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Adept Technology, Inc (NASDAQ:ADEP)

F2Q2014 Earnings Conference Call

February 06, 2014 05:00 PM ET

Executives

Laura Guerrant – Investor Relations

Rob Cain – President and Chief Executive Officer

Seth Halio – Chief Financial Officer

Analysts

Phil L. Shen – ROTH Capital Partners LLC

Mark N. Argento – Lake Street Capital Markets LLC

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Adept Technology's Fiscal 2014 Second Quarter Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, February 6, 2014. And I would now like to turn the conference over to Laura Guerrant, Adept's Investor Relations. Please go ahead, ma'am.

Laura Guerrant

Thank you, Kamile. Good afternoon everyone and thank you for joining us. With us on today's call are Rob Cain, Adept Technology's President and Chief Executive Officer and Seth Halio, Adept’s Chief Financial Officer.

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, February 6, 2014.

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 today's press release, the 10-Q for the quarter ended December 28, 2013 filed today and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, filed with the SEC on September 20, 2013, 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 statement is 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 a reconciliation between the non-GAAP and GAAP amounts are provided in our fiscal second quarter press release, which was issued today and 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 is also available on the Investor Relations section of the Adept website. Following introductory comments by management, we will open the call to take your questions.

And with that, I would like to now turn the conference over to Rob Cain. Rob?

Rob Cain

Well, thank you, Laura. I will begin today with a review of our second quarter overall performance and then Seth Halio, our CFO will provide a more detailed review of our financial results and then we’ll wrap-up with some questions.

Our Q2 results illustrate the continued progress of our turnaround plan. We are pleased with our ability to improve our gross margins while strategically investing in products and rebuilding our sales organization to support long-term sustainable growth.

We believe that our progress has been and will continue to be depended on discipline and intense focus on the voice of the customer, introducing new products, expanding our margins, stabilizing and growing our sales.

These four imperative frame our efforts to stabilize to sustain and grow this business over time and number one objective is to instill a bottom line culture in our company and grow earnings per share. Our number two objective is to grow our top line, and finally our third objective is to re brand this business internally and externally. I will discuss these more in detail later on the call.

Focusing on Q2 more specifically, we generated revenues for second quarter of $14.6 million and gross margins of 46.9%, both significant improvements over the quarter of last year. Our operating income for the second quarter was $0.1 million compared to the operating losses for the 13 last quarters. Adjusted EBITDA was $1.1 million in the second quarter compared to an adjusted EBITDA loss of negative $2.4 million year-over-year.

Overall, we are encouraged with this progress were marking across our strategic initiatives to achieve long-term profitable and sustainable growth and remain fully committed to the execution of our turnaround strategy.

At this time, I would now like to turn the call over to Seth to discuss our financial performance for the quarter. Seth?

Seth Halio

Thank you, Rob. Good afternoon, everyone. Since much of this information is contained in our earnings release and Form 10-Q, which were filed today, I will be brief.

Revenues for Adept’s second quarter were $14.6 million compared with $10.8 million reported in the 2013 second quarter, a 35% growth. Our revenues also grew 7.5% compared to this year first quarter. While revenues in Europe were relatively flat compared to a year ago, sales in Asia more than doubled and we saw a significant growth in geographies outside our core U.S., European, and Asian markets. Service revenue continued its strong growth at 23% versus a year ago.

Gross margins for the second quarter was 46.9% compared with 31.8% in the second quarter of last year. Last year second quarter included a total of $3 million for restructuring charges, impairment of intangible assets and goodwill and adjustments to the excess and obsolete inventory reserve.

Operating expenses for this quarter were $6.7 million compared to $8.8 million a year-ago. We continue to closely monitor our spending as our operating expenses grew less than 3% in the second quarter compared to the first quarter despite a 7.5% growth in sales. As Rob mentioned, our operating income for the second quarter was $100,000 compared with an operating loss of $5.3 million in last year’s second quarter and $200,000 operating loss in this year’s first quarter.

We reported fully diluted GAAP net income attributable to common shareholders of $0.01 per share. This compares with a loss of $0.50 per share in the 2013 second quarter. Our non-GAAP adjusted EBITDA was a positive $1.1 million compared to an adjusted EBITDA loss of $2.4 million in the 2013 second quarter.

Adept's cash and cash equivalents at December 28 totaled $5.3 million. In the quarter, we used cash for operating activities of $1.4 million, primarily for working capital purposes and this was offset by cash provided by our stock plans of about $400,000.

At quarter-end, we had no bank debt outstanding, but we have available an $8 million line of credit, which contains no financial covenants.

With that, I’d like to turn the call back to Rob.

Rob Cain

Well, thank you, Seth. We are pleased with our improvements in Q2, but despite the progress, we are not yet satisfied with these results and have much work to do to continue to execute on our business goals and grow our topline.

Generating cash with visibility and certainty is at the core of our plan. This means managing our cash so that every spend will make a stock full and value add. We’ll continue to make progress in growing our sales. At a strategic level, we’ve established collaborative relationships with key customers, developing technologies with broad market appeal and releasing new products quarter, which were linked to the voice of the customer.

As you would expect, we approach our sales opportunities differently for our mobile products and our fixed products as well these geography. Our mobile business continues to accelerate with orders in semiconductor, small flexible manufacturing, warehouse, medical and pharmaceutical applications. We are also in strategic level discussions in all of these markets with major customers and we expect this segment of our business to continue to expand.

I’d like to share some highlights in our fixed business; as a reminder, our global markets for fixed products include small, flexible manufacturing, food packaging within our capacity of range of 7.5 pounds and below.

During the second quarter, Adept won new orders in all major markets. Some examples included Harpak-ULMA for food packaging and Pepsico for applications in our multi-pack facilities. We also won new business in the automotive space related to material handing.

The important part of our objective is to grow revenues to accelerate the worldwide service business. Our service business is no longer about spares, service and training. It’s much more. It’s about finding ways to lower our customers’ cost of ownership through advanced service programs and finding proactive solutions for our installed base moving forward.

Another part of our objective is to grow our sales is through new product introductions linked to the voice of the customer. During Q2, I’m happy to announce, the Company released four new products. The release of ePLC for Quattro, Viper, Cobra, which completes the line up of controller-less robots for direct interface to industry PLC standards.

Second, we released our latest version of ACE, Automation Control Environment, which is our powerful software solution that makes it easy to configure program, manage single and multi-robot automation systems. Third, we released an updated version of our SPC-4200 transporter for autonomous movement of SMIF Pods in the semiconductor Cleanrooms.

And lastly, we released 30 SoftPIC grippers, which is the best patent gripping applications in the food space.

Before I turn the call over to the operator for questions, I would like to take a moment and thank our employees. They are a major part of our customers buying decision and are based upon people and our ability to implement automation solutions worldwide more effectively than our competition. I’d like to personally thank each and every one of them for their support as we make our business stronger everyday and every quarter.

At this time, I’d like to turn the call over to the operator, so we may answer your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Philip Shen with ROTH Capital. Please go ahead.

Phil L. Shen – ROTH Capital Partners LLC

Hey, Rob and Seth. Thank you for taking my questions.

Rob Cain

Hey. Thanks for joining, Phil. Good to hear your voice.

Phil L. Shen – ROTH Capital Partners LLC

Likewise. I would like to start off by discussing the end market mix in the quarter. Can you talk us about what it was and how you expect it to evolve over the next year?

Rob Cain

Sure. Our end market mix, I’d say that largely about 15% to 18% of our business was a pure mobile mix and that said, many different markets primarily semiconductor still, but also warehousing and some logistics work. The fixed business, the key drivers there are high volume electronics in all of our geographies whether it’s North America, Europe, Asia/Pacific Rim, small flexible manufacturing in all those continents as well and that feeds several different micro market as well.

So this business, as we mentioned, is about 22% or so of our overall topline and continues to trend nicely and that was obviously global as well.

Phil L. Shen – ROTH Capital Partners LLC

Great. I saw the Asian business was up 141% year-over-year, U.S. was up 37%. Can you talk us about what kind of growth do you see by region over the next year?

Rob Cain

Sure. Asia/Pacific Rim is obviously a very hotspot for us a number of years, primarily high volume electronics manufacturing, secondarily would be small flexible manufacturing, packaging and assembly. I’m proud of the business because the business we won there was reaping orders from some very key accounts in both of those spaces. So we continue to invest in Asia/Pacific Rim in personnel and other assets and resources, and we expect some continued growth there without giving any guidance.

Moving over to North America, the team has done a nice job there of continuing to trend quarter-over-quarter, and as you’ve seen over the last couple of months and quarter that we have in fact partnered with the right high level integrators and the high level distributors and we believe that that work has started to take fruit.

We also did a strategic integrated conference here in the West Coast, about three months ago and we are preparing to do and even better one in our facility on the East Coast. So I believe the marketing strategies and the sales strategy is starting to pay off, there coupled with the Food Safety Administration act. So that’s a nice win, win for us and as you just saw we patented a family of grippers to boost that revenue stream.

Our European business is actually doing very well, almost country-by-country. Our German business is doing well and we expect that to outpace the market for a period of time. We are making some other changes that I think will help us longer-term in places like Italy and the U.K. and you will see that our France market actually did pretty well this quarter too.

Phil L. Shen – ROTH Capital Partners LLC

Great. And historically SOUL has been 10% of the overall end market mix and with healthier industry fundamentals there, are you starting to see an increase in order flow or greater increase? How do you expect to sell manufacturers take on your equipment as we look to the future.

Rob Cain

Yes, that’s a tricky one because a lot of those guys have some significant backlog. They still need to burn off, so it’s almost different by region and by account. And we’ve got key sales people in front of each one of those accounts to understand where they are at and what their burn rate is. So the good news is we can predict what they are going to be doing and then we’ll actually be in front of it, so we wouldn’t have to buy inventory or something like that as we might in the old days.

I don’t think that is going to be material business for us in the next two quarters, and they will certainly be some and that we know we’re going to get some in Q3 and a little bit in Q4, but I think that will actually be up in the next fiscal year for us.

Phil L. Shen – ROTH Capital Partners LLC

Great. One more and I will jump back in queue. You had some nice inroads with mobile and 15% of your roll mix there. How many customers are you enrolled with today and how does that compare with three months ago. And if you could speak in general about the mobile business and what you see ahead that would be helpful as well.

Rob Cain

Sure. In general mobile feeds the semiconductor space and we have two products there. We have the Handler and the Transporter; both of those products are performing quite nicely. In the semiconductor space alone we are focusing on 200 millimeter fabs and 150 millimeter. We are not going after 300 millimeter at this point and we believe it will be pulled over in the appropriate time.

So let me see those fabs, we’re in conversations with 18 of them. We have a very focused priority list and in the coming quarters, of course we plan to put some more names as part of these calls in the semiconductor.

If you move over to the warehouse and logistics space, we are doing a number of things at the strategic level of the company to progress some very key technology and product ideas to either accelerate our current product strategy or income of a different product strategy for that particular space.

At the same time, we’ve already penetrated that space with our existing products and while I can’t give names here. I can’t tell you that once again we’ve started with the biggest names in the space and we plan to capture those accounts and work our way through.

What we’ve learned is we have a compelling product. This is a truly autonomous robot that provides value add in large warehousing space, small tight semiconductor spaces that change weekly with different recipes and we've learned that the value add proposition for our customer is sometimes as much higher than what we believe it is, which is how we like it. So that space is compelling.

There is another space that is the airline space. In last quarter, I announced a order in the airline space in Asia for mobile products, and we are actually moving around food trays that we’ve all eaten of airplanes as opposed to people doing that and doing it in a much more efficient fashion. So that's an entire new vertical for us. It's not one of our lead verticals, because the semiconductor space will deepen that, we’ve got very specific growth goals there and we're going to expect those to be hit and then our next base of course is warehouse and logistics.

On top of that is the entire small flexible manufacturing space. So in the last two quarters, we’ve sold these products to some of our current customers that we’ve sold fixed products too. So that's an entire marketplace that we are in the process of harvesting as well at the same time.

So the mobile business is part of the game changer for our turnaround. The technology that we have with those products allow us to accelerate our product roadmaps, our current thinking, and even our next generation thinking.

The fixed space is just as compelling with the current markets that we’re feeding right now in every geography. So I don't want to diminish the color of the fixed products and that right now they are certainly the bulk of our installed base, but moving forward I think you're going to see equal pressure on both of those product lines.

Phil L. Shen – ROTH Capital Partners LLC

Great. Thanks Rob and Seth and I’ll jump back in queue.

Rob Cain

Thanks Will, thanks for your support.

Operator

Our next question is from the line of Mark Argento with Lake Street Capital Markets. Please go ahead.

Mark N. Argento – Lake Street Capital Markets LLC

Yes. Hi, good afternoon, guys.

Rob Cain

Hi, Mark.

Mark N. Argento – Lake Street Capital Markets LLC

I know you spend a little bit of time going through mobile. So maybe I’ll shift over to the fixed side of the business for a couple of questions, in particular, the food opportunities, I know you guys launched a much new group of products and I'm guessing those are directly related to the food business and I know you mentioned Pepsico as a new customer in the quarter. Maybe talk a little bit about the food opportunity, it sounds like you’ve signed up some Tier 1 guys and how that could rollout over the coming quarters?

Rob Cain

Sure. So obviously it's going to be a relatively generic answer. Competitors are going to hear this. So in general, our strategy is to look at the market whether it's organic or inorganic. We believe we had a product and a product family that addresses the controls, the software, the architecture, the vision and gripping capability and certainly the hardware, the backside up. That package if USDA accredited.

As we address our markets for organic and inorganic around the globe, we have very specific penetration plans for Tier 1s, Tier 2s and Tier 3s and we think we have a unique value proposition.

One of the things that we don't talk about on this call is we don't throw out a lot of big food names and you may think why we’re not doing business with them, but in fact we are and we are doing that business through an integrator. For example, last quarter we sold into a number of the top 20 accounts, but we didn't mention those names in our delivery. So we have been in there.

We continue to accelerate that business we’re not satisfied with it at all as a matter of fact it’s one of our spotlight item is the management team. We need to accelerate food by putting pressure on ourselves to do that, because we have the products, we have the sales channels now and certainly got the market as well along with the Food Safety Administration Act, which as you all know is driving the automation of the food space from the farm all the way to the table.

Mark N. Argento – Lake Street Capital Markets LLC

Got you. Do you have a dedicated sales team that’s just focused on the food vertical or what’s your kind of go-to-market strategy?

Rob Cain

Sure. We’ve got a dedicated marketing team that focuses on fixed and food and we have a different marketing team that focus on mobile and they overlap substantially of course, but that’s important to think about those two differently at the front-end of the ship. The sales team largely sells fixed and food products because a lot of those are the same markets and same geographical regions like Midwest or upper East Coast or certainly way into Canada two largest chicken producers here in the Northern Canada area and then of course in Mexico.

So all of our sales team is very equipped to sell the value-add prop of all of our food applications probably our best sales teams right now are in Europe and North America for food and you can imagine that we’re accelerating that because in China just announced $1 trillion market for food in the next two to three years and you can bet that we’ve got a strategy to get in there and get a significant hunk of that.

Mark N. Argento – Lake Street Capital Markets LLC

Great. And then just transitioning back over to the mobile opportunity, now it’s kind of a $2 million to $2.5 million that the revenue you guys puts in the quarter on the mobile side, how much of that is, is that mostly all guys take in two, three, four units and got out of plus a demo/beta test basis or are you guys actually in full scale commercial deployment with guys at this point?

Rob Cain

Yes, that’s a great question. It’s a mix. You’re absolutely right, when we work with large accounts, I stress the word large, we talk about forecast and product set and value-add by product, our product is designed, so over time that a person could have 100 robots and one warehouse application, we are working in harmony. So it picks a longer-term value-add. So, if you have an opportunity like that, you’re probably going to start with two to three to understand how they’re going to interact with one another and as we are successful with that, then we move on to a Phase II and Phase III.

Serve is a blend of that. I will tell you that anytime that we’ve actually sold a smaller quantity that customer has always been happy and come back and ask for may be particular design changes for their application, but certainly have come back and asked the follow-on order. So products in fact it will be safer in doing there intuitive and simple to operate.

Mark N. Argento – Lake Street Capital Markets LLC

Great and last question I know you guys are, as you stated number one focus is bottom line, number two is growth. If you like your sacrificing opportunity to grow by trying to be disciplined on the bottom line at this point, how do you feel kind of what’s kind of targeting there in terms of the need or the opportunity to grow in the investment relative to China Harbin, cash level is high and they’re higher and run the business profitably?

Rob Cain

Great question. Our focus is bottom line, it’s important to me and our shareholders I believe and certainly our Board that we do in fact generate a profit and more profitable business and I’m happy to announce that today, but longer-term, you asked the right question and that’s the one we wrestle with everyday. If we have an ROI that’s appropriate and we will move on that.

Whether that’s additional sales openings that we have right now, additional marketing openings that we have right now, if we needed cash for new product development, then we would find a way to get that. So at any time we think we need to invest, we either have or will. I also stated we’ve got a couple of ideas on the board that we might need to do some investment with and I’m confident like I said if we need to that we can execute that quickly.

Mark N. Argento – Lake Street Capital Markets LLC

All right, congrats on another solid quarter.

Rob Cain

Thank you Mark and thanks for joining.

Operator

(Operator Instructions) Our next question is from Dick Ryan with Dougherty. Please go ahead. Ryan your line is open. Please check your mute button. It appears Mr. Ryan is not available. I’m showing no further questions at this time. And now I’d like to turn the call back over to Mr. Cain for closing remarks.

Rob Cain

Thank you very much for your support. We appreciate your attendance and questions today. We look forward to updating you on the progress in the next quarters call. Thank you very much.

Operator

Ladies and gentlemen, that does conclude the Adept Technology’s fiscal 2014 second quarter financial results conference call. We thank you for your participation. You may now disconnect.

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