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Adept Technology, Inc. (NASDAQ:ADEP)

F3Q12 Earnings Call

May 2, 2012 5:00 PM ET

Executives

Lisa Cummins – SVP, Finance & CFO

John Dulchinos – President & CEO

John Boutsikaris – Senior VP of Sales and Marketing

Analysts

Marko Rodriguez – Stonegate Securities

Mike Cikos – Sidoti & Company

Sam Bergman – Bayberry Asset Management

Frank Barresi – Ameriprise Financial

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Adept third quarter 2012 results conference call. During today's presentation, all parties are in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) This conference is being recorded today, May 2, 2012.

I now like to turn the conference over to Ms. Lisa Cummins, Chief Financial Officer. Please go ahead.

Lisa Cummins

Good afternoon, everyone and thank you for joining us. As we begin today's call, let me remind you that during the course of this conference call, we may make certain remarks regarding Adept's expectations as to future events and future financial and operational performance, plans and prospects of the company, all of which are based on the company's position as of today, May 2, 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 risks described in our press release and in our annual report on 10-K for the fiscal year ended June 30, 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 third 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 results in the third quarter were solid, with revenue growth of 37% year-over-year and 15% sequentially. The large jump in annual revenue reflects strength across our new and traditional products, as well as an increasing diversification in our revenue stream.

We saw particular strength in Europe, and specifically Germany, where demand for our traditional [inaudible] remained solid. As you recall, going into the quarter, we had concerns about the strength of our European markets, and are happy to report we saw solid increases in both Germany and France this quarter.

In addition, our recently acquired mobile robots and packaging solutions initiatives continue to gain traction, making up over 17% of our revenues for the quarter. We are also seeing a return to a modest growth cycle in the disk drive market, driven by what appears to be a loosening in the capital investment climate, and perhaps recovery from the floods in Thailand. We expect this trend to continue over the next couple of quarters.

Our gross margin declined to 41% in the quarter, driven almost entirely by a single large order from Germany that had a disproportionate mix of a low margin traditional product. Without this order, gross margins would have been close to 44%.

Revenues in the Americas were up 46% over last year. More importantly those revenues came from multiple markets and products, including traditional components for medicals and pharmaceuticals, as well as sales of our mobile solutions into the commercial market and our packaging solutions.

We continue to see beginning traction in China, where our new support centre is located. If you remember, China is rapidly becoming a major market for industrial robots, and we believe Adept’s Brand commands value in this market. Accumulating all these data points, component revenues were up year-over-year reflecting strength, growth and value in our traditional components business.

Now I will spend a few minutes on our exciting new business initiatives, packaging solutions and mobile robots, and how these initiatives support our long-term strategy to achieve sustainable revenue growth and consistent profitability. In our fiscal third quarter, we continued to recognize material revenues related to our packaging solutions, as we delivered 4 cells to Earthbound Farms, a leader in the FreshCut leafy greens, to automate their prewash produce packaging process.

This is a fast-growing segment in the natural foods market, and includes both bag products and clamshells, with many fruits and vegetables packaged this way. These products provide the consumer convenience and the grocer a better display, longer shelf life, and labor savings in shelf stocking. In the US, much of this market is located in the South East and in California near Adept’s corporate office.

Having a high visible, lead customer in close proximity to Adept’s corporate office is very valuable and a solid endorsement and validation of our unique technology. It also shows that in this market segment demand for new, more effective, flexible robotic solutions is very strong. While 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.

In the US alone, it employs close to 1 million workers. These are jobs with a high degree of competitive processes, with many plants employee turnover rates approaching 40%. The grouping [ph] technology that we acquired from InMoTx plus our existing USDA Quattro robot, and Pack Expert application software are fundamental enablers for these applications.

A key challenge in this market is the diverse range of products and packages driven by changing consumer demand. For producers to adopt automation, they need flexibility and reconfigurability that can be easily adapted to the variety of products and packages in the market. Our patented gripping technology, advanced software, and vision provide the capabilities to address these needs, essentially reducing the complexity of the applications to standard software and hardware modules that can be easily replicated and scaled.

As we discussed in previous columns, besides being a very large opportunity, it has potential to substantially change our financial model, as the average order size and visibility is much better than our traditional components business. This along with the consumables and service revenues to the company, the system sales have potential to provide for much more consistent, sustainable revenues over time.

As we discussed in our last earnings call, we finalized the consolidation of the Denmark entity transferring the IP to our corporate office here in California. The Earthbound Farms order, along with all our group production, were done from our corporate office in the March quarter. As you saw in the earnings release, the one-time structuring cost associated with this activity during the quarter was $791,000.

However, we believe the consolidation will save us approximately $500,000 per quarter in operating expenses. We continue to aggressively pursue opportunities in this market, and are excited about its long-term potential for the company.

Now turning our attention to Mobile robots, I’m pleased to report that Q2 is another solid quarter with 45% of our mobile robot revenue coming from commercial customers. As we discussed on previous calls, when they acquired mobile robots they were selling predominantly to the research market. Our strategy was to take their leading edge atomics navigation and mapping technologies to researchers, and focus it on Adept’s existing and new commercial markets to solve complex logistics problem in a range of industries.

Significant logistics problems require a fleet of robots. We have combined our acquired technology with a new enterprise fleet manager that we have developed that allows fleets of robots to operate optimally. In the March quarter, we made shipments across all three vertical application segments, healthcare, warehousing and clean rooms. In most enterprise logistics -- in most enterprises, logistics remains the major bottleneck in least automated functions.

In US warehousing alone, there are over 600,000 people involved in logistics. They are spending on labor exceeding $21 billion. We believe our smart logistics builds on our unique mobile technology have tremendous long-term potential across a wide range of industries. And as with packaging, we believe this business will be characterized by larger average orders sizes and better visibility than our traditional businesses.

Before I turn the call over to Lisa, I would like to make a comment about the validation of our thesis for growth and expansion. As most of you have seen, and Amazon recently acquired Kiva Systems for $775 million, looking to increase automation and improve productivity in its warehouses. This acquisition underscores our belief that over time more and more commercial retailers, manufacturers, and packaging companies will be looking for similar improvements.

It also supports our premise that the robotics market is moving from general purpose industrial arms to its application level solution in vertical markets, where automation has been largely non-existent or extremely inflexible. We believe Adept is in a leading position to enable us to benefit from these trends.

In closing, I want to reiterate that Adept focused on our financial model and maximizing value to our shareholders by building an organization capability, executing our plan and delivering results. In November, we added John Boutsikaris, to head up our global sales and marketing, who came to us from the natural foods market. And in March we added Robert Malley to lead our global operations, who brings a solid track record in driving low-cost leading supply chains in the operationally challenging semiconductor market.

These new additions to our management team are essential to driving further growth and execution. I believe we have done an excellent job in managing expenses over the past few years, while maximizing the creation of value added IP in new high-growth markets. As we look forward and build momentum in our new businesses, we believe we can grow our top line, while growing our OpEx at a slower pace, translating our technology into revenues and profits. We further believe this model will return us to sustainable GAAP profitability as we continue on our growth trajectory.

I will now turn the call over to Lisa for a review of the financials.

Lisa Cummins

Thank you John. Revenues for Adept’s fiscal 2012 third quarter was $17.5 million compared with $12.8 million in the same quarter of last year and $15.2 million from the previous quarter end. The annual increase in revenues was driven primarily by gains in some of our core markets including automotive and industrial, medical and pharmaceutical, and new packaging solutions in the Mobile robots initiative.

By business segment, robotics revenues, which represents sales of our intelligent robotic systems and vision guidance technology and motion control software was $14.6 million for the quarter compared to $9.8 million in the third quarter of 2011 and $12.9 million in the previous quarter.

Looking now at our services and support business, revenues in the third quarter of 2012 were $2.8 million compared to $3 million in the third quarter of 2011 and $2.3 million in the prior quarter.

Looking at revenue by regions, European sales were 48% of total revenues in the third quarter of 2012, US was 32%, Asia was 17% and 3% for all other.

Turning now to gross margins, for the fiscal 2012 third quarter, reported gross margin was 41.1% of revenue compared with 44.8% in the third quarter of fiscal 2011 and 43% in the previous quarter. Our margin this quarter was impacted by product mix, which included a large order from a German customer for our lower margin traditional products. We expect our gross margins to return to normalized levels in the current quarter, and that we will see longer-term and sustainable improvements in margins, as our new packaging solutions and mobile robots continue to become an increasing portion of our revenues.

Turning to operating expenses, OpEx for the quarter was $8.3 million compared to $8.6 million in the third quarter of 2011 and $7.5 million last quarter. The sequential increase in expenses is directly related to the consolidation of InMoTx into our California headquarters, which resulted in a one-time charge of $791,000.

We recorded an operating loss of $1.2 million in the third quarter of 2012 compared with an operating loss of $2.9 million in the third quarter of 2011 and $1 million in the previous quarter. GAAP net loss for the quarter was $1.5 million or $0.16 per diluted share compared to a net loss of $3.3 million or $0.37 per share for the third quarter of 2011 and a net loss of $1.2 million or $0.13 per diluted share in the previous quarter. Operating expenses in the third quarter of fiscal 2012 include the aforementioned restructuring expenses of $791,000.

Adjusted EBITDA which excludes interest, depreciation, amortization, taxes, merger and acquisition expense, restructuring and stock option expense was a loss of $51,000 in the third quarter compared with an adjusted EBITDA loss of $870,000 in the third quarter of fiscal 2011 and an adjusted EBITDA loss of $79,000 in the previous quarter.

Turning now to the balance sheet, Adept ended the quarter with cash and cash equivalents of $6 million down from $6.5 million at the end of December. The decrease in cash is primarily due to the payment of restructuring costs for the consolidation of InMoTx, and increased accounts receivable.

Account receivables were $13.6 million at the end of the quarter, up from $10.1 million at the end of December. Accounts payable were $7.3 million, which compares with $6.9 million at the end of last quarter. Inventory levels, net of reserves, were $8.7 million at the end of the third quarter compared with $10.2 million at the end of December.

With that I will now turn the call over to the operator for questions. But before I do, I would like to introduce Mr. John Boutsikaris, our new senior VP of Sales and Marketing, who will be joining us for the question-and-answer session. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Laura Ingalls [ph] with Stonegate Securities. Please go ahead.

Marko Rodriguez - Stonegate Securities

Hi, this is Marko Rodriguez calling on behalf of Laura. I was wondering if you could discuss a little bit more in regard to the strength you saw in Germany. Are you seeing a macroeconomic tick up in that area or there are some other underlying events that caused the strength there?

John Dulchinos

Well, I will take a first shot of it, and John can answer some added color. So Germany is one of our stronger markets. We generate 30% to 40% of our revenues on a typical quarter out of Germany. And Germany is unique in our business in that it services Germany, but it is also a very large export business. And if I look at the revenue distribution over the last quarter, Germany was driven both by solid strength in Europe, but also by strength in Asia, which drove the exports.

So we feel a little bit buffered in our European business because it is servicing both the European continent and Asia.

Marko Rodriguez - Stonegate Securities

Okay. Is this because of improving economic conditions in those geographic areas, are you just, are you taking market share, any kind of color you can provide there?

John Dulchinos

Sure. I think it is a combination of -- but we don’t have updated market statistics to be able to point specifically at market share gains. But at least in the competitive opportunities we have been involved; we have been winning those with our technologies. Again, I think that there is a reasonable poll from Asia that it is supporting the business we’re shipping into Germany that is integrated into solutions, and then getting shipped out into tools that are destined for in particular China. So that has been a pretty good growth driver for the European business.

Marko Rodriguez - Stonegate Securities

Got it. Okay. And then shifting gears to the packaging, food packaging industry, aside from the Earthbound Farms solution here that you just announced in your press release, are there any other things that you can kind of talk about or help us quantify the opportunity that you are seeing near-term in terms of maybe I don’t know, pipeline numbers or anything of that nature?

John Boutsikaris

Hi Marko. This is John. I don’t know if we can discuss pipeline numbers. I guess the best way to describe it is that this is an area that is not traditionally an automated area in most fresh-cut organizations. And there is a -- I will just simply say a target rich opportunity out there for us, specifically with the application that we are using because it can be replicated very easily in a number of different companies with fundamentally the same problem.

So it really has a very defined market opportunity, and we believe we have a very positive solution to address that market opportunity. So we see it as a real opportunity and star going forward.

Marko Rodriguez - Stonegate Securities

Okay. Maybe if I can ask it slightly differently, you mention that the packaging solutions and mobile robots were about 17% of your quarterly revenues, is there any kind of way you can break that up between packaging and mobile of that 17%? And what kind of expectations you are thinking, I don’t know, 12 months from now?

John Dulchinos

I will answer this. We don’t break that down to any further segmentation than our new businesses in combination versus our traditional business. So unfortunately I can’t provide you additional color in that. We do expect this business to grow and we have a long-term target that these new businesses will represent half of our revenues.

So we think that there is a tremendous opportunity in the long run for these business segments, and both bring unique IP into largely untapped application segments.

Marko Rodriguez - Stonegate Securities

Got it. Okay, and in regard to the restructuring initiatives, are the OpEx levels that you exited here in Q3, are those good numbers that we should be using for modeling purposes going forward?

Lisa Cummins

Hi, this is Lisa. So, you would have to take our total OpEx less the restructuring piece, and in addition to that, there is an additional $300,000 related to Denmark in transferring the IP to California that we cannot classify as restructuring. So you would need to include that in there as well.

Marko Rodriguez - Stonegate Securities

So, ex the restructuring charge obviously, an additional $300,000 out of that OpEx and that is a good number kind of going forward for modeling purpose?

Lisa Cummins

Yes. In relation to go forward, but then you do have to remember that we are investing in some R&D and sales and marketing related to our new initiatives, but not as much as restructuring.

Marko Rodriguez - Stonegate Securities

Perfect. And integration, any update there in terms of the movements there, are we fully integrated?

John Dulchinos

Yes, this is John Dulchinos again. One of the other really positive stories out of the quarter, besides the very strong revenue growth, the Earthbound Farms order was delivered from our corporate offices, and all grippers that we shipped in the quarter both on the Earthbound Farms system, as well as consumables as some of the system goes out and play [ph], were all delivered from our California operation.

So we have done it. So we integrate it, and we have been building an organization here to have the capability to deliver these sales from our office.

Marko Rodriguez - Stonegate Securities

Great. And then lastly, just wondered if you could provide any kind of color in regard to the recent opening of the Shanghai office, how is that kind of coming along?

John Dulchinos

Actually it has gone quite well. It has come along quite quickly and everyone over there is fully operational and functional. We are providing sales and service support to our customers in China, and I don’t think anybody is unhappy with this. It is a very good office. It is a nice office. It is located in as we said in Shanghai, in a very nice area. It speaks well for that and shows the colors of the company. So it is a good operation.

Marko Rodriguez - Stonegate Securities

All right. I will jump back in queue. Thanks guys.

John Dulchinos

Thank you.

Lisa Cummins

Thank you.

Operator

Thank you. And our next question comes from the line of Mike Cikos with Sidoti & Company. Please go ahead.

Mike Cikos - Sidoti & Company

Hi guys. Just a couple of quick questions for you, the first thing I wanted to ask you about was the revenue pickup you saw, you attribute it to you are now seeing growth in Europe, and the cyclical uptick in disk drive sales. Can you describe, I guess the cycles for disk drives in general, how long does that cycle typically last for?

John Dulchinos

Sure. This is John Dulchinos. Let me add, let me talk about it I guess in a couple of different pieces. You know, if you look at the magnitude of the growth, which was pretty substantial year-over-year, it really fell into a much healthier Europe than we were a year ago, and even than we were in the December quarter. As well as very strong growth in the US year-over-year, and growth from our new business initiatives that were in a smaller state back then.

And then lastly the disk drive, the disk drive was a relatively modest amount. I don’t know if we broke out the segment, but it is probably 10 percentish would be I think a pretty good estimate, maybe less than that in terms of the overall revenue up tick. Normally, and we don’t think this is a massive cycle, but in the December quarter we had almost no revenue from disk drive.

So we think this has the potential to be a two or three quarter kind of uptick, and you know, maybe slightly up to from where we were this quarter. So it will provide a little bit of extra revenue cushion as we go forward.

Mike Cikos - Sidoti & Company

Okay. And as far as the growth that you are seeing out of the Americas and Europe then, I mean, has it been on a relatively linear basis, can you point to the fact that growth has been occurring throughout the quarter. Was it spotty, could you give us some clarification with that?

John Dulchinos

Well, normally March and June quarters are quite a bit stronger from September and December quarters of the previous year. You know, so part of it was we move into a good budgeting cycle with our customers, and that helps to provide some of the uptick. It was a very strong order quarter almost from the outset.

I mean from the very beginning of the quarter, it started healthy. Some of that may have been things that started last quarter, and then it trended relatively strong throughout the entire quarter. So it was fairly linear in terms of order tracking.

Mike Cikos - Sidoti & Company

Okay. And then based on what you have seen so for this current quarter, I mean is there reason to believe that this will, this trend will continue?

John Dulchinos

You know, I can’t speak to forward-looking guidance. You know, I think that the reason we brought John onboard was to help build the processes and systems in our sales and marketing organizations to drive more consistent growth over time. So, we are certainly working in that direction.

Mike Cikos - Sidoti & Company

Okay, and then just jumping ship to the gross margins, I know they were impacted by the one large order coming out of Europe, if you could give us some more insight, as far as what the product was or, who the customer was, if it is I guess traditional customer that you have that typically places orders with you historically, or if it is a new one that will be terrific?

John Boutsikaris

Hi, Mike, this is John Boutsikaris. I can’t give you the customer. Unfortunately, we are precluded from doing that with that customer. The product was basically in our six-axis product line, and it was I guess I would treat it as more of an anomaly than anything else. It happened to be something that we -- there is good news and bad news.

We got a much larger order then we anticipated, but it impacted our margins a bit more negatively than we thought. And the good news is it was a strategic opportunity, and we will continue to see more business from that customer, but we don’t anticipate seeing that product in that size going forward.

Mike Cikos - Sidoti & Company

Okay, so you expect seeing more business from that customer, they have been a customer of yours for a while now though?

John Boutsikaris

They have been a customer for a couple of years.

Mike Cikos - Sidoti & Company

Okay. And moving over to the restructuring expenses, some of these were restructuring expenses then correct?

Lisa Cummins

Yes, we are done. We went from 18 employees down to 2 currently. The office is closed, and involved in the restructuring expense this quarter was some inventory write-off and some things that we did not know until we actually started physically closing the office. And in terms of payment of some of the employees in Denmark regulation, we had to pay out a little more than we expected in addition to the inventory write-offs.

Mike Cikos - Sidoti & Company

All right. And then just the last thing I wanted to comment on before I jump back into the queue, was the Shanghai support office that you guys have now. So you are seeing the benefits of it. But one thing that was alluded to on the last conference call was there has been talk with some potential, you had some potential opportunities for design wins, is there anything further on this front as far as whether or not you can get some material revenue out of those design wins, or just in general what is happening with those design wins?

John Dulchinos

Yes, Mike, this is John Dulchinos. I don’t, I’m not sure what you were referring to. Was it in the Q&A or was it on the script?

Mike Cikos - Sidoti & Company

I thought it had been on the script. I don’t have the transcript in front of me, so I apologize for that.

John Dulchinos

I guess what I will say is that our business in Asia, probably China is maybe a third of that business, somewhere in that magnitude. And China is, Asia in general, and certainly China is a business where we get design wins with channel partners, or with key customers who then replicate those designs.

Our focus in China, it is a big market, and of course in any big market you got to figure out how to segment it down, is packaging, which of course plays very tightly to our initiative here, and solar and electronics. You know, so kind of those three areas that we’re putting our efforts in, and we do have design wins in those areas with either end users or channel partners, and those are some of what contributes into the revenues that we’re getting right now.

Mike Cikos - Sidoti & Company

Okay. All right. Thanks a lot guys. And I will just jump back into the queue now. Thank you.

Lisa Cummins

Thanks Mike.

John Dulchinos

Thanks Michael.

Operator

Thank you. And our next question comes from the line of Sam Bergman with Bayberry Asset Management. Please go ahead.

Sam Bergman - Bayberry Asset Management

Good afternoon John and Lisa, how are you?

Lisa Cummins

Good and how are you?

John Dulchinos

Good.

Sam Bergman - Bayberry Asset Management

And welcome to the new John.

John Boutsikaris

Thank you Sam.

Sam Bergman - Bayberry Asset Management

A couple of questions I have, first of all can you quantify the momentum going into the fourth quarter, like you did I think in the second-quarter going to third quarter on the last conference call?

John Dulchinos

We don’t provide forward guidance as I said earlier. I guess I would say that the March quarter was a positive book-to-bill quarter, and provided some good backlog for the June quarter. But beyond that I really can’t characterize it.

Sam Bergman - Bayberry Asset Management

Okay. So, if I ask it in a different way in terms of how bringing in the natural food business into the mix, you did mention that when you will get sustainable revenues from that area, you feel the company will be on a different trajectory. How long do you think that is going to take the company to develop and become profitable quarter after quarter?

John Dulchinos

Hi Sam. We won’t speak to the profitability. But in answer to the first quarter of the question, which is when do we believe we will see some sustained momentum, I believe we will see that probably by the end of this calendar year. I think we are very comfortable with that position.

Sam Bergman - Bayberry Asset Management

So, do you have pilots going on or beta sites in the natural food industry right now, other than what you did for Earthbound that you can talk about?

John Boutsikaris

I can tell you that we have, they are not pilots. They are actual sales. But I can’t talk about them. Unfortunately we are in the process if you will. But we’re out of the beta, out of the beta stage.

John Dulchinos

Sam, let me just remind you that this is a -- that we hired John because for a variety of reasons. But important because he brings a very deep domain expertise in food packaging and natural food products, and we talked about it in some of the calls. This is a big market, largely untapped, and really our strategy is to really segment it down to applications that we can succeed at and then ramp and scale.

While it may not be a big deal to a lot of people on the call today, being able to disclose the Earthbound Farms, who is a real leader in green products, fresh-cut products, is really important because that allows us to now work our way through the rest of that market segment, and be able to take a solution that we have got refined and be able to deliver to a variety of different customers, and that is really our strategy.

Sam Bergman - Bayberry Asset Management

And how long has it been up and running for them, just a short time?

John Dulchinos

This quarter, actually it is -- we can say that their initial systems were turned on and are in production as we speak today.

Sam Bergman - Bayberry Asset Management

Can you talk about the business development side of getting enough people to call on the natural foods warehouses that need this product, and will that drive costs on the SG&A, or do you feel the revenue will take care of the added cost.

John Dulchinos

I will speak to the cost side of that and let John speak to the kind of how we see the selling activities going. As we have talked about I think on a number of these calls, the good news out of this business is that the average order size is 5 to 10 times larger than the average order size in our traditional business.

And so while we would want to put in place some dedicated people from the industry to sell this, because that is the best way to scale the business, they should have a much better cost footprint compared to our traditional business in terms of SG&A. And so while we will add some resources to make this happen, I fully expect that the revenues will grow in concert with those expenses at a rate that is better than our traditional business.

Let me now turn to John and see his comments on -- just kind of how he sees the business development activity.

John Boutsikaris

Sam, I would probably echo what John said. I think we are actually pretty well suited today, and pretty well structured from a sales standpoint to really address this business from the standpoint of where we need to be with respect to the right people on the street, and calling on the right accounts.

I think we need to beef up our marketing a bit, and we are in the process of doing that. I don’t think we will see an appreciable increase in any of the sales and marketing expense associated with that effort. I think we are pretty comfortably set at least for the near term to see a reasonable return on the investments we have already made.

Sam Bergman - Bayberry Asset Management

John, can you tell us what the average order is in that particular industry versus the other industries you are in because you did say it could be as much as 5 to 10 times as much?

John Dulchinos

Well, let me just answer it this way, our normal sell is around $200,000, give or take a bit depending on auction content and configuration. And what we have seen so far is a typical customer will start with 2 to 4 of these. And it is expected over time we would see those, so those numbers go up if someone has a successful installation. So, yes, it is a much better business than our traditional business in terms of size of the orders we get.

Sam Bergman - Bayberry Asset Management

All right, and you had bought out InMoTx and that is a company that you just closed a facility down in Denmark, and I believe there is what 2 people plus the IP, right?

John Dulchinos

Yes, I mean, it's really -- you know, the IP is all here, and…

Lisa Cummins

Those two people have been integrated into our German office, and the other one is just transitioning out.

John Dulchinos

Yes, so we have nobody in Denmark anymore. It's -- they've all been moved into either the corporation here or in a support role in our German office.

Sam Bergman - Bayberry Asset Management

Okay, and the last question, I will let somebody else get on the line, I believe I asked this last quarter regarding the cash balance Lisa, so the cash balance is a little bit down. You feel comfortable for the remainder of the year and going forward that you will become cash flow positive and not need to hit the marketplace for any offering or secondary offering?

Lisa Cummins

Well, I definitely would always feel more comfortable with a stronger balance sheet and we still have access to our line of credit, and we have an increase in our receivables to about $3 million. So I definitely feel comfortable with our cash position where we are at today, but I'm always looking at alternatives for financing sources that are the best return for our shareholders.

Sam Bergman - Bayberry Asset Management

Okay, thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Frank Barresi with Ameriprise Financial. Please go ahead.

Frank Barresi - Ameriprise Financial

Hi guys, how are you doing?

Lisa Cummins

Hi, good. How are you Frank?

Frank Barresi - Ameriprise Financial

Very well. I'm doing very well. Now, John, you mentioned this Kiva systems being bought for $775 million by Amazon. And they are a much different company than you are I'm sure but are there similarities between you and them?

John Dulchinos

Yes, let me answer that Frank. Kiva is a very different business than ours, but there is a common thread which is that they use mobile robot level technology, primitive version than what we have to solve a warehousing application, and so while they had -- their offering was different than ours on a direct comparison.

It is in a very related space, and I think it speaks very well to the value of our mobile robot technology, and secondly to the fact that application level solutions which is what we are working towards in both packaging and in mobile have a lot of value to the right customers and so you know, I think it's a good endorsement of what we're doing or what we’re trying to do in our business.

Frank Barresi - Ameriprise Financial

Does the Amazon paying this much for, I mean, I don't know how big a company Kiva was, I mean because they are buying it mostly to use themselves, right, for their own warehouses.

John Dulchinos

Yes, we don't have the data either because it's a privately held company, but our estimate it was for a fairly large multiple of revenues, and yes, our expectation is that they would buy it to use that technology in automating their warehouses and, you know, as leaders and segments go, it typically needs followers who want to develop similar solutions or a similar strategy to be able to compete effectively and so when something like this happens to us it's a good statement on the industry, and it is a good statement on the opportunity for Adept and for what we’re trying to do.

Frank Barresi - Ameriprise Financial

Yes, and this happened in the last two months, but have you seen any and maybe it's too soon, any increase in inquiries for your mobile robots or any activity because of this or inquiries anyway.

John Dulchinos

Yes. I answered yes.

Frank Barresi - Ameriprise Financial

Okay, that is good, and then I just had two other questions. One, a simply one, this $500,000, you said that the integration was going to save you $500,000 a quarter, did I get that right?

Lisa Cummins

Yes, you got that right, but just to be clear that's $500,000 related to the Denmark entity. So we were paying more than that and we expect the expenses related to the Denmark entity to go down $500,000.

Frank Barresi - Ameriprise Financial

And they’re going to go up in California then or …

Lisa Cummins

It is offset by investments that we would make for just general R&D and sales and marketing, but we have already made the investment this quarter for transferring the IP. So we don't need to increase related to Denmark, just for general investment for new initiatives.

Frank Barresi - Ameriprise Financial

Okay. So it's not like when I look at numbers thinking, we're going to save $500,000, no.

Lisa Cummins

What I want to be clear about, I wouldn’t take the net number and just deduct $500,000.

Frank Barresi - Ameriprise Financial

Okay, all right, and then, you know, someone earlier asked about you know, like backlog and packaging operations and it's like when someone orders, wasn't that you say I can look at my nose, but then you say it was like 65% of the money is upfront or when there is -- when you do the development work for them.

Lisa Cummins

So for the packaging solutions, we usually get about 40% upfront as the initial order, and then we get a subsequent 20% at shipment and then the remainder.

Frank Barresi - Ameriprise Financial

Okay, and so, and then we will see how much of a backlog you have related to the packaging solutions I guess when you do follow your 10-Q we will be able to see deferred revenue again or…

Lisa Cummins

Yes, it depends on whether we shipped that quarter or not but yes, that is a different revenue line.

Frank Barresi - Ameriprise Financial

Okay, all right. And then just one other question on, you know, you and John have talked about the model being different with the mobile robots and packaging, and so when I looked you know, at the SG&A you know, say for the quarter and the last nine months, you know, it's something like you know, not the 30%, you know, but something in the 30% range, with the new offering, I mean any idea of how it will change. I mean, it will be lower is I take it you are saying but a lot lower?

John Dulchinos

That is a good assumption. In fact, let me just make a couple of comments kind of answering this. First off, you know, I just -- I want to make sure that that we are clear that we're not trying to be cagey about, you know, the amount of revenue we are getting in new businesses or how much backlog we have or any of that.

You know, we want to certainly be as open as we can, but it is important to remember these are new businesses and segments where we think we have tremendous opportunity and, you know, the business won't be perfectly linear, and we also want to be very careful not to tip off competitors to what we're doing or give them too much information. So we're trying to balance how much we disclose versus how we manage our competitive opportunity in this space.

Relative to the value proposition of these new businesses, there is a nice accounting of it on our investor presentation that's on our website, and if you go to the back pages of that there is a table that shows a model of what we think is possible between the current business and these future initiatives, and the shorter answer is that we believe both gross margin will be better and SG&A will be better and that the gap, and then if you look at it on the profitability basis, we think in the long run these business have the potential to be twice as profitable as the traditional business. But we think there is a lot of upside over the long-haul with these businesses.

Frank Barresi - Ameriprise Financial

Got it, good deal. Hey, thanks a lot.

John Dulchinos

Thanks Mike.

Lisa Cummins

Thank you.

Operator

And we have a follow-up question from the line of Mike Cikos - Sidoti & Company. Please go ahead.

Mike Cikos - Sidoti & Company

Hi guys, just want to piggyback off of an earlier question that have been asked regarding the cash balance. So you plan on getting some relief from the accounts receivable by year end then with this 3 million spike that we saw in the third quarter?

Lisa Cummins

Correct. Our average days outstanding is usually in the range of 60 to 70 and most of the shipments went out at the end of the quarter, which is why we saw the spike in accounts receivable and a decrease in inventory. So we should collect most of that this quarter.

Mike Cikos - Sidoti & Company

Okay, and what was that about the inventory balance?

Lisa Cummins

The inventory balance decreased this quarter.

Mike Cikos - Sidoti & Company

Right.

Lisa Cummins

And it was up [ph] so that's why we our accounts receivable increased as well.

Mike Cikos - Sidoti & Company

Okay.

Lisa Cummins

We are able to use existing inventory.

Mike Cikos - Sidoti & Company

Would we expect the inventory balance to then bounce back up in the following quarter?

Lisa Cummins

It depends on the product mix but it should depending on where we are in revenues and our product mix.

John Dulchinos

But the inventory shouldn’t go up?

Lisa Cummins

It should stay where it is consistent.

Mike Cikos - Sidoti & Company

Yes, okay. All right, thanks a lot guys. Continue to grow the business and I will talk to you soon. All right.

Lisa Cummins

Okay, thanks Mike.

John Dulchinos

Thanks Mike.

Mike Cikos - Sidoti & Company

Bye-bye.

Operator

And we have another follow-up from Sam Bergman with Bayberry Asset Management. Please go ahead.

Sam Bergman - Bayberry Asset Management

Hi, just a couple of quick follow-ups. In terms of investors, investor relations for the remainder of the year, can you tell us what your plans are?

Lisa Cummins

In terms of conferences and …

Sam Bergman - Bayberry Asset Management

Not conferences but actually talking to institutions, fund managers about the story.

Lisa Cummins

Yes, we've been actively marketing the story. In the last few months we had engaged Stonegate for our investor relations help, and we’ve gone out and had been marketing the story and we will continue to do that after we finished this quarter's activities.

Sam Bergman - Bayberry Asset Management

And did you say you will continue to do that?

Lisa Cummins

Yes, yes, after this quarter and we finish our, you know, the SEC filings and everything like that we should be able to start doing that as well.

Sam Bergman - Bayberry Asset Management

Has there been any new 13-B filings recently?

Lisa Cummins

I think there was one that should be out there.

Sam Bergman - Bayberry Asset Management

Okay, can you tell me who it is?

Lisa Cummins

I have to look up [ph] instead of staying on this call.

Sam Bergman - Bayberry Asset Management

Okay and the last question you still have two large shareholders I guess, Austin Marxe, David Greenhouse as top [ph] investments.

Lisa Cummins

Right, yes.

Sam Bergman - Bayberry Asset Management

I’m sure they’ve gotten back to you guys on a regular basis, can you tell me what -- with your new business initiative going forward do you have full support from them?

Lisa Cummins

Oh, definitely. We speak to them quite regularly. Certain situations that David Greenhouse we went out and gave him our investor presentation back in New York in December, and he was completely supportive of the new strategy, and same with [inaudible]. I speak with Peter Conrad, and he is on the call as well. And they're very supportive of the new strategy. They see the opportunity and the fact that these are untapped much larger markets in our traditional business. It's just a great -- it's a great growth story.

Sam Bergman - Bayberry Asset Management

Keep up the great work. Thank you very much.

Lisa Cummins

Thank you.

Operator

And we have no further questions. I'd like to turn it back over to management.

John Dulchinos

Thank you. Well, we want to thank everybody for joining us on this call and we appreciate your support of Adept, and what we’re doing with our businesses, and we look forward to speaking with you on the next call. Thank you.

Operator

Ladies and gentlemen that does conclude today's presentation. Thank you for your participation. If you like to listen to today’s replay, the phone number is 1800-406-7325, access ID 453-2388. Thank you. Have a good day.

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