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Adept Technology Inc. (NASDAQ:ADEP)

F2Q2012 (Qtr End 12/31/2011) Earnings Call

February 1, 2012 04:30 pm ET

Executives

Lisa Cummins - SVP, Finance & CFO

John Dulchinos - President & CEO

Analysts

Sam Bergman - Bayberry Asset Management

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Adept Technology second fiscal quarter 2012 results conference call. During today's presentation, all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, February 1st, 2012.

And I would now like to turn the conference over to Lisa Cummins. Please go ahead.

Lisa Cummins

Good afternoon, everyone and thank you for joining us. I just want to clarify this is actually the Q2 2012 fiscal results call. 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 1st, 2012.

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 risk described in our press release and in our annual report on 10-K for the fiscal year ended June 30th, 2011 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 2012 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. The financial results for the quarter were in line with our expectations, up 14% year-over-year but down sequentially which is typical given the period of seasonal weakness. However the numbers don’t accurately reflect the substantial progress we have made towards our strategic objective which I will highlight in a moment.

First, the sequential revenue decline was largely driven by weakness in Europe and to a lesser degree the ongoing downturn in disk drive. Looking at Europe, we believe that we experienced the full impact of any downside in that sector during the quarter and currently expect revenues from that geography to return to growth throughout the remainder of this fiscal year. And not surprising disk drive revenues were close to zero in the quarter reflecting the tight capital investment climate from the industry consolidation and the impact of the floods in Thailand. We do expect to see improvement in the market in 2012.

In our Components business, the aforementioned revenue declines were mostly offset by stronger revenues in the US where we had our best revenue quarter since the downturn as well a very strong quarter in our traditional Packaging Components business. We also saw a beginning traction in China where we recently opened a new support center. If you remember, China is rapidly becoming a major market for industrial robots and we believe the best brand commends value in this market. Assimilating all these data points, component revenues were up year-over-year reflecting strength, growth and value in our traditional Components business.

Now I would like to shift gears and speak to our new initiatives, Packaging Solutions and MobileRobots and how these initiatives support our long-term strategy to achieve sustainable revenue growth and consistent profitability. First, I am pleased to report that in our second fiscal quarter, we recognized our first material revenues related to our Packaging Solutions business as we delivered (inaudible) cells in the natural products market representing close to $1 million in revenue.

As we have discussed on previous calls, the natural foods market is a largely untapped automation market that represents roughly one-third of the entire food market and the technology we’ve acquired from InMoTx is an enabler for these applications.

Besides being a very large opportunity, it also has the potential to substantially change our financial model for a couple of reasons. First, the average order size and the visibility is much better than in our traditional components business. The revenue we recognized in our second quarter was based on two orders, they were booked in the June quarter. This is substantially larger and much longer visibility than atypical in our components business and over time will provide a much more leveraged and consistent sales model.

Second, each sale includes high margin consumable grippers that over the life of the cell contribute almost as much margin as the initial system. As we announced in the last earnings call, we took steps in the quarter to consolidate the Denmark entity and transfer the IP to our corporate offices. As of this month, we have substantially completed the consolidation in our operation with all future cells and grippers delivered from those offices. This should save us approximately $500,000 per quarter in operating expenses, the impact of which will be fully realized in our June quarter.

While we are continually somewhat conservative in the near-term on the scale of the project we pursue, we are confident that this segment will achieve sustainable and growing revenues in the coming months and years.

Now turning our attention to Mobile Robot. I am pleased to report that Q2 was our best quarter to date, with close to 50% of the Mobile Robot revenue coming from commercial customers.

To refresh your memories, when we acquired MobileRobots, they were selling predominantly to the research market. Our strategy was to take their leading edge autonomous navigation and mapping technology sold to researchers and re-channel it into Adept’s existing and new commercial market to solve complex logistics problems in a range of industries.

In our second quarter, we made shipments into the industrial, healthcare and clean room industries as we began to populate new applications in each segment. As most of the logistic problems require a fleet of robots to solve including our new enterprise suite manager software we expect MobileRobots to be a much more leveraged financial model than our traditional business and see opportunities for much larger average orders sizes through OEMs or end user channels.

Lastly I want to emphasize that Adept remains very focused on our financial model in maximizing value to our share holders. I believe we have done an excellent job in reducing expenses over the past few years and continue to constantly monitor expense levels such that we are always looking for improvement.

As a percent of sales in 2009, we’ve successfully reduced operating expense 21%. Our goal to maintain the expense level as we return to a growth trajectory thereby reducing our return to positive GAAP net income.

In closing, we are pleased with results of the quarter and believe we are well positioned to leverage our industry-leading product to become a leader in the markets we serve. While 2011 was marked by the integration of our acquisition, 2012 is focused on growing revenues and leveraging our financial model to return the company to sustainable profitability as soon as possible. I have outlined how we think we can get there and we work to get these objectives throughout the year providing update each quarter. I will now turn the call over to Lisa for a review of the financials. Lisa?

Lisa Cummins

Thank you John. Revenues for Adept’s fiscal 2012 second quarter was $15.2 million compared with $13.3 million in the same quarter of last year and $16.6 million from the previous quarter end. The annual increase in revenues was driven primarily by gains in some of our core markets including automotive, consumer electronics, packaging and industrial as well as relative strength in our new initiatives.

By business segment robotics revenue which represents sales of our intelligent robotic systems and vision science technology and motion control software was $12.9 million for the quarter compared to $10.2 million in the second quarter of 2011 and $13.4 million in the previous quarter.

Looking now at our services and support business, revenues in the second quarter of 2012 were $2.3 million compared to $3.2 million in the second quarter of 2011 and $3.3 million in the prior quarter.

Looking at revenue by region, European sales were 43% of total revenues in the second quarter of 2012, US was 31%, Asia was 15%, Canada was 6% and 5% for all other.

Turning now to gross margins, for the fiscal 2012 second quarter we reported gross margin was 43% of revenue compared with 38.9% in the second quarter of fiscal 2011 and 43.8% in the previous quarter. Our margin this quarter was impacted by favorable changes to our cost structure with certain of our foreign players, product mix shift and increased operational efficiencies.

Turning to operating expenses, OpEx for the quarter was $7.5 million compared to $7 million in the second quarter of 2011 and $7.7 million last quarter. The annual increase in expenses is directly related to the consolidation of InMoTx.

We recorded an operating loss of $1 million in the second quarter of 2012 compared with operating loss of $1.8 million in the second quarter of 2011 and $435,000 in the previous quarter. GAAP net loss for the quarter was $1.2 million or $0.13 per diluted shares compared to a net loss of $1.7 million or $0.20 per share for the second quarter of 2011 and a net loss of $619,000 or $0.07 per diluted shares in the previous quarter. Operating expenses in the second quarter at fiscal 2012 included $423,000 in restructuring expenses related to the consolidation of the Denmark facility into the Company’s headquarters in California.

Excluding the restructuring expense Adept would have reported a net loss to $800,000 for the second fiscal quarter of 2012. Adjusted EBITDA which excludes interest, depreciation, amortization, taxes merger and acquisition expense, restructuring and stock options expansion was a loss of $79,000 in the second quarter compared with an adjusted EBITDA loss of $190,000 in second quarter of fiscal 2011 and adjusted EBITDA $418,000 in the previous quarter.

Turning now to the balance sheet, Adept ended the quarter with cash and cash equivalent of $6.5 million down from $7.1 million at the end of the September. The decrease in cash is primarily due to a decline in the accounts payable and capital expenditures related to our mobile and packaging business initiative.

Account receivables were $10.1 million at the end of the quarter down from $11 million at the end of the September. Accounts payable were $6.9 million which compares with $8.1 million at the end of last quarter. Inventory level net of reserves were $10.2 million at the end of the second quarter compared with $10.7 million at the end of September.

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

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line of Sam Bergman with Bayberry Asset Management. Please go ahead.

Sam Bergman - Bayberry Asset Management

Good. Several questions I have. First of all. I did not hear what Lisa said about the percentage of business in Europe for the quarter?

Lisa Cummins

The percentage of business in Europe was 43% for this quarter.

Sam Bergman - Bayberry Asset Management

43%. And John do you feel this is the bottom for your for Europe this quarter and why do you feel that way?

John Dulchinos

Because we have a stronger outlooks from the field and based also on the backlog that we have for the quarter.

Sam Bergman - Bayberry Asset Management

Did you have a company, any backlogs going to the next quarter?

John Dulchinos

We don’t publish backlog numbers but we do monitor it and without defining it completely I can tell you that we have a high degree of confidence that the third quarter will have better revenues from Europe than the second quarter did.

Sam Bergman - Bayberry Asset Management

And you opened an office in China, how many are people staffing their office?

John Dulchinos

It is just a handful. It is meant to be a sales and support center first and then we will continue to expand it. We have been supporting China from our Singapore office to-date and to a lesser degree from our US operations. So now we have got people on the ground in China for sales, service and application. And that should allow us to do a better job of supporting customers as well as identifying a new program in China.

Sam Bergman - Bayberry Asset Management

Any recent wins in China?

John Dulchinos

Yes. The good and the bad news about China, is they tend to be design win based opportunities but it will take a little bit of time for them to translate into revenues, but once they do, they are more sustainable.

Sam Bergman - Bayberry Asset Management

So the design wins when you obtained them in China, one should assume that it will wrap up to decent revenue or is it considered a single or double or triple or is it just a very small piece of the pie?

John Dulchinos

Right now, a relatively modest piece of the pie, I don’t have the exact breakdown numbers for China, but they are single-digit in terms of percentage of the company revenues. But the programs are such that they scale substantially and over time, we would expect China to be a material revenue stream for the company in our traditional components business.

Sam Bergman - Bayberry Asset Management

Now, in terms of the balance sheet, your cash was down this quarter, receivables were down. Is there any chance that the company in the near future, figuring this year 2012, that you need to do some kind of offering or do you feel comfortable where the cash is?

Lisa Cummins

No, good question. But I feel comfortable where the cash is right now, I always like more. But we’re managing it very closely. I look at it daily and they should be definitely sufficient to get through the rest of the year with no problems.

John Dulchinos

Sam, cash is a very high priority for us and we take our cash balance very seriously and we set our team to manage it on an ongoing basis. And from a senior management level, it is our top priority in this calendar year too to grow our cash balance?

Lisa Cummins

And we do also still have a $10 million credit line with Silicon Valley Bank that we can tap in to if needed.

Sam Bergman - Bayberry Asset Management

That’s good. So, if you look at the acquisitions in 2011, is there anymore integration that you can do to drop the cost or is there a possibility that you can move some S&G to the research development area without adding more staff?

John Dulchinos

Yes, Sam, time to grow revenues. I think from our perspective the primary focus on both packing solutions and MobileRobots is to grow revenues in this calendar year. I think at some point reducing cost in those and there we have done the consolidations now with InMoTx. We’ll get a large portion of benefit this quarter. We’ll get the full benefit the next quarter.

But really from an executive management standpoint we are entirely focused on how we are going to start converting this technology into customer win and revenues that start to scale as the year goes on. And I think we are very pleased with the second quarter and I don’t have the actual member at my fingertips but somewhere in the order of 20% of our revenues came from this new initiatives. So we are very pleased we are starting to get traction at the customer level which is really what matters.

Sam Bergman - Bayberry Asset Management

So you have enough feet on the ground or sales people to grow revenues or do you need to add?

John Dulchinos

I think our plan this year would be to do our best to hold the line in OpEx with just modest increases and the really we’ve got what we feel is well resourced organization that has room for us to grow revenues without substantially adding to the operating expense.

Sam Bergman - Bayberry Asset Management

Just two remaining questions, last quarter you mentioned I guess in the MobileRobots area that you are looking to do or perhaps gain some design wins in the national food industry. How is that going?

John Dulchinos

Was that in Mobile Robots or was that in packaging?

Sam Bergman - Bayberry Asset Management

It is actually in packaging.

John Dulchinos

We are getting design wins. We delivered our first five cells in the December quarter, we have backlog for sales now in the March quarter and we actually expect, as we go into June to start getting our first BT business in that segment. So again, we are not trying, we’ve taken a relatively cautious approach to the kind of progress we pursue, but we are starting to now convert our technology into revenue in that business segment.

Sam Bergman - Bayberry Asset Management

Who was your first customer on that; can you name anybody?

John Dulchinos

We have not publicly disclosed it, but we have customers that are in the natural foods market which is really our primary focus area; in the food and vegetable space.

Sam Bergman - Bayberry Asset Management

And then the last question, the MobileRobots, what kind of commercial applications and perhaps if you could just mention one that you were able to selling and shipping and install in this past quarter?

John Dulchinos

We had three project wins in the quarter or three segments that we sold our MobileRobots into commercial applications in the quarter. One was traditional industrial materials movement. This was in the tire industry and moved tires dynamically around a production facility. The second was the relationship we had with Swisslog where we’re starting to get initial sales of our MobileRobots in the hospitals and to move specimens and pharmaceuticals. And then the third was in clean rooms, moving production facility supplies doing from the line in clean rooms.

Sam Bergman - Bayberry Asset Management

So to wrap it up, in all those design wins or applications, would say that particular division has much more available growth than your divisions going forward?

John Dulchinos

I think if you look at the potential serviceable and addressable market for us, both on an individual basis, MobileRobots and packaging are larger potential addressable markets for Adept than our traditional SCARA Robot marketing is. So they both represent substantial growth for the company in the future.

Sam Bergman - Bayberry Asset Management

And how you are playing to attack those addressable markets, if you already have it?

John Dulchinos

Well, that’s we’ve been working towards some commercial and it’s a combination obviously of a host of things from marketing to customer gratification, down to product and applications and then we would be happy to have a conversation with you in more detail in other time. But I can say that the primary focus of the company over the last couple of quarters is how define our addressable markets very crisply and how to develop application level solutions to solve those customer problems.

Operator

Our next question comes from the line of [Frank Buressi] with (inaudible). Please go ahead.

Unidentified Analyst

The packaging orders you have, you said they were with two different customers and do you have a lot of systems that are you mentioned backlog at all, I think regarding packaging, but do you have a lot of systems that are already out in where they haven’t been accepted as revenue yet, but they are being used by customers go under plans?

John Dulchinos

No. We’ve been…

Lisa Cummins

Yes. The way we recognize revenue on the packaging solutions is the percentage of completion and the majority of their revenue is recognized at shipment 95%. They want it shipped 95% as recognized.

Unidentified Analyst

And so when you set up, you don’t actually set the sell up at the plant before they buy it, at their plant; do they come to your plant to see how it would work?

Lisa Cummins

Yeah. There is something called a Factory Acceptance Test that they have to, that it has to pass before it’s shipped to their site; that we have at our factory.

John Dulchinos

And just may be that, and we can expand on this relative to cash flow from the packaging solutions business.

Lisa Cummins

Right. We usually get most of the payment upfront for the systems as well. So that would be in our deferred revenue.

Unidentified Analyst

Okay. They are paying you -- they decide, hey, I believe this will work. They pay you to do to; you are trying to avoid too much customization from what I recall you earlier?

Lisa Cummins

Exactly. So we get about 60% payment upfront and then once we pass, the FAT is one milestone and then at their site there is another test called the Site Acceptance Test and that’s when we recognize the final 5% and get paid the final amount.

John Dulchinos

So it comes to -- that’s one of the benefit of this business is that the working capital required for a program is largely financed by the customer in the project.

Unidentified Analyst

And I guess and that’s why it takes a while to get going, because they are going to put the money upfront, I mean, they’ve got to be committed. I guess, if it didn’t work at all, you have to give them their money back, but they pay. And so if I look at deferred revenue and try to get an idea of how much was, I don’t know if you have much deferred revenue?

Lisa Cummins

Right. When you see our Q, you’ll see it broken out.

Unidentified Analyst

Okay, okay.

John Dulchinos

Not working is not an option, Frank.

Lisa Cummins

Yeah. That’s correct; it’s not an option at all.

Unidentified Analyst

You’ll make it work.

John Dulchinos

And actually it’s a good segway, because one of the things we talked about in one of the previous calls, we’re taking a somewhat cautious approach. We want to make sure that the programs we do are good executable projects that we can get in and get the customer expectations to find, meet their expectations and deliver piece of equipment. Once we have that to a recipe that we believe is really highly refined, then we’ll be able to scale these revenues pretty quickly in this business. But, I think the good news is, you know, we’ve now moved from an R&D phase to revenues and we expect revenues to continue to progress in that business segment.

Unidentified Analyst

And so, I guess, how many kinds, this is a nebulous question, but how many different customers do you have to have using it before you think you will be comfortable with that, you know, scaling it up?

John Dulchinos

It’s not a number of customers. It’s an application segment; it includes a pretty wide market. And so really for Adept, the strategy is to narrow the focus down to applications segment that we can solve a customer problem and then go sell to all of the other companies who are in that space, and leverage the experience base we got. And I think you will see it, as we progress in this business, revenues will come in larger and larger clumps.

I mean, I think that one thing that’s noteworthy about this is we are still in the pilot stage portion of this business where we are getting customers wins with new applications and even with that we have an average order size of about $0.5 million and so its a world of difference from a sales expense standpoint in our traditional business and in size it’s much, much smaller.

Unidentified Analyst

And so, yeah because this just – so what it takes off, I forget how many thousands potentially you know…

John Dulchinos

But I think that beyond the revenue growth what’s really important we want to highlight in the discussion today is beyond the revenue growth, these new businesses have a much more attractive go-to-market cost model than our traditional business. So as revenue starts to scale and as the new business depending on larger portion of our revenues, we will see our expense numbers and mortgage numbers drop as a percent of revenues because these businesses are much more efficient in that category. That’s part of how the company’s like increased profitability in the future.

Unidentified Analyst

You know and John, I have heard a lot about the potential applications for this Microsoft Kinect Camera System, I mean would that offer any advantage to you to adopt any of that technology in any of these areas or?

John Dulchinos

Well, I think you are talking about, these are the specifics or the general, and sensing, for MobileRobots sensing is really important and actually in our MobileRobots product there is a range of three dimensional sensing and while the itself is not really something we integrate into our products. The technology behind it has the potential to and certainly what Microsoft and others in the consumer space are doing is they are really driving down the cost of sensing technology which makes our mobile robots cheaper in the future and actually the three dimensional sensing is more of the cornerstones of our strategy in packaging as well. So and a general answer to the absolute question, the answer is yes Frank, specifically to the Kinect, it’s not an industrial product, it’s not something we would actually package in onto our product, but certainly the technology itself has applicability in the future.

Unidentified Analyst

It could help reduce your cost, I mean it could I mean if it, you know if you could integrate it or you know the technology.

John Dulchinos

Yeah. Low cost three dimensional sensing will be enabler for robots going forward.

Unidentified Analyst

Now I have seen these mobile robots used in inventory where I don't know how sophisticated they are or they know where the inventory is, they go and get it, pick it up and for different kinds of manufactures, distributors, is that one of the applications you talked about, well I guess industrial material moving tires around.

John Dulchinos

Yeah, so it’s logistics, it’s moving stuff around facilities and what you move, where you move it from and in what facilities you move it in may vary, but moving stuff in a warehouse, moving stuff in a production facility, moving stuff in a clean room, moving stuff in a hospital, ultimately moving stuff in an office building, it’s all the same basic technology and where Adept stands alone right now is with a very robots that is easy to use, autonomous navigation based robot solutions. And that really opens up a lot of applications because of the flexibility it delivers for our customers.

Unidentified Analyst

I don’t know how large a market is mobile robot, I mean I don’t know how large it is, but I mean isn’t it a fairly large market. I mean it’s just moving thing around in plant or a warehouse or is it, I don’t know I mean?

John Dulchinos

We think it’s big, we think it is in aggregate substantially bigger than our current core traditional business market is. So the premise of our strategy is that in both Packaging Solutions and the Mobile Robot, we move the company into adjacent markets that have much larger scales in our current market and are largely untapped. So we have a opportunity to grow into a relatively open space rather than in our traditional market where we are up against pretty entrenched competitors and trying to move the company position is not trivial to do.

Unidentified Analyst

Right. So there is already a market for these Mobile Robots, but you’re saying you have autonomous navigation?

John Dulchinos

If you look at Mobile Robots, the majority of the robots in the market, companies like iRobot and others. So the robots that have a person in the loop, they are generally somebody who is the brains behind what the robot is doing, making decisions for it.

In our technology, our robots make the decision. They have the intelligence built into the robots. So the robot can navigate itself, it can define where it is going. It can develop its own path. It can avoid obstacles and it can move very much the way a person does except that it is much more predictable, a robot and we have seen we had studied where our customers were, but the robot is able to make the delivery on a much more consistent basis than a person can. Besides the labor savings, the robot also provides a much more deterministic delivery cycle than a person can do.

Unidentified Analyst

Okay. And are there other companies out there with autonomous robot, robotic solutions that I mean already offering this in the warehouses or?

John Dulchinos

No, not autonomously navigated devices. There are other companies who make either AGVs, automated guided vehicles or more primitive mobile robots that are used in industrial facilities, but there is no one today who is a commercial company who have had autonomously navigated vehicles.

Unidentified Analyst

One last question about the InMoTx, it’s like, you were saying that you thought that the packaging and mobile robots are something like 20% of your revenue this quarter. How big a business was it when you originally bought it, when they were only selling to research?

John Dulchinos

Less than half from what we did this quarter.

Unidentified Analyst

And I imagine the research market is pretty tough, is getting tougher, I mean has that held up, the research business they have or?

John Dulchinos

No, that stayed steady. It’s not an emphasis of growth for us. It’s really a vehicle to keep our hand on the pulse of what goes on in the research community. It’s a way that we can see what kind of technologies might make sense to bring in to our commercial products. Our strategy is to invest in that segment, to grow our strategy is to maintain it and take the cash flows out of that and fund our commercial activities.

Unidentified Analyst

Were these prospects you found or that they were customers of yours or on the MobileRobots or where these totally new people where you just saw the application in one end to show them the solution?

John Dulchinos

It’s a combination of two. One of the byproducts of the acquisition is that the MobileRobots came with the URL. So we own the MobileRobot URL for a website. We actually have a very active incoming inbound lead model in MobileRobots. And so some of the applications we go find, some of the applications come in through that inbound inquiry looking for a mobile robot to solve the problem and depending on which, I don’t know which avenue led to each one of these applications, but kind of a combination of those two things.

Unidentified Analyst

And one other thing and I will let up somebody else ask questions. When you bought InMoTx, had they started to any of these initiatives to get commercial customers or are they just strictly focused on the research?

John Dulchinos

They had a couple of installations that we actually spent the reasonable amount of 2011 cleaning up and that’s really what led us to kind of redefining our strategy to make sure we are focused on the right applications because that is the key part. And so we have got a relatively modest installed base to date and I guess one think I will remind everybody is that one of the attractiveness of this business is one, our installed base is big enough. We get some very healthy margin contribution from consumable grippers that will provide very attractive profits in the future for the business.

Unidentified Analyst

And that’s in mobile robots as well as in packaging?

John Dulchinos

No it is in packaging, mobile may have a different ongoing revenues from software upgrades, but packaging has the consumables model.

Operator

(Operator Instructions)

Our next question is from the line of [Bruce Winter], a private investor. Please go ahead.

Bruce Winter

I would like to think of your business in terms of how you had guided to your customers. You can either distribute mechanisms and optical components, you can be a system integrator or you can have proprietary technology that adds value much faster, could you recast your income statement in terms of how you add value to your customers?

John Dulchinos

Sure, first off in everyone of our segments, whether it is our traditional business or mobile robots or MobileRobots or our packing solution, there is either trade secrets, core technology or patents that define Adept’s technology base. So Adept has built its company as a innovator that really is focused on emerging application areas.

In our traditional business which is 80% of our revenues, and our core technology in our traditional business is really mission guided, high performance, motion control and software. So really Adept’s cornerstone IP is we have the best hand to eye coordination in the world in terms of industrial robotics.

We deliver that to our customers, largely through robots and we have a range of robots that some have unique IP like our Quattro which have a [banded] kinematics. Our Cobra which has some innovative drive train technology, or our Python Modules which are relatively conventional linear active. So it depends on the product as to how much IP is in the mechanism but certainly at the core there's a tremendous amount of Adept advanced technology in there and that’s as I said 75% to 80% of our revenues.

In MobileRobots our IP really revolves around our autonomous navigation and mapping technology. We are developing a next generation robot products that have I think some very innovative technology in it. By the core software control navigation is really key in that business. and what that enable is dynamic movement of goods for our customers.

So one of the real powerful things about MobileRobots is every robust is the computer and so when you have a MobileRobots in the facility connected to a network you meet your needs, you have tracking of whatever is going on in your facility and so that really becomes viable when you get to that which is another area where Adept has a unique IP. But really the freedom of movement of good and the full trace ability as what our MobileRobots technology enable.

And than in packaging food industry is big, so I am not going to cover the whole thing but really looking natural fruit product, meat, poultry, sea food, dairy, fruits and vegetable. A fundamental challenge with those products is being able to handle them and InMoTx IP really enables those application. Now that gets delivered the customers in a packaging cell that does their applications but the cornerstone of the IP is in the gripping technology. Would that answer your question, [Bruce]? Is that what you are looking for?

Unidentified Analysts

Yes, I have a question about that but that did answer my question. I am trying to think of what does that imply for gross margins if you are mainly a company that is intellectual property and highly differentiated and you are not just a system integrated or distributor. You should have gross margins in the what, 40s?

John Dulchinos

Where we’d like to have our gross margins?

Unidentified Analyst

Yeah, yeah. So would I, so what is the deal?

John Dulchinos

Let me just say that in the traditional robot business and the industrial robot business, that gets very favorable gross margins. In fact I think there is very few robot companies in the world, industrial robot companies who have the tidy gross margins, we do in that business. So the reason we are – but it’s a highly competitive market, there is a lot of in-trans competitors. The reason we embarked on this strategy 18 months ago to expand into a adjacent segment in MobileRobots and packaging solutions is because we believe that the market opportunities are big enough and our IT set will allow us to be able to design improved gross margins in the future. So that is the strategy and now we’d like to continue to move forward to execute on it.

Unidentified Analyst

That was good. I understand the strategy. Now, I looked at your website and I looked at your packaging and all I see is the. I Love Lucy, movie candy and that stuff. Could you explain to me what exactly you do for foods and vegetables and meat and stuff like that?

John Dulchinos

Sure. I think we are not getting to do a good job of getting our video distributed or we have you on wrong side of the website. But that aside, food really is, you think about food, you kind of think about it in a progression and it depends on exactly which segment of the market. But when you sell with the product, that product gets wrapped. The wrapped product gets placed into a bag or a carton and that carton then gets placed into a bag which is placed into a box. That box then gets placed into a pallet. And that’s kind of the progression that occurs, largely regardless of how the product gets made, whether it’s a candy that gets molded versus an apple that gets packed. They all kind of start as a raw product. They typically get wrapped and then they get bags or carton, then they get boxed.

A natural product is a product that’s organic, it comes from nature, whether it comes from an animal or comes from a tree. What we do in natural food products is, that’s a pretty big market as well, we’re focused on either loading wrapping machines and there is half a dozen ways that products get wrapped, either individually or in bulk. But there is standard machinery that does that. Our job is to take individual portions and load them into wrapping machines at high rates of speed.

Unidentified Analyst

It’s not like you put bananas in a box or apples in a box or something like that. You would put package?

John Dulchinos

We do that as well. But it depends, you know, when you get to an apple, there is a lot of that, we would probably handle a bag of apples. Our job in or one of our jobs, one of the five jobs we deliver. One of the five cells we delivered in December was handling potatoes. And taking a vacuum form, bag of potatoes and loading it into a cart.

Unidentified Analyst

I mean, how about sorting potatoes?

John Dulchinos

We could sort potatoes. I think it really depends on the application. Normally for fruits and vegetables, you individually handle specialty products but the stuff that you would get from Harry and David would be stuff that would be individually handled. The stuff you buy at a grocery store largely are going to be bulk packaged just because of the volume and the cost structure. So it depends on the segment. In the meat and poultry segment it is all individually handled and that’s where robots come in.

So fruits and vegetables will depend on the application. There is one job we delivered, its handling a full pack of tomatoes with the cellophane wrapped on the top. That is a tricky job because you have to handle the tomato without squishing them and also not disrupt the cellophane on top of the container.

Unidentified Analyst

I am on your website right now and I believe that the only videos that you have are of packaged candies and stuff like that?

Lisa Cummins

Go to solutions in the solutions page and we can talk afterwards that can play into exactly where if you go to the optimation.

Unidentified Analyst

Okay. I would like to get to another point I wanted to make. Your R&D is $2.2 million a quarter and I figure that I can buy a dollar worth of Adept stock and get a dollar worth of R&D in three years. I have never seen any situation like that. If I buy a dollar worth of Adept stock now, what I am going to get in for my dollar of Research and Development in three years?

John Dulchinos

May be we are not understanding the question?

Unidentified Analyst

Your market cap is about 24 and change, you spent $2.2 million a quarter on research and development. So multiply 2.2 times four, that's 8.8 and then multiply it by three that’s your market cap. Now I can buy at $1 of Adept stock and get $1 of research and development if I just wait for three years. So what I get if I did that. What's your return on your research and development, what, yeah what, I mean it sounds like an incredible deal right now?

John Dulchinos

It is an incredible deal right now. I think your denominator stood up which is….

Unidentified Analyst

No, what's your market cap?

John Dulchinos

Yeah, that's what I am saying, our market, I said your denominator is off, because our market cap is not realistic. But that aside, we you know, we spend a tremendous amount, we spend close to $10 million in the last year developing technology in these new business initiatives, you know we’re just at the beginning phase of translating that into revenues and we believe we have a tremendous opportunity in front of us. We can’t control…

Unidentified Analyst

Exactly. And this is an incredible deal, that’s why I want to buy your stock, but I don't see it. Your actual value in the stock market is 24 and change. It is probably worked a lot more and I just want to know what in this research and development is going to produce results. The denominator is 24 and change?

John Dulchinos

Yeah, I understand that you picked that off of a legitimate number, I am just saying that it’s kind of absurd from my perspective and it’s going to translate into, it’s going to be really clear for us. MobileRobots, packaging solutions and continued growth in our traditional businesses.

But really where we think the accelerated growth is going to come from is in these new business initiatives and there is a lot of R&D dollars that's been flowing into that over the last year and its translating you know, this again like I said at the beginning of the call, if you look at our year-over-year revenues, our core business was modestly growing, but for the first time we got material revenues out of packaging solutions in the December quarter and out of our commercial segment in MobileRobots and more focused on growing both of those revenue streams substantially over the next couple of years.

Unidentified Analyst

And you are going to produce results from this $2.2 million you spend every year, every quarter on something….

John Dulchinos

So that $2.2 million some of it goes into maintaining existing product line; a portion of that goes into developing new software technologies that enable our robots to be faster and better and easier to apply, some of that investment goes into creating a brand new product line in MobileRobots; some went into developing suite level enterprise software for our MobileRobots; some of that’s going into creating the packaging, ripping IP that enable these application; it goes in a host of things of which they come out in products that we expect will be accepted by customers and purchased customers to solve their problems.

Lisa Cummins

And let me give you that website, probably because we announced here, you can get through it from our website, that its optimation.adept.com and it has all the information you need on our packaging solutions; its very nice website. So you might want to take a look at that.

Unidentified Analyst

Okay, sounds good. Well, good luck and I agree with you. Your stock is worth a lot more than it is and I just have to pick the right time to buy it. Thank you very much.

John Dulchinos

I wouldn’t wait too long.

Operator

(Operator Instructions) I am showing no further questions in queue. I would like to turn the call back over for closing remarks.

John Dulchinos

Well, I want to thank everybody for joining us on this call. We appreciate your interest in Adept and support and we look forward to sharing our progress at the next earnings call, in late April or early May. So thank you everybody.

Operator

And ladies and gentlemen, this does conclude our conference for today. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4508600. I would like to thank you for your participation and you may now disconnect.

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