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Adept Technology, Inc. (NASDAQ:ADEP)

F2Q2011 Earnings Call Transcript

February 2, 2011 5:00 pm ET

Executives

Lisa Cummins – CFO

John Dulchinos – President and CEO

Analysts

Sam Burton – Berry Asset Management

John Nelson – State of Wisconsin Investment Board

Chris Thomson – Mindshare Capital

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Adept Technology’s second quarter 2011 financial results conference call. During today’s presentation, all participants 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, February 2, 2011. At this time, I would like to turn the conference over to Lisa Cummins, Chief Financial Officer. Please go ahead, ma’am.

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, February 2, 2011.

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, 2010, 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 second quarter 2011 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. Q2 was a strong quarter for Adept, with annual revenue growth of 45%, while orders grew 23% compared with the same period last year. Sequentially, revenues declined 9%, which is largely in line with normal seasonal trends that we see in the first half of our fiscal year and perhaps exaggerated a bit by the expected decline in revenues from the disk drive space. However, orders increased 8% over last quarter and were the second strongest in two-and-a-half years.

We experienced a larger than expected decline in gross margin during the quarter driven primarily by under-absorption of labor into inventory, among other issues Lisa will discuss in a moment. We can now expect to see the same issue recurring at these levels in Q3 and are currently expecting an increase in gross margin in the current quarter. As a result of our recent acquisitions, we are identifying synergies that can improve and streamline operations, such as consolidation of duplicate functions and facilities. This will enable us to get to critical math in each of our locations, leveraging expertise and resources and moving towards a lower breakeven level. We are committed to maintain the successful cost cutting efforts we undertook over the past couple of years to increase the leverage in our model as revenues grow going forward.

Despite the seasonal softness in Q2, we continue to see a return to increased demand for some of our traditional markets including the industrial and automotive markets in Germany, as well as increasing activity in several markets in Asia, including packaging and solar.

Globally, we continue to build traction in the packaging industry and it’s underscored by our recent acquisition of InMoTx which I’ll discuss in a moment.

We believe packaging is going to be a major growth driver for Adept and further, that we are better positioned than any of peers to penetrate this still emerging market.

Customer (inaudible) Adept MT400 MobileRobot powered by mobile robot motivity continues to be strong, and we are beginning to see evidence of the pending convergence of packaging and logistics. This is validated at the recent (inaudible) packaging fair in Chicago and is a market that Adept is uniquely qualified to address. We received the first orders for Adept PAC USDA packaging cells launched in November. The Adept PAC incorporates our USDA accepted Quattro robot and the quick turn in orders is further a validation of our pending opportunity with InMoTx.

While the packaging industry continues away from manual labor and outdated packaging machinery, Adept is in a very strong position to benefit as the demand for high dexterity, flexible and affordable robotic solutions will continue to increase substantially. Excluding disk drive, activity in Asia continued to increase that we began to penetrate emerging new markets such as packaging and logistics. China is one of the fastest growing robotics markets in Asia and globally.

To address this opportunity and to support our growing customer base in the region, we will be opening a new sales office and service center in China. But in order to describe the declines in Q2 and given the cyclicality of this industry, we expect them to stay down for the next couple of quarters. However, as we did during the last spike-up, we will continue to monitor the market closely and pursue significant design wins for the next uptick in the business driving our return to growth in this space when the cycle turns.

A major highlight for the quarter was our acquisition of InMoTx which significantly enhances our ability to penetrate the packaging market for meat, poultry, sea food, dairy, fruits and nuts which in the industry are referred to as natural or organic products. This is a highly strategic and synergistic acquisition for Adept and we are very excited about how it’s stretching our position in the marketplace and against the competition. Like MobileRobots, InMoTx was at a disadvantage in gaining momentum with larger commercial customers. By leveraging our established international sales infrastructure and Global Fortune 1000 customer base and brands, we believe we can significantly accelerate our penetration into the food packaging market in the coming quarters and years. InMoTx is unique in its broad portfolio of intellectual property dedicated to inspecting, sorting, grading and hygienically packaging unwrapped natural food safely to eliminate the risk of contamination introduced by manual handling.

What’s critical to understand in evaluating this acquisition is that InMoTx’s gripping technology enables Adept to leverage our existing USDA accepted Quattro robot family to effectively address a virtually untapped market that represents about 75,000 or one-third of all packaging lines. In addition to Bayer’s entry in this niche, yet high-volume markets are very high.

Standard machinery builders have a tepid dissolved [ph] strict standards of this environment with slow, complex and inflexible solutions. However, to day, none of them particularly successful or competitive as opposed to the manual labor model.

In addition, depending on the number of lines, the ROI for given customers choosing our platform would be approximately one to two years at most. Our platform enables packaging manufacturers to substantially reduce the risk of contamination or increasing throughput by as much as 500% when compared to manual handling, creating what we believe is an exciting and compelling offering.

Earlier this month, the Obama administration passed bill H.R.2751 known as the FDA Food Safety and Modernization Act. Under this new law, the FDA will have much broader powers to regulate the cleanliness of food production facilities and significantly reduce the causes of bacteria-related contamination.

One of the larger sources of bacteria are people, especially those involved in the handling of unwrapped natural products. With this new law, food producers will be highly motivated to reduce the amount of manual labor used in handling of raw products, replacing with sterile, cleanable, flexible equipment. With InMoTx, Adept is the only company where there is complete standard solution for these applications built on USDA accepted robotics platform.

Regarding the financial impact to Adept, the revenue per packaging cell will increase significantly with InMoTx. In addition, the InMoTx grippers are a consumable and require replacement approximately every two to four weeks. While replacement cost is minimal in terms of overall cost to the customer, it is a high margin and recurring revenue stream that’s expected to grow substantially over the next several years.

The integration of MobileRobots into Adept is largely completed and we continue to identify and pursue several new opportunities in the logistics, medical and consumer electronics industries among many others. We believe there are multiple opportunities to deploy application incorporating MobileRobots’ technology with Adept’s solution into a variety of industries, even beyond our traditional target markets.

In closing, Q2 was solid quarter and as we enter a seasonally stronger second half, we’re excited about the opportunities for growth and expansion into new and emerging markets for our robot. We’ll continue to drive for increased efficiencies in our financial model and remain confident we have and continue to take the right steps to Adept [ph] to the next phase of our growth cycle. I will now turn the call over to Lisa for a review of our financials. Lisa?

Lisa Cummins

Thank you, John. Revenues for Adept’s fiscal 2011 second quarter increased 45% to $13.3 million from $9.2 million for the second quarter of fiscal 2010 and declined 9% from $14.6 million in the previous quarter. The sequential decline in revenues is in line with normal seasonal patterns as we work through our typically slower first half of the year. By business segment, robotics revenue which represent sales of our intelligent robotic systems and vision-guidance technology and motion control software were $10.2 million for the quarter, compared to $6.7 million in the same period last and $11.9 million in the previous quarter.

Looking now at our services and support business, revenues in the second quarter of 2011 were $3.2 million, an increase of 28% and compared to $2.5 million in the second quarter of 2010 and 18% over the $2.7 million in the prior quarter. Looking at revenue by region, European sales were 53%, the US comprised 32%, with sales from Asia 13% during the second quarter.

Turning now to gross margins, for the fiscal 2011 second quarter, reported gross margin was 39% of revenue, compared with 44% in the second quarter of fiscal of 2010 and 44% in the previous quarter. Our margin this quarter was negatively impacted by under-absorption of labor into inventory, a slight increase of warranty charges, as well as the negative impact of currency exchange between the dollar and the yen. As John noted previously, we expect an increase in gross margin in the current quarter. Turning to operating expenses, OpEx for the quarter was $7 million, compared to $5.7 million in the second quarter of last year and flat with the $7 million reported last quarter. The annual increase in operating expenses was driven largely by higher expenses as a result of staff compensation and salary expenses in connection with the company’s acquisition of MobileRobots, as well as expenses incurred in the acquisition of InMoTx.

In addition, salaries had been temporarily reduced for Adept’s employees in the same period last year, as we now begin to correct expense reduction efforts. We recorded an operating loss of $1.8 million in the second quarter of 2011 compared with an operating loss of $1.6 million in the same period last year and $638,000 in the previous quarter. The increased operating loss is the result of the temporary decrease in gross margin and the increase in operating expenses associated with our acquisition activity.

GAAP net loss for the quarter was $1.7 million or $0.20 per diluted share compared to a net loss $1.8 million or $0.21 per diluted share for the second quarter of 2010 and a net loss of $1.1 million, or $0.12 per diluted share in the previous quarter. Adjusted EBITDA, which excludes interest earned, depreciation, amortization, taxes, merger and acquisition expense and stock option expense was a negative $190,000 in the second quarter compared with an adjusted EBITDA loss of $1.1 million in fiscal Q2 of 2010 and adjusted EBITDA of $203,000 in the previous quarter.

Turning now to the balance sheet, Adept ended the quarter with cash and cash equivalents of $6.7 million, compared with $7.6 million at the end of September. The decrease in cash is a result of cash spend in connection with our recent acquisitions and a temporary build-up of production inventory as we head into our seasonally stronger second half. Accounts receivable were $10.8 million at the end of December, compared with $12.2 million at the end of September. Accounts payable were $6.4 million which compares to $8.5 million at the end of last quarter.

Inventory levels net reserves were $10.1 million at the end of the second quarter compared with $10.6 million at the end of September, reflecting a drop in our service inventory due to increased strength in that segment of our business. With that, I will now turn the call over to the operator for questions. Operator?

Operator

Thank you, ma’am. (Operator instructions) First question is from the line of Sam Burton with Berry Asset Management. Please go ahead.

Sam Burton – Berry Asset Management

Good afternoon, John and Lisa. How are you?

John Dulchinos

Good, Sam. How are you?

Sam Burton – Berry Asset Management

Pretty good. A couple of questions. Can you compare your pipeline of opportunities beginning this quarter versus the beginning of last quarter in terms of perhaps dollar or large deals?

John Dulchinos

We don’t – I probably can’t comment on that, because this information, we don’t disclose. But I think the one thing that we did call out in the script is that the bookings in Q2 were 8% higher than the previous quarter. And if you look back over the last two-and-a-half years, the second largest to our March quarter of last year in terms of order volume.

Sam Burton – Berry Asset Management

All right. In terms of this market being a little bit slower right now for at least a couple of quarters, can this company be profitable without the disk drive market coming back for a couple of quarters?

John Dulchinos

Yes. I think one of things that we have been a bit very focused on is driving our operational model to a point that we can generate cash flows. As you appreciate, we spent a reasonable amount of resources and cash in terms of the acquisition of two companies and really what our strategy as we looked out over the next several quarters is we really put some energy behind these acquisitions and get them to a level of critical math and momentum that we can start to recoup the revenue streams.

Sam Burton – Berry Asset Management

So if you were to integrate these two companies fully, what kind of savings do you think you could have in the S&G line?

John Dulchinos

I think it’s modest. I mean, we are – I think there are some facilities and some duplicate functions. Remember, when we acquired MobileRobots, they had about 20 or 22 people and InMoTx, I think, has 15 or 16. So there aren’t huge savings in terms of personnel that we could get. And really more than anything else, these companies allow us to absorb our existing functions into potential revenue streams that have much higher growth rates as we look to the future.

Sam Burton – Berry Asset Management

So would you say the markets that you are in right now, you are in the like second or third inning of growth, because if I go back to 2008, the company is at $64 million worth of business and this year, you had with this market at one-time very strong, the solar market, very strong, and you weren’t able to get the $55 million. So I’m just wondering what’s going on. Are you losing some market share or is the growth did not happen because you are still in the second inning of this growth in the packaging industry and in other industries?

John Dulchinos

Yes. If you look at our fiscal 2008 which is the high watermark just prior to the credit crisis, that growth was largely driven out of Europe, and largely driven from their industrial and automotive customers and the European solar manufacturers. We are in a healthier US economy than we’ve been navigating through over the last couple of few quarters. So, I think there are – if you look at Germany, Germany is starting to recover. And we’ve seen solid growth from the floor in Germany and it continues to build. Solar is improving. I think we expect it to continue to improve. The US has been a bit of a disappointment in terms of its rebound from the downturn, but we believe packaging is going to be a real driver in that market. And clearly in the packaging market, which I think holds tremendous promise, we are in the – in the overall packaging market, we are in the probably a third inning; in the natural products market, we are in the first inning. We’ve got tremendous long-term growth opportunities with a very differentiated technology that I think can play out very well as we look to the future. So, we see very high promise and with packaging that generally has the most appeal in western world economies, Europe and the US is where I think we’ll see the most traction in those initiatives.

Sam Burton – Berry Asset Management

Can you tell me in terms of competition, what competitive views have come up against quite often in the packaging business?

John Dulchinos

I would say other robot companies, most kind of general purpose robot companies have some kind of product to the packaging industry. And so that’s one flavor of competitor. And then the other is dedicated packaging machinery companies who are trying to offer more flexibility to what has historically been a very dedicated machine, things that can only do one system. And when robots kind of see this, robots bring the dexterity of people with the efficiency of machine. The challenge we’ve seen in packaging is that there isn’t a very strong integration channel, because the applications are fundamentally different building carburetors or putting cellphones together. There’s a lot of variability in the product. And as you go in segment that further and look at natural products, which is meat and poultry and fruits and vegetables, there’s really more variability. And as such, most of these applications have not been solved by equipment because it’s just too difficult to meet the regulatory requirements and to be able to handle with flexibility. We’ve had the best product in class with our Quattro, but with a channel that hasn’t been able to solve these problems. We haven’t gotten the traction that we would like to see today, although we’ve been quite successful with it. With InMoTx, they have just unbelievable technology related handling the products. So, they have very innovative solutions that for handling odd-shaped products like chicken salads, chicken drumsticks and fish salads. And no one else has a solution that is like this in the marketplace. You take that technology and apply it to our USDA robots that are best-in-class in terms of performance, it creates a solution that really addresses the weaknesses we’ve seen in the market to date. So we are very bullish about what this can mean in the industry as we go forward.

Sam Burton – Berry Asset Management

Is there much that has to be done in terms of engineering to get InMoTx’s products integrated with your products?

John Dulchinos

No. I mean, that’s the beauty of it. But I think MobileRobots is a – has been – has acquired resources to take their research products and bring them over to the commercial sector. The beauty of InMoTx is that they’ve got a standard solution into this space, I think we could help refine it and make it, but we can walk out tomorrow and get orders. In fact – since we’ve closed the acquisition, we already have received orders on behalf of the combined company and I believe we can see this business scale relatively quickly.

Sam Burton – Berry Asset Management

Would their orders be larger than orders you tend to get at Adept?

John Dulchinos

Yes, I think that’s the – the nice part is that everyone of their sales force [ph] will probably be an ASP at four to five times our Quattro price. So we are going to get these in on average $200,000 kind of increments. And the other thing that’s attractive is that these gripper which are very unique and required to solve a lot of these applications have a finite life to them that make them a consumable in terms of paneling and that requires a constant replacement by customers. So there’s a nice follow-up services and consumables revenue stream following the sales of the cell.

Sam Burton – Berry Asset Management

So, I just want to ask one last question and that goes back toward when I said earlier regarding the profitability without the disk drive market. If I did my math right, it seems that you have to get to around $17 million to break even on a quarterly basis, if that were to eclipse the – your run rate in 2008, is there a possibility that you can get to that number by the fourth quarter?

John Dulchinos

We are not providing guidance. But I think one thing in your calculations is, a fair amount of our stock comp is hid in the P&L right now from the acquisition of MobileRobots.

Lisa Cummins

And that significantly increased in the first two quarters after the acquisition, so that will be going down. So you need to factor that in.

Sam Burton – Berry Asset Management

So how much is it up to this point and how much is it expected to go down?

Lisa Cummins

I can’t comment on how much is it expected to go down, but it’s been probably about 40%, has been accrued already.

Sam Burton – Berry Asset Management

Okay. And you feel the next two quarters, the remaining 60% that is going to be accrued?

Lisa Cummins

It’ll depend on our equity model. I can’t comment on exact numbers.

John Dulchinos

It’s a material amount. The stock is spent at a material amount of the operating expense every quarter.

Lisa Cummins

It’s heavily weighted to beginning of a time vesting period, so it’s heavily weighted in the first year. The first year is the highest, second year is about 50%, and the last year is almost nothing.

Sam Burton – Berry Asset Management

Okay. Thank you.

John Dulchinos

Thank you, Sam.

Operator

Thank you. Our next question comes from the line of John Nelson with the State of Wisconsin Investment Board. Please go ahead.

John Nelson – State of Wisconsin Investment Board

Hi, this is just kind of a follow-up on some of the questions already asked which I think a number of your shareholders find interesting and useful. Competition in the industrial robot side, what – who do come up against more so often with the Quattro when you are bidding for a project?

John Dulchinos

There’s probably four or five companies in the world who would – who make products that kind of are relatively competitive with Quattro, companies such as FANUC, with a large Japanese motor company ABB that has a robotics division, Kawasaki has a robotics division, probably the three that I would think come up to the top of the list.

John Nelson – State of Wisconsin Investment Board

Okay. Where would you say your company fits as far as positioning, as far as number one, two, three, four of those names you mentioned in the industrial robotics side?

John Dulchinos

I think this isyou look at the Quattro segment versus the overall segment, companies like FANUC are much larger and ABB because they service the automotive welding markets which are substantial high-dollar items. So Adept is more of a niche player than those companies. But from a product standpoint Quattro stands alone. In fact, we just won a program with one of the major food companies that had evaluated all parallel style robots which is what Quattro is a subset of, and hands down selected Adept because of our performance and capabilities. So there is no doubt that Quattro has performance advantages over any other similar robot. But I want to take a step – go to a step about distraction which is, the biggest problem we’ve seen in the last two to three years in terms of selling Quattro which has been fit – the capability of an integration channel to solve these applications that have a lot of variability in them has been – has not been very good. And one of the biggest constraints has been the ability to grip these things properly. The reason that we acquired InMoTx is that they bring some foundational technology to the area of handling raw products, bagged products, things that are very difficult to handle any other way. And to date, the solutions in the market are very limiting. And when you look at what InMoTx brings and you combine it with our performance advantages on the Quattro in the market, some very compelling solution to offer to this space.

John Nelson – State of Wisconsin Investment Board

Okay. Can you give me an idea as far as you might where your company is positioned in those niche markets that you compete in? Would you say you have a substantial percentage of it, or not? And then, the opportunity becomes what – the potential is for you to get more share or can you do fine keeping your current share at least in the Quattro addressable niches?

John Dulchinos

Well, I think there is two ways to slice it. One way is you can carve it horizontally; the other way is you can carve it vertically. If you look at a horizontal slice and you kind of (inaudible) Japan to the size, Japan is a market that is difficult for anybody, but domestic suppliers who participate in. Adept is the market leader in small part assembly and handling robots. So we have a strong credibility and market position in that kind of horizontal space. If you cut it vertically and start to look at packaging, and you kind of (inaudible) the Quattro kind of robots, Adept is probably on a par with ABB and FANUC in terms of market share, companies that are much larger. I believe that this acquisition now gives us a substantial leg-up when anybody else is going just robots and isn’t addressing one of the fundamental issues, which is how do you grip this stuff in a hygienic and flexible and fast way. And I think this is going to give us a substantial competitive advantage in the marketplace.

John Nelson – State of Wisconsin Investment Board

Good. In your pipeline of projects that you are bidding on, is there quite a significant range as far as small to big and is there anything unusual or different about this cycle as far as the number of big projects that you are bidding on versus the number of smaller projects you bidding on?

John Dulchinos

I guess what I can’t say is that there is a fair amount of variability and the reason we’ve been so aggressive at looking at the packaging market and I guess to a lesser degree the mobile robot market is that we believe that we can see sales leverage in those markets, either through OEM channels or through – in the case of packaging selling, a much larger ticket item into that space in a more complete solution. So that gives us an ability to kind of shift from lower dollar sales to higher dollar sales. And as you look at, we are trying to take Adept, one of the things is, of course, our SG&A expense. And one of the reasons is that when you are selling small ticket robots one or two at a time, it’s hard to get very efficient. If you start to sell larger ticket items, like packaging solutions and packaging lines, you have the opportunity to get much more leverage out of the sales expense and that’s really what has the opportunity to do. And then the second piece which is we will be subtle in the near term, I think substantial in the long-term is it's recurring revenue model that comes from the consumable grippers and services and upgrade that we can sell to an installed base of InMoTx customers. And so, as we build an installed base, we get the opportunity to profit from the larger and larger of recurring revenues.

John Nelson – State of Wisconsin Investment Board

Once installed, what kind of say percentage of revenues for the installed base could the consumable grippers be?

John Dulchinos

I think the grippers by themselves are probably 5% to 10% of the sell price. Look at them in combo, with other services that we could provide, our goal is to get – our goal is to see double our return on systems in the field which is something we don't get out of our components business.

John Nelson – State of Wisconsin Investment Board

Okay, good. And then one more, well, let's see. Do you expect any significant problems with passing on rising raw materials cost?

John Dulchinos

Well, I can tell you the yen over the last years has certainly had a sizeable dent in our gross margins. I think one of these we have had a dent and that has not been (inaudible) for us to pass to our customers in price increases. So, I don't think that our business will be affected by commodity price increases, but certainly currencies have an impact in our business.

John Nelson – State of Wisconsin Investment Board

And have they – are they to such an extent that you would consider hedging?

John Dulchinos

Lisa?

Lisa Cummins

Well, the hedging means that you take a gamble on what that foreign exchange is going to be, what our currency is going to be. And right now, I feel that we are at – I hope we are at the bottom of it. So, no, the answer is no, not right now.

John Dulchinos

I think a more practical way is, John, that we are trying to work it to be at least with our suppliers sharing the currency risk better. To date, we've taken the lion's share of it. And so, some of these product lines and our goal is to get down to be a more balanced perspective. I think that is the more practical way for us to manage the currency situation.

John Nelson – State of Wisconsin Investment Board

Okay. Do you think that will be real difficult or not very difficult as far as getting that currency share?

John Dulchinos

Well, let me just say that I consider where we are right now at the bottom. So there is nowhere for us to go, but to get better than where we are right now. SO how much better we will see, but we are substantially underwater on some of the products. I mean if you had the currency model of 2008, you would see a very, very income statement right now from our company, very substantial the currency effect on things. So we have nowhere to go, but up from here.

John Nelson – State of Wisconsin Investment Board

Okay. And then, one – just one the last question on InMoTx and penetration of natural products markets, you would think that is going to be a long (inaudible) or do you think that or have you gotten indications from those producers that they really want to need your type of solution?

John Dulchinos

There is a lot of excitement. InMoTx actually has done a wonderful job garnering interest over the last few years in its technology and has had relationships with some very fairly major corporations. The challenge for them is they just were so under-resourced and under-capitalized that it really wasn't practical for them to get very far with these companies, so they couldn't – these companies couldn't buy anything more than a demonstration stuff from them, so they couldn't rely an organization that doesn't have a global footprint and a support organization. We've got a number of, I think just in the month, we've been – we've had them under our foot, and I think it's really showing the Adept's credibility and brand and history and infrastructure with the InMoTx technology is a very strong combination. So I think we'll see this in due very well, of course. I think there is at some level a bit of hockey stick that will occur which is normally the way this works is companies will buy one or two to start with, prove them out, evaluate them, they make sure that the stuff works. And then they will have factories that need 5, 10, 15, 20 of these. And when you start to get to those follow-on orders, I think we have a real opportunity for some nice revenues that will come on to this unit.

John Nelson – State of Wisconsin Investment Board

Okay. Good. I think your shareholders would also find it useful if you gave a quarterly breakdown as far as the where the sales are coming from, like Europe, Asia and the US.

John Dulchinos

I did provide that, US was 32%, Europe was –

John Nelson – State of Wisconsin Investment Board

I'm sorry, I missed that.

Lisa Cummins

54% and Asia was 14%.

John Nelson – State of Wisconsin Investment Board

Okay, great. Thanks very much. And look forward to profitability.

John Dulchinos

Yes.

Lisa Cummins

Yes.

John Nelson – State of Wisconsin Investment Board

Thanks. Thank you.

Operator

Thank you. (Operator instructions) Our next question is from the line of Chris Thomson with Mindshare Capital. Please go ahead.

Chris Thomson – Mindshare Capital

Good afternoon, John and Lisa.

John Dulchinos

Hey, Chris, how are you?

Lisa Cummins

Hello.

Chris Thomson – Mindshare Capital

Following it up on the breaking down of revenue, can you break out product and service revenue on the quarter?

John Dulchinos

Sure. Lisa?

Lisa Cummins

Yes, the product revenue (inaudible).

John Dulchinos

Hang on, Chris, so you need to pull those numbers up again.

Chris Thomson – Mindshare Capital

Okay.

Lisa Cummins

So, robotics revenue was $10.2 million, services was $3.2 million.

Chris Thomson – Mindshare Capital

Okay.

Lisa Cummins

And then compared to same period last year was $6.7 for robotics and $2.5 for service and then compared to prior quarter, $11.9 million for robotics and $2.7 million for service. So service was up.

Chris Thomson – Mindshare Capital

Okay. Very good. Thank you for answering my next question, that was impressive. MobileRobot, can you talk at all about the revenue they gave in the quarter?

Lisa Cummins

We actually don't disclose that, it will be discussed in our Q, if you want to look at our Q1, we file that.

Chris Thomson – Mindshare Capital

Okay. Do you have an expectation to when you will be filing that?

Lisa Cummins

On Monday.

Chris Thomson – Mindshare Capital

Monday, okay.

John Dulchinos

But it would –

Lisa Cummins

It was in line with what we expected.

Chris Thomson – Mindshare Capital

Yes. Okay. I am just trying to kind of get a handle on organic growth a little bit. That's fine. I'll take a look at it. You mentioned in the press release as well as your remarks just about slightly higher warranty expense, wouldn't be doing my job if I didn't ask if there was any issues that required a little more warranty expense in the quarter? Can you just address that a little bit more?

John Dulchinos

Well, first off, Chris, we're glad you are doing your job.

Lisa Cummins

Well, there was nothing significant. No, it was just we had gone through and did (inaudible) of our warranty reserve and analysis and we just felt it was prudent to add a little extra bounce for this quarter to make sure we were conservative and had a good adequate reserve, but nothing significant or to worry about.

Chris Thomson – Mindshare Capital

Okay. When do you expect to open your China sales office?

Lisa Cummins

We are in the process right now, and it should be fully up and running next quarter.

Chris Thomson – Mindshare Capital

Next quarter. Okay. Can you specify they don't need further or is it kind of tough to know for sure?

Lisa Cummins

No, it's definitely – I mean, we are viewing the lease right now and should be signed. You have to sign the lease first before you kind of (inaudible). So I am currently doing that right – as we speak.

Chris Thomson – Mindshare Capital

Okay. Got it.

John Dulchinos

It's located outside of Shanghai. And we've got a good – we are kind of two concentrations of business right now in China, one in the Shanghai to Beijing corridor and then another down in Shenzhen area. And so we show – to put in this (inaudible) I think there is a lot of additional growth outside of Pac which is where we started. And so, we got a lot. And, of course, the need for a local premises is very important in China and this should be able to help to us.

Lisa Cummins

And we've also hired the Managing Director there as well.

Chris Thomson – Mindshare Capital

Okay. And you are pursuing a direct sales model there?

John Dulchinos

Yes.

Chris Thomson – Mindshare Capital

Okay. How many reps are you going to have, do you expect?

John Dulchinos

Well, it is a combination of direct sales and a value added reseller channel.

Chris Thomson – Mindshare Capital

Okay.

John Dulchinos

I think it is going to be – really what we are looking for is partners in China who can start some specific and vertical applications. And right now, we've got one top on new build solutions around ID cards, these are electronic smart cards. We have another partner who does it around packaging solutions and another one focused on solar. So that kind of really the strategy is not that grind it out of a robot at time over there is to establish partners who can take or more products into vertical market applications.

Chris Thomson – Mindshare Capital

Got it. Sounds good. And then the last question, I am just going to throw it out there and see what happens? Talk about trying to lower your breakeven point, do you have a target in mind, or where you can think you can get your quarterly breakeven revenue point to?

John Dulchinos

I'm glad you threw it out there, well, obviously not an answer for you, but I will say that you do – as you all know, after you do several acquisitions, you start to map a distributed organization, and why I think this is important is to go back and clean that up and some of the stuff that we are working on to make sure that we keep ourselves streamlined and efficient.

Chris Thomson – Mindshare Capital

Very good. (inaudible), guys.

John Dulchinos

Yes.

Lisa Cummins

Thank you.

Operator

Thank you. And at this time, I'm showing no further questions. I would like to turn it back to Mr. Dulchinos for any closing comments.

John Dulchinos

Sure. Well, I want to thank everybody for joining the call. We would be presenting at the Americas Growth Capital Conference, the AGC Conference on February 15 in San Francisco. So if any of you (inaudible) we would love to have there and more about our story and where we are going. So we appreciate your support and look forward to conversing with you at the end of our fiscal third quarter conference call in April. Thanks.

Operator

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1800-406-7325 or 303-590-3030 using access code of 44010877 followed by the pound key. This does conclude the Adept Technology second quarter 2011 financial results conference call. Thank you for your participation. You may now disconnect.

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