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Adept Technology, Inc. (NASDAQ:ADEP)

F4Q08 Earnings Call

September 3, 2008 5:00 pm ET

Executives

Lisa M. Cummins - Chief Financial Officer, Vice President, Finance & Secretary

Robert H. Bucher - Chief Executive Officer and Director

John Dulchinos - President, Chief Operating Officer and Director

Analysts

[John Groover – Groover and McBaine Capital Management]

[Michael Tannenbaum – Linrock Capital]

Efrin Sales - Valaris Capital

Jeff Kun - Wall Street Capital Partners

Operator

Welcome to the Adept Technology’s fiscal fourth quarter year 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Lisa Cummins, Chief Financial Officer.

Lisa M. Cummins

As we begin today’s call let me remind you that during the course of this conference call we will make certain remarks regarding Adept’s expectations as to future events and future financial performance, plans and prospects of the company all of which are based on the company’s position as of today, September 3, 2008. 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, 2007 as well as the risks described inn 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 Q4 2008 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 is available on the Investor Relations section of our website. Following our introductory comments we will open up the call to take your questions.

I would now like to turn the call over to Rob Bucher for some opening remarks.

Robert H. Bucher

In addition to our earnings release we sent out two additional releases which are very significant. First we announced the share repurchase program under which we plan to repurchase up to $2.5 million in Adept common stock. We believe this action underscores our commitment to increase shareholder value and is a very attractive use of our cash. We are confident that given our strong balance sheet and cash position we can continue to invest in the initiatives that are key to our future success as well as enhance the value of our company by repurchasing common stock under this program.

Second, we announced John Dulchinos’ promotion to President and CEO. This promotion is important in several ways but most importantly the change signifies that the turnaround of Adept Technology is behind us. Since joining Adept nearly five years ago our financial model has improved substantially and we have returned to growth and profitability. We are focused on new and exciting opportunities and have made substantial strides in our core vertical markets of solar, packaging and medical. We have dramatically expanded our geographic reach to include Europe, Asia, South America and even Central America and continue to make inroads to further expand our reach.

In short we have executed on virtually every key operational and financial objective we set out to do at the onset of my tenure. And now it’s John’s turn to take the helm and lead the company into its next phase of sustained growth. John’s long history with Adept and vast experience in the industry make him the ideal candidate for this job and I’m confident that this move is the right one for the company. As noted in the release I will remain actively involved both as Board Chairman and in an advisory role for the foreseeable future or as long as John and I feel that I’m providing added value. Obviously our goal is to make this as smooth a transition as possible and to maintain the momentum we’ve begun.

With that I will turn the call over to John for an overview of Q4 and the full fiscal year 2008.

John Dulchinos

I’m excited about my expanded role at Adept and look forward to continued success. On a personal note I also wish to thank Rob for his contributions these past five years and hope we can see similar achievements in the coming years.

Now for a business update, fiscal 2008 marked a strong period for Adept and we are pleased with our performance which included 25% revenue growth, net income of $3.6 million and positive cash generation. We executed against our financial, operational sales and importantly geographic objectives. Of particular note during the year we significantly strengthened our financial model by returning to substantial profitability and increasing our cash to over $15 million and we entered into multiple new geographies including China, Korea, Japan, India, Mexico, Brazil and Argentina. We introduced new products including the unparalleled Quattro robot to address and penetrate emerging high growth markets such as solar cell manufacturing where we have already established a strong foothold and we successfully expanded our indirect distribution strategy which has resulted in reduced expenses and perhaps more importantly opened new markets such as Korea and Japan via distributor relationships which had previously been closed to Adept.

We ended the year with a strong Q4 as we continued to gain traction in each of our target vertical markets, packaging, solar, medical and disk drive achieving 36% year-over-year growth and 4% sequential revenue growth. We delivered continued profitability during the quarter going from a loss during the same period last year to net income of $900,000 for the quarter. Our expenses were impacted during the quarter by increased legal and advisory costs associated M&A related activity and with our dispute with our landlord as well as increased spending related to our aggressive marketing program and promotional activities within our solar vertical which I’ll discuss more in a moment.

Gross margins improved both sequentially and on an annual basis growing more than two percentage points sequentially and more than 3.5 percentage points from Q4 of 2007. Our higher gross margins are being driven by our ASB products such as our Quattro robot. We expect this trend to continue during fiscal 09 and we believe we can achieve further gross margin improvement throughout the year as we cut in additional cost reductions into the Quattro robot. Sales momentum continued across our three growth verticals during the quarter. In solar Germany continued to be a strong market for Adept though we are making strides in our geographic expansion efforts beyond Europe. Handling and inspecting solar cells at various stages of the production process requires very tight coupling between vision and motion technology making our Quattro robot a compelling offer in the marketplace. Customers tell us that the Quattro’s performance particularly during inspection processes is a key differentiator.

During the quarter we continued to ship against the major order we received from the Roth and Rau joint venture company we discussed last quarter. In addition we secured additional design wins beyond Roth and Rau and orders continue to be driven by end user demand for our product which is creating pull through effects of our technology for our machine manufacturers. We’re also starting to see signs of activity in parts of Asia for solar cell manufacturing automation equipment including China, India, Korea and Japan. Very recently we received a significant design win from a large OEM in the United States supporting our belief that Adept is becoming a de facto standard for this market. We are pleased with our success of our geographic expansion efforts to date and expect to see more progress in this key objective throughout fiscal 09.

As I noted a moment ago we’re making substantial investments in the solar market including accelerated marketing activities with trade shows and promotional activities such as the Inter Solar Show in July in San Francisco and the current solar show in Valencia, Spain. In addition we noted last quarter the addition of ten new application engineers who started this summer expanding our capabilities in this fast growing market. While solar currently comprises a relatively small portion of overall business it is a key target market where we see enormous opportunities for future growth. Moving forward into the new fiscal year we are confident these investments will enable Adept to emerge as a major player in the high growth solar cell manufacturing market.

In the packaging vertical we had another excellent sales quarter in France further penetrating the food and pharmaceutical markets and continued to experience additional business in the United States. Our geographic reach in the packaging vertical is also widening as we move beyond the US and Europe and into Asia and Central and South America. We also begin shipping against programs we discussed last quarter in Japan and Korea the largest and fourth largest robotics markets in the world. Strength in the packaging vertical is being driven by our demand within the cosmetics, pharmaceutical and of course food handling sectors. Our robotics systems offer a compelling ROI to packaging customers which is driving the ongoing demand and also supporting the geographic expansion we are seeing particularly in Central and South American regions.

In addition our recently introduced inverted Cobra s800 robot brings high speed handling solutions to case and cart loading applications and is ideal for customers needing extremely fast packaging and who face floor space challenges. We believe this latest generation Cobra robot which is the fastest in its class will enable us to further penetrate the packaging vertical market going forward.

In our medical vertical we continue to sell products in the medical device manufacturing space and to build up our position and capabilities in the surgical assist market which we believe is a long term high growth market for the company. We believe that Cerebellum’s existing customer relationships and strength in the medical OEM space within France and beyond can extend Adept’s regional capabilities more quickly into this market. The acquisition of Cerebellum is on track to be accretive to Adept’s earnings in fiscal 09.

We continue to see solid results across our entire product line during the quarter achieving strong sales of our Cobra, Viper and Quattro products. Once again the Quattro surpassing our expectations in the continued strong demand for our Cobra and Viper products indicates the Quattro is not cannibalizing our existing product sales. Quattro is completely complementary to our product portfolio and incremental to our business.

As we enter the new fiscal year we are enthusiastic about the opportunities for growth and further successes. We are in an excellent financial position with a solid balance sheet, our geographic expansion strategy is coming to fruition as our global reach is wider than ever before. Our sales strategies leverages huge market opportunities with a unique and compelling product offering and our expansion efforts through third party distributors are enabling market share gains. We are pleased with our performance this year and are excited about out future.

I’ll now turn the call to Lisa for a review of our financial results.

Lisa M. Cummins

Revenues for Adept’s fiscal 2008 fourth quarter ended June 30, 2008 were $16.7 million up 36% from revenues of $12.3 million in the fourth quarter of fiscal 2007. Full year revenues were $60.8 million up 25% from revenues of $48.7 million in 2007. This extensive growth seen in both the quarter as well as the fiscal year was primarily driven by growth in Europe where we have continued to experience strong demand from the automotive and industrial markets and where we have successfully established ourselves in the solar cell manufacturing market and further expanded into the French packaging market.

Sequentially Q4 revenues were up 4% from $16.1 million in the third quarter 2008. By business segment robotics revenues which represents sales of our motion controlled systems, robotics mechanisms and components in vision guidance software were $46.7 million in fiscal 2008 up 52% from revenues of $30.7 million in fiscal 2007. Looking now at our services and support businesses, revenues were $14.1 million in fiscal 2008 down 21% from $17.9 million in fiscal 2007 and reflecting lower sales of remanufactured robotics to disk drive and consumer electronics manufacturers in the US and Asia.

Looking at revenue by region 32% of sales in fiscal 2008 were from the US compared to 40% in fiscal 2007 and 68% were international compared to 60% in fiscal 2007. While the majority of our international business is coming from Germany and France our strong relationships and sales presence are starting to produce interest from Korea, China and India as they realize the ROI in Quattro’s performance and the solar cell manufacturing market. Additionally we continue to gain global traction in the packaging vertical as we pursue large market opportunities in Asia and South America. European sales were up 43% in 2008 reflecting continued strength in the Germany automotive and industrial markets, a robust market in France for various packaging applications as well as our new relationship with Roth and Rau which established us a prominent in the solar vertical. Asian sales in fiscal 2008 were down 38% reflecting continued weakness in the disk drive market. Finally US sales were basically flat in fiscal 2008.

Turning now to gross margins for the fiscal 2008 fourth quarter reported gross margin was 48.5% of revenue compared to 44.9% in Q4 2007 and 46.3% in Q3 2008. We expect to see gross margins continue to increase as we seek outsourcing opportunities for Quattro. This year we invested heavily in marketing our solar vertical. This marketing effort did produce several wins and we are being bullish regarding sales activity in major equipment suppliers. As reported in accordance with GAAP operating expenses in fiscal 2008 were $27.3 million down 18% compared with $33.4 million in fiscal 2007. Included in operating expenses was approximately $280,000 in consulting fees related to Sarbanes-Oxley Compliance. We expect to save $150,000 in fiscal 2009 when we are in compliance with the regulations and operating without the related consulting fees.

Expenses were also impacted by increased legal and other advisory costs associated with M&A related activity and our lease dispute. Operating income as reported under GAAP in fiscal 2008 was $2.8 million as compared with operating loss in fiscal 2007 of $12.4 million. Adept recorded net income in fiscal 2008 of $3.6 million or $0.46 per share, $0.44 per diluted share. This compares with a net loss of $11.5 million of $1.50 per basic and diluted share in fiscal 2007. Positively impacting our net income was a large foreign currency gain this year of $755,000 which we do not expect to continue. Adjusted EBITDA which excludes interest earned, depreciation, amortization, taxes, goodwill impairment and stock option expense was $1.4 million in the fourth quarter of 2007 compared with an EBITDA of $2 million in the fourth quarter of 2007 which excluded similar non-cash items. For the full year fiscal 2008 EBITDA was $6.2 million compared to EBITDA loss of $6.3 million for fiscal 2007.

Turning now to the balance sheet Adept ended the quarter with cash and short term investments of $15.2 million up 24% compared with $12.3 million at the end of March and up 39.4% from $10.9 million reported ended the same period last year. We generated cash from operations of $6.9 million in fiscal 2008 meeting and exceeding our goal of being cash flow positive for the year. Accounts receivable were $11.8 million at the end of June compared with $13.9 million at the end of March. Inventory levels were $10.2 million at the end of the fourth quarter compared with $10 million at the end of March.

I would like to close with some comments on our outlook for fiscal 2008. Based on our current positions and our target vertical markets we expect to increase revenue by 10% to 20% in fiscal 2009 or to range between $67 million and $73 million. We expect to record net income of $3.8 million to $4.8 million for fiscal 2009. As a reminder our net income in fiscal 2008 was positively impacted by foreign currency exchange gains which is unpredictable and therefore not included in our guidance for fiscal 2009. Finally we expect to be cash flow positive from operations for fiscal 2009 as a whole.

I will now turn the call over to Rob for closing remarks.

Robert H. Bucher

Just to reiterate what John has already said fiscal 2008 was a very pivotal period for Adept as we returned to profitability and substantially strengthened our balance sheet. We continue to expand our foothold in our targeted vertical markets of packaging, solar, medical and even disk drive and continue to make significant progress as we look to address and invest in the resources and products to be successful in each area. Our geographic expansion efforts are clearly working as we penetrate new geographies each quarter and our product portfolio has never been stronger and more equipped to address the markets we serve.

I’m looking forward to continued success with Adept in my new role as Board Chairman and I’m confident John will take the company to its next level as we enter a new fiscal year.

I would now like to open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first question is from John Groover – Groover and McBaine Capital Management.

John Groover – Groover and McBaine Capital Management

I’m confused on the revenue guidance for the new year. The solar opportunity is huge this year even if I take away the disk drive and subtract and I assume everything else is flat, I get almost a $20 million increment in revenue and maybe you could comment on that as far as why you’re thinking of 10 to 20 instead of 20 to 30%. Is this the conservatism you showed in February with four months to go in the year you said that the estimate was 52 to 57 or a middle of 54.5 and you did 12% more than four months later in June? If we apply the same conservative fudge factor to you $67 million to $73 million to get to more like my $80 million?

John Dulchinos

I think we’re very bullish on solar, we believe it’s going to have a strong impact on the business going forward. It was a very modest part of our business last year. In fact it was in the 5% to 6% range of revenues so it had a fairly insignificant impact on our overall results. We believe we’ll do much better than that this year but we also have a number of other segments in our business that we don’t we’ll grow quite as aggressively as obviously solar will. Without speaking too much to the conservatism of it we would be disappointed if we hit the bottom end of our range but given what looks like an uncertain economic period coming up we just want to make sure that we’re trying to be pragmatic in terms of our guidance. Rob, you want to add something to that?

Robert H. Bucher

I think it’s also due to the fact that most of our orders come in on a 60 to 90 day delivery period. It’s very difficult for us to look past six months and we’re very bullish moving forward but again there’s uncertainty going into 2009. I think that’s where it came from, John.

Operator

Our next question is from Michael Tannenbaum – Linrock Capital.

Michael Tannenbaum – Linrock Capital

I just wanted to know if you could disclose the bookings for this quarter, if that’s available? Also I had a question regarding the outsourcing of the production of the Quattro robot? I know that you guys have been talking about that. I wanted to know if there was a timetable for that?

John Dulchinos

Lisa, do you have the increase in backlog? Is that a published number?

Lisa M. Cummins

No.

John Dulchinos

For the year? We grew backlog about $5 million this fiscal year from a year ago so that’s probably the best assessment we can give you about our bookings versus revenues. As far as Quattro goes we are still in the process of determining the best manufacturing strategy for it. We do have some very specific cost reductions that are in the process of cutting in over the next few months that we expect to drive gross margins up on the product and that’s one of the things we’ve modeled in our P&L as we go forward.

Michael Tannenbaum – Linrock Capital

I was just wondering about your decision to buy back stock versus maybe the desire to reinvest in the business and drive growth or your guys business model and the lack of a need to reinvest?

Robert H. Bucher

To put it plainly we think our stock is a very compelling story in terms of investing so that’s one of the reasons. But the other one is that we’re very positive in terms of positive cash flow this year and expectations in 2009. So it just seems to us to be a very good use of our cash.

[Michael Tannenbaum – Linrock Capital]

There was a press release regarding what you guys branded as the Adept Solaris product line. I was wondering if the combination of the two robots had been offered to customers before on somewhat of an unbranded basis and kind of trying to get a better sense of what’s the incremental value additive of this solution compared to what had been offered before by third party integrators?

John Dulchinos

Adept Solaris is the branding we’ve given our Solar product strategy and our Solar product portfolio. We’ve been selling into the market thus far our standard robot products. What we are focusing on doing as we go through this fiscal year is expanding on that and developing specific software solutions, inspection solutions and handling solutions built around our current technology and delivering those into the market place that carry more application content for Solar. So the overriding umbrella for that product strategy and that initiative is our Solaris brand. And that’s what it speaks to. So our current products, the Quattro, the Cobra, the Viper, will be subsets of that as we develop the application software to go with them and they’ll be a subset of the overall Solaris product line. Does that answer your question Michael?

[Michael Tannenbaum – Linrock Capital]

Yes absolutely. And then finally, I kind of wanted to get a sense - I’m not sure if this is proprietary or not - just somewhat of an understanding of the economics of these third party distribution agreements that you guys have agreed upon I guess in India and in East Asia? Are these people just basically like resellers or is it more of a JV?

John Dulchinos

They’re currently reseller relationships although one of them is with one of the major manufacturers in India who is using it for their own internal use, but for the most part these agreements are just buyer/seller relationships, reseller agreements. So they’re not joint ventures.

Operator

Our next question comes from Efrin Sales - Valaris Capital.

Efrin Sales - Valaris Capital

Your net income, I’m just looking at your guidance for 09, you have some non-cash items that are imbedded in that net income number so I was wondering if you could just help me fill in some of those numbers. For next year what should D&A be?

Lisa M. Cummins

It’s about $1.8 million.

Efrin Sales - Valaris Capital

And you also have that non-cash stock compensation expense. What is that projected to be next year?

Lisa M. Cummins

Probably about $2 million.

Efrin Sales - Valaris Capital

And maintenance CapEx next year?

Lisa M. Cummins

About $250,000 a quarter, a million for the year.

Efrin Sales - Valaris Capital

So if I’m adding this up, you’re free cash flow is about $7.6 million next year?

Lisa M. Cummins

Yes.

Efrin Sales - Valaris Capital

Second question just has to do with your SG&A from last quarter. It sounded like you had some non-recurring items in there. As we’re doing our modeling, what’s a good run rate for us to be using for your SG&A for 2008?

John Dulchinos

One of the things we did spend was a substantial incremental expense in marketing for Solar. We went to a number of solar trade shows and really worked hard to establish the Adept brand in solar and that is something that we would expect to continue to do but in a more modest effect than we did in Q4.

Lisa M. Cummins

$28 million for the year.

John Dulchinos

We had total operating expenses modeled at about $29 million for the year.

Efrin Sales - Valaris Capital

And that’s kind of a normalized, it doesn’t have any unusual items like lawsuits or anything?

Robert H. Bucher

The other thing to always remember with a company the size of Adept being a small cap company what would be considered a small activity is a major expense to us and would rock our SG&A quite quickly. So M&A which we’re still actively pursuing and improvements in terms of our infrastructure that may or may not be needed, they can have substantial changes in that number.

Efrin Sales - Valaris Capital

And my final question has to do with an earlier question actually about your revenue guidance and we can all make our assumptions whether or not you guys are being overly conservative or not, but can you help me just better understand if revenues are, pick a number, $10 million higher than your projecting, how much flow through there should be to the bottom line for an incremental $10 million?

John Dulchinos

Beyond the base plan probably 35% of that should flow to the bottom line.

Robert H. Bucher

Well you have to take the sales cost associated with it.

John Dulchinos

Take the sales expense out. Take incremental sales commissions.

Robert H. Bucher

I was going to say it’s linear but in order to do those types of numbers we’d have to add more sales capacity. You can only do so much in terms of a per salesman revenue and we’re reaching those numbers. We’re very optimal and we’re very careful about adding new ones to it because of our distant past. So we can only do so much with the sales capacity that we have and as we add to it then that’s a direct business model expense against the revenue line.

John Dulchinos

You can kind of work your way through the number. You’d say the incremental $10 million if you keep it at the same margin rate comes in at upper 40s in gross margin and then you take away from that whatever incremental expenses it takes to deliver that and to procure it. So I think the way we would look at it is we’d probably expect that 30% to 35% of that would fall to the bottom line; the other would go towards other expenses related to getting that incremental revenue stream. But you wouldn’t have to add facilities or add financial infrastructure or IT infrastructure or other things that are kind of part of our baseline run rate.

Operator

Our next question comes from Jeff Kun - Wall Street Capital Partners.

Jeff Kun - Wall Street Capital Partners

My question pertains to the currency gain with the dollar strengthening, are we doing anything to hedge there so we don’t have a currency loss of that magnitude?

Lisa M. Cummins

No we’re not doing any hedging at this time.

Operator

There are no further questions in the queue at this time.

John Dulchinos

I’d like to thank you for joining us on this call. It’s been a pleasure reporting another great quarter for Adept, and we look forward to having similar calls in the future as the year progresses. Again thank you very much for your support, and good afternoon. Bye.

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