compared to a net loss of $3.3 million or $0.40 per fully diluted share in the fourth quarter and a net loss of $1.6 million or $0.20 per fully diluted share in the first quarter of fiscal 2009. Adjusted EBITDA which excludes interest earned, depreciation, amortization, taxes, and stock option expense, was $693,000 in the first quarter compared with an adjusted EBITDA loss of $1.5 million in the fourth quarter of fiscal 2009 and a loss of $800,000 in the first quarter of fiscal 2009.

Turning now to the balance sheet, Adept ended the quarter with cash and cash equivalent of $7.1 million, compared with $7.5 million at the end of June. Accounts receivable were $10.4 million at the end of September compared with $7 million at the end of June reflecting increased revenue levels in the appropriate bad debt reserves. Inventory levels net of reserves were $7.6 million at the end of first quarter compared with $8.1 million at the end of June.

With that, I will now turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of John Nelson. Please go ahead.

John Nelson - State of Wisconsin Investment

Good job on the quarter and a wonderful job on controlling expenses. My question was related to the vision robots, the big order that was filled and recognized of $2.5 million for the major consumer electronics manufacturer? Do you think is that basically filled them up or do you think this is the beginning of potential more orders in the future to this particularly manufacturer?

John Dulchinos

Yes, we’ve actually been very pleased to see a rebound in the technology sector. The one thing about the technology sector is it tends to be lumpy, so you get an order and it gets digested. We expect to see continued strength in 2010 in the technology sector and we expect to receive additional orders from this customer as well as others in this space. The timing and the specifics of it ends up being a bit lumpy, so it’s hard to project an exact timing to it, but this is the beginning of what should be some additional business over the next few quarters.

John Nelson - State of Wisconsin Investment

Was that order, both initiated and filled within the quarter?

John Dulchinos

The order came in at the end of last quarter and the majority of it was filled this quarter, but not all of it.

John Nelson - State of Wisconsin Investment

You mentioned that solar being very slow, but you are designed in for 10 manufacturers for the tools for solar?

John Dulchinos

Yes.

John Nelson - State of Wisconsin Investment

Are those manufacturers, both domestic and international and if there are some that are international, are they European and Asian or can you identify the geographical areas?

John Dulchinos

Yes, they are all three. There are US equipment builders, there are European equipment builders and there are Asian equipment builders. The solar business runs like the semiconductor equipment business does and that it’s kind of cyclical and you need to get designed in the equipment manufactures’ tools during slow periods because when you got to ramp, they're just going to replicate whatever they have.

To us, the measure of our success in solar is our ability to get these design wins and what's most notable is the last cycle, when solar revenues were 5% of our business in 2008, we only had three equipment design wins. We made a lot of progress on that front, even though it doesn’t show up on the revenue line yet, we believe that puts us in a good position for the future when the solar market starts to reinvest in capacity and reinvest in equipment and we'll be in a good spot for that.

John Nelson - State of Wisconsin Investment

Okay and just for perspective, are the components that you sell into these solar equipment manufacturers tool sets, are they a substantial part of the cost of the overall tool or a small part of the overall tool?

John Dulchinos

Our robots form the handling cells to process tools in the solar industry. So when you're trying to put a solar cell onto a process tool, that’s going to either do screen printing or etching or whatever. Then our robots load and unload that. Our robot is typically 25% of the handling cell’s cost which is a small percentage of the process tools cost.

Operator

(Operator Instructions). The next question comes from the line of Benjamin Burditt with Special Situations Fund.

Benjamin Burditt - Special Situations Fund

Could you give me again the geographic breakout of sales of Europe, Asia and US?

Lisa Cummins

Europe was 44% and US was 28%, Asia was 26%.

Benjamin Burditt - Special Situations Fund

In terms of large customers that came through during this quarter primarily, does that make this quarter kind of an outlier or you feel the revenue run rate attained in this quarter is quite [high]at sustainable level from where you are at right now in the business?

John Dulchinos

It provided a little bit of extra juice for the summer quarter. We are seeing two things happening. In the summer quarter, we certainly got some benefit from that order, but over the last couple of quarters, we have been building increased broad-based order activity and revenue activity.

I don’t think that I can say we’ll sustain this exact number because we are not giving guidance, but I think we are seeing the overall business start to get a little more solid than it's certainly been in the last couple of quarters. What’s important to us is just how much financial leverage there is in the financial model with increased revenues. You can see how quickly losses turned into adjusted EBITDA profits with a relatively modest unit volume increase in our business.

Operator

(Operator Instructions). Our next question comes from the line of Gerard Cohen with JM Cohen and Company.

Gerard Cohen - JM Cohen and Company

What’s your turnover in terms of the time from the time you get an order till the time that you can ship it out and recognize those revenue? It depends on the customer but just out of curiosity and the type of robot you have to build.

John Dulchinos

Well, our ability to just fulfill an order typically is four to eight weeks. We’re not at a stage in the business. Let me give you a little background on that one. When we were in healthier times like we were in 2008, we would get orders from customers that would stretch over a two or three quarter or even one year of time period because they want it secured. They wanted secure pricing and availability. What happens in a downturn and certainly what’s happened over the last year is its all random up and we get an order. The customers are only placing orders now because they want delivery now and so in most of our business, its quick churn right now. It’s typically four to eight week kind of churns on orders.

Gerard Cohen - JM Cohen and Company

Just out of curiosity, just, do you have to keep any particular parts on hand just or it's pretty easy if with you to get the parts if you in this type of environment for your particular robots or anything like that?

John Dulchinos

We maintain typically on a product side, we typically maintain probably out a quarter’s worth of inventory to fulfill business, so it depends on product mix and specific configuration, but that’s kind of a good rule of thumb for us.

Gerard Cohen - JM Cohen and Company

You haven’t had any problems recently in getting anything as needed?

John Dulchinos

No, but certainly we're cognizant. The last time when there was tech crash in 2000, 2001 we certainly saw supply chain constraints coming out of that and we're very cognizant of managing our supplier base and our forecast to be able to respond to that.

Operator

(Operator Instructions). I show no further questions in queue. I'd like to turn the call back over to management for closing remarks.

John Dulchinos

Okay, and thank you. I'd like to thank all of you for joining us on the call today. We certainly appreciate your support. It's been a very challenging last several months. We feel very good about the progress we've made this quarter and look forward to speaking to you in February at the next quarterly result. Thank you and have a good day.

Operator

Thank you. Ladies and gentlemen, this concludes the Adept Technology reports first quarter 2010 results conference call. If you'd like to listen to a replay of today's conference please dial 303-590-3030 or 1800-406-7325 and enter the access code 417-5185. Those numbers again are 303-590-3030, 1800-406-7325 and the access code is 417-5185. ACC would like to thank you for your participation. You may now disconnect.

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