Sono-Tek Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2023

There are 10 speakers on the call.

Operator

And welcome to the Sonotech Corporation Mid Year Fiscal Year 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory.

Operator

Please go ahead.

Speaker 1

Thank you, Andrea, and thank you to everyone joining us today. Donatec released their 2nd quarter and first half fiscal twenty twenty four results pre market this morning. Product, market and geography sales tables on the last page of the release will be part of today's discussion. With me on the call today are Doctor. Chris Cocchio, Sonitek's Chairman and CEO Steve Harshbarger, President and COO and Steve Bagley, Chief Financial Officer.

Speaker 1

Before turning the call over to management, I'd like to make the following remarks concerning forward looking statements. Please note that various remarks that may be made on this conference All about future expectations, plans and prospects for the company constitute forward looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated By these forward looking statements as a result of various important factors, including those discussed in the company's filings with the SEC, The company assumes no obligation to update the information contained in this conference call. I would now like to turn the call over to Chris Foccio, Chairman and CEO, Sonatek. Chris?

Speaker 2

Good morning, and thank you, Stephanie, and thank you, everyone, for joining us. Today, we're going to discuss our 2nd quarter and first half of fiscal year twenty twenty four results that were released this morning before the market opened. I will begin with some opening remarks and then Steve Bagley, our Chief Financial Officer, will provide a financial review. Steve Harshbarger, President and COO, will then go through the business and operational results. Following his comments, we'll open the call for your questions.

Speaker 2

Now as a reminder, SiloTech currently holds 2 earnings calls for fiscal year. This is our mid year call for the 6 months August 31, 2023. Our fiscal year end is February, so fiscal 2024 We'll end on February 29, 2024, and our next earnings call for the 12 months of fiscal 2024 will be in May of 2024. Now as many of you already know, Sonotech developed a revolutionary method of applying thin film precision coating several The proprietary technology involves the use of our advanced high frequency ultrasonic nozzles incorporated into specialty motion control systems. And these are able to achieve uniform micron and nanofinthen And coatings on to our customers' products.

Speaker 2

Our solutions offer dramatic savings in raw material, water and energy usage And are environmentally friendly, therefore. Now the first critical advantage of our ultrasonic coating systems is the ability to apply precision thin films, Which are vitally important in today's world with thousands of products and micro components now requiring a functional More protective coating to be added to them. The strategic shift that we made several years ago to offer more complex Complete Solutions has meaningfully broadened our addressable market and resulted in significant growth in our average unit selling prices. Our larger machines now commonly sell for over $300,000 and the systems prices Can reach $1,000,000 or more, which significantly impacts our quarterly revenue. This is what happened in the Q2 when we finally were largely free of the supply chain constraints that held back our sales growth over the past year.

Speaker 2

We reported our strongest quarter ever, 50% higher than a year ago and ahead of expectations. We shipped 1 of our newest multi access systems valued at over $1,100,000 in addition to new orders, And sales reached $5,640,000 Now in addition to the high sales, backlog still increased 26% from the end of our last fiscal year 6 months ago, it was $10,700,000 the highest in our history. This growth was due to our Excuse me, strategic shift to large complex systems and platforms and also our focus on opening new markets for our unique thin film coating technology. This includes 3 main areas with very strong global growth that we've talked about before: Microelectronics and Semiconductors, Medical Devices and Alternative or Clean Energy. We've served these industry sectors for many years And are continuing to advance our products and system solutions in these areas for the latest generational technology.

Speaker 2

Clean energy, including fuel cells, green hydrogen generation, carbon capture and advanced solar cells, Our markets, we've been providing R and D and pilot lines for close to a decade. We're now having a lot of success with these customers transitioning From production to production scale systems as a result of prior R and D and process development work They did with our experienced application engineers. Over the past year, we've announced nearly $6,000,000 from large orders, primarily from the clean energy, Also the medical sector. The largest and most recent order is valued at $2,190,000 and it's the largest order The Clean Energy sector to date as well as the largest in Sonotech's history. These orders are among the first from our delivery shipment strategy to large Although our proprietary ultrasonic atomization technology, where Sonaeffect began more than 40 years ago, Remains at the heart of all of our systems.

Speaker 2

We've been able to achieve this shift through our own research and development work, which we consider to be our lifeblood. We attribute increase in sales both in this quarter and to come, a direct result of our investments in R and D With a strong focus on product expansion, in the first half of the year alone, we've already invested 1,400,000 compared to $1,000,000 in the year ago period. And to further support our growth and expansion for these large platform custom engineered systems, We've increased our headcount by approximately 10% this year, mainly in the areas of engineering, R and D and sales engineers. We want to ensure that we stay fully staffed and in front of our needs. We're excited about these investments and that they've begun to pay off.

Speaker 2

Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger, more complex Systems for production applications with multiple and repeat orders. In fact, we're already working on the next generation of machines. Looking ahead to the second half of this year, we're confident that shipments of previously delayed in new orders will continue to positively impact sales. We're expecting at least 25% year over year sales growth for fiscal 2024 ending next February. We expect that these will also put us back on our pre COVID growth path.

Speaker 2

Thank you, Nell, and I'll turn it over to Steve Bagley, our CFO, who will to provide additional details on our financial results. Steve?

Speaker 3

Thank you, Chris, and good morning, everyone. For the Q2 of fiscal 2024, net sales increased 50% to $5,640,000 and increased 57% from the $3,600,000 reported in the Q1 of this fiscal year ended May 31, 2023. Steve Harshberger will go into more detail with respect to sales. During the quarter, approximately 43% of sales originated outside of the United States and Canada, compared with 56% in the Q2 of fiscal 2023. Gross profit increased 48 percent to $2,800,000 compared with the prior year period.

Speaker 3

The gross profit margin was 49.7 percent compared with 50.4% for the prior year period. The decrease in the gross profit margin was due to product mix. Operating expenses increased 30% to $2,200,000 compared to $1,700,000 in the prior year's Q2. As Chris pointed out earlier, technical headcount increased Approximately 10% across several areas. Research and product development costs increased 56% to $789,000 primarily due to increased headcount and related salaries and the higher costs of research and development materials and supplies, all of which are used in the development of new products for new and existing markets.

Speaker 3

Marketing and selling expenses increased 22% to $945,000 for the quarter. The increase was due to increased headcount, salaries, commissions, travel and trade show expenses, partially offset by a decrease in insurance expense. General and administrative expenses increased 15% to $501,000 primarily due to increased salaries and professional fees, partially offset by a decrease in stock based compensation expense. Operating income increased 2 18% to $566,000 for the Q2. The increase was primarily due to increases in revenue And gross profit offset by an increase in operating expenses.

Speaker 3

Operating margin for the quarter increased to 10% from 5% in the prior year period. Interest and dividend income increased to $124,000 in the Q2 of fiscal 2024 compared with $19,000 for the Q2 of fiscal 2023, primarily due to the current higher interest rate environment and our large cash balances. Net income was 541,000 or $0.03 per share compared to $162,000 or $0.01 per share for the Q2 of fiscal 2023. The increase primarily resulted from an increase in gross profit and interest in dividend income, partially offset by an increase And operating expenses and income tax expense, diluted weighted average shares outstanding increased slightly to approximately 15,700,000 shares. We've continued to add to our cash holdings, cash, cash equivalents And marketable securities at August 31, 2023 were $12,300,000 approximately $900,000 Higher than our fiscal year end and we continue to carry no debt on our balance sheet.

Speaker 3

CapEx for the 6 months was $146,000 all of which is directed to ongoing upgrades of our manufacturing and development lab facilities. We expect to invest approximately $500,000 in new equipment for the full year. And now I'll turn the call over to Steve Harshberger, President and COO for an operational review of the Q2. Steve?

Speaker 4

Thank you, Steve. Good morning, everybody, and thanks for joining us today. As most of our listeners likely know, Cenotec breaks down our sales in 3 ways, by markets, by product, And by geography, and that's how I'm going to address these in my upcoming comments. Please refer to the short tables on the last page of our earnings release for all the details. For the Q2, we were excited to report net sales of $5,640,000 This came in ahead of our expectations and is a 50% increase from a year ago and a 57% increase compared to the Q1 of the fiscal year, which ended now on May 31, 2023.

Speaker 4

The increase was primarily driven by increased shipments of our multi access coating systems, which are commonly used in the clean energy and medical device markets. For the quarter, sales of these multi access coating machines were up 96% In total $2,900,000 These systems contain some of our newest and highest ASP platforms, And they were also the most severely supply constrained product line up through our Q1 of this year. We were able to finally break out of this last year's supply chain issues and meaningfully increase shipments As a result of a significant program we implemented to broaden our supply chain options, which included increasing our own vertical integration With the introduction of a new multi access product line that we call the NovoCoat. This vertical integration expansion is a Process that is ongoing and we're continuing to build and increase the depth of our in house manufacturing capabilities every day. Integrated Coating Systems sales doubled to $853,000 driven by sales of our newly developed float glass coating platform, which is continuing to gain acceptance into the market.

Speaker 4

Fluxing Systems sales dipped against a tough comparison to last year When sales of a newly released spray flexing platform called the Sonoflux X2 were strong, over the years, we've installed thousands spray flexing machines and our customers continue to upgrade their equipment to our latest model spray flexers when we advance our technology. So although there has been a dip in Flexure sales for the quarter and the first half, there is a large customer base and quote activity still remains very strong in OEM sales were lower in the quarter as well, which we had expected Because many of our OEM partners built up excess inventory to combat their own supply chain concerns of last year. This was largely offset by an increase of spare parts and service related revenue, which is a growing revenue stream for us that falls in the other product category and grew 64% this quarter. Sales of spare parts and other maintenance packages that support our large platform multi access Machines are growing in importance as we place more and more of these machines with high ASPs, average selling prices, into the field. In fact, we believe that the follow on service and support spare packages Could reach as much as 10% to 15% of the total order value of our large full systems.

Speaker 4

Looking at our market baskets, sales to the alternative clean energy market grew 161% And we're positively impacted by the growing number of Simatech customers transitioning from our R and D machines to production scale systems They carry much higher ASPs and many of our large contract excuse me, many of our recent large contract announcements are from this area and are used in the manufacturing of critical membranes for carbon capture, green hydrogen generation In fuel cell applications, sales this quarter included the shipment of a $1,100,000 system and a second system For the same customer, similar value still remains in our backlog. Medical sales rebounded strongly in Q2 With 117% growth, this was driven by several large multinational companies taking delivery of Specialty implantable medical device coating systems during this quarter. Industrial sales grew by 104% Due to the recent introduction of several new generation systems, including the shipment of a large float glass coating machine that we delivered into Latin America. By geography, approximately 57% of our sales were to the U. S.

Speaker 4

And Canada compared 44% in the comparable period of fiscal 2023. Sales to the U. S. And Canada increased by 94% That are investing in the clean energy sector and other advanced research markets. These include the CHIPS Act and the Replacing Reduction Act, which we've talked about before.

Speaker 4

The difference now is that our cash is starting to reach our customer base and they're spending it on equipment such as ours. Asia Pacific sales decreased by 35%, primarily due to decreased sales to China, While other areas of Asia remain very strong. However, now that China is back open to international visits after the COVID lockdown, We are working to regain our momentum there. Our backlog continued to grow during the quarter and on August 31st had more than doubled to $10,700,000 compared to $5,000,000 last year and was up 26% from $8,500,000 6 months ago at the end of our last fiscal year. I apologize.

Speaker 4

I have a little cold. This is the highest reported backlog in our history. Excuse me one second as I grab a drink.

Speaker 3

Again, apologies.

Speaker 2

Would you like to take over Steve?

Speaker 4

Yes. All right. I think I'm back. That is the highest reported backlog in our history and it reflects The increasing order activity from the clean energy sector in particular, this also includes the recent $2,190,000 order that we announced, which is the largest order from the order from this sector to date and the largest in order history. Customer deposits reached $3,400,000 at August 31, reflecting and the continued receipt of several large new orders.

Speaker 4

We generally require deposits of 50% or greater on orders valued at over several $100,000 In closing, and as Chris mentioned earlier, our outlook is strong and we're expecting a very good second half of the year with a minimum of 25% Your sales growth for the full fiscal year ending February 20, 2024. Again, I apologize for my cough there. You've caught a little cold over the weekend that's still lingering with me. And now we'll turn it back over to the operators for some Q and A, if I can speak.

Operator

We will now begin the question and answer session. And our first question will come from Ted Jackson of Northland. Please go

Speaker 4

ahead. Good morning, Ted. I don't know if you can hear me, but I can't hear you yet.

Speaker 2

We can hear you, Ted.

Speaker 5

I I don't think

Speaker 4

anybody here. Does anybody hear Ted Jackson?

Speaker 2

No. Yes, I don't hear him.

Speaker 4

Maybe we can come back to Ted and Maybe figure out the audio there. Suspect maybe everybody is afraid to ask me a question because I'll start coughing.

Speaker 2

It was Ted Jackson. Nelson Opus had a question. I don't see this. Can our conference coordinator take another question? They're having technical issues according to

Speaker 4

It looks like we have several people in the queue for questions, but it doesn't sound like we can get them through to so we can hear their questions.

Speaker 2

Yes. Yes. Definitely the same.

Speaker 4

Technical issue on the Chorus Call.

Speaker 2

Right.

Speaker 4

For those of you still with us, if you can hear us, just hang tight. We're trying to work out the technical issues through The Chorus Call group that organizes this for us?

Speaker 2

Correct. The Chorus folks are saying this never happened to them before. So

Speaker 3

I think it's that guy Murphy running around.

Speaker 6

Pardon me. The next question will come from Nelson Obis with Wynnefield Capital. Please go ahead.

Speaker 7

Yes. Hi there. Can you hear me?

Speaker 4

We got you, Nelson. Thanks for joining today.

Speaker 7

I'm just curious what the EBITDA comparison was in the quarter?

Speaker 4

Mr. Bagley, do you have the EBITDA there?

Speaker 3

Just give me a second because I do not have the calic right in front of me. Hold on a second there, guys.

Speaker 2

Yes. It's a I would say while we Get an answer to you that we typically don't even look at EBITDA. I know financial companies do, but We're more focused on our growth in our earnings and our cash.

Speaker 7

Yes. Well, it's very helpful for figuring out What the private market value is, which is a better I think that's something you should think about, okay. It's not just financial companies. It's basically Across the entire board. And that of course you get credit for your cash, which is nice to see enough with that.

Speaker 7

That's a

Speaker 3

good point. EBITDA, I've got income before taxes of 7.15. I'm adding back my depreciation and amortization. I'm coming in around 9.94.

Speaker 7

Well, very nice. Now look, I mean, don't get me wrong. I'm not a fan of quarterly reporting, but We're in an interesting period where it looks like the economy may be slowing down. You're an industrial company that is Operating in a way which is very counter to a lot of what industrial companies are concerned though, which is an economic slowdown. Can you just help me?

Speaker 7

What's the rationale for not having, particularly in this environment, not having quarterly calls? Because I think that You're atypical and you should get credit for it. And you're going to put a queue out and why not put color in it? I think that's something the Board should think about. But can you help me out?

Speaker 7

The only company except of course for foreign companies that don't have conference calls quarterly, either they don't have them Well, they have them quarterly. But in this particular situation, given the time we're in, given what the promise your company has, doesn't that make sense to consider during it quarterly?

Speaker 4

Yes, that's good input, Nelson. I will say that we had typically Never done any quarterly calls at all. So this is all relatively new for us. And we thought as a start, we'd get our feet with doing them semiannually. But it's good input.

Speaker 4

Maybe we should be thinking about going to quarterly conference calls all. And we had at some point planned to make that transition Once we kind of got our feet wet into this whole process, as you know, the IR aspects of this is relatively new for our organization. But that may be a good next step for us to follow on and I'll discuss that with our BOD going forward.

Speaker 7

I think you're hiding your light under a bushel Basket, you've given us numbers that are quite attractive and quite counter to what a lot of industrial companies Are experiencing. So, putting a little getting rid of that bushel basket, I think would be something to think The other question is, look, I understand why the gross margins Percentages are down slightly in terms of the mix, in terms of your gearing up for A lot of additional work and hiring some more specialists. But as you look out, Do you anticipate perhaps in a normalized environment some operating leverage Which would be reflected in higher gross margins on a higher revenue base or is that not in the cards?

Speaker 4

I think that we will see go ahead, Chris, do you want to speak to this?

Speaker 2

Yes. I was going to say that there are trends that are competing with each other. Typically, when a company starts to bring in more outside equipment into their sale, you would expect the Margins to go down, gross margins. But that hasn't happened here. And I think that's the other side of the coin is that We're probably getting some credit for our dominance in this market that's been holding it into the 40s.

Speaker 2

Actually, it's been in the high 40s, but Our history is in the 40s and it's staying in there. So there are things going on.

Speaker 4

The one thing I would add to that, that this past quarter, Nelson, that we had a couple of things occur that affected the gross margin. One is our OEM sales were Unusually low as a result of our OEM partners building up excess inventory. Basic didn't anticipate that they were They thought there were no supply chain issues, so they built up excess inventory and our OEM sales are very high margin items. And that happened in combination with some new products that we introduced in this quarter. And these new products, So it was that Novocoat platform that I mentioned earlier.

Speaker 4

They're quite complex, big platform systems that a lot went into. And your first release of those new products, you don't put as much focus into reducing costs As you do to get them out there and have them functioning well for the need. And as for most of our product lines, once we release a product line, we'll typically 6 months or so follow that product line with some reduction in cost, which don't affect quality, of course, But there are just things that you could say, hey, listen, where can we make some efficiencies in that manufacturing process with the different parts or Different ways to build things that will reduce some costs out of there. So I do think there'll be a couple of things that will occur simultaneously here That will help margins in the future, in addition to just general operational leverage, that we're bound to see some of that happen, I would say, at some point here.

Speaker 7

Very helpful. Look, last question. It's one heck of a ramp in sales. By the way, you should be happy that, of course, that your Gross margins held practically at 50%. The last question, I mean, you had a big ramp in sales.

Speaker 7

What's your capacity utilization? I mean, you have the ability to grow physically into this incredible ramp up in revenues?

Speaker 4

Yes. Within the existing facility here, we're fortunate that we bought our industrial complex, which is 5 buildings of which we're in 3 of those 5 buildings right now. And that within those three buildings right now, we think we can get up To around the $25,000,000 to $30,000,000 area and that with then moving our Tenants out, which we have short term leases on the remaining two tenants, one of them ends in May of this coming year and the other one ends shortly after that, We should be able to get up into the $40,000,000 maybe mid-40s or so of revenue within the existing facility. Now once we go beyond that, we will have to start thinking about further expansion, but at least we have enough existing space within our Right now to get up into that mid-40s for revenue.

Speaker 7

Good. Okay, great. Thank you. Great quarter.

Speaker 4

Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Bill Nicklin. Please go ahead.

Speaker 8

Hi. Thanks. You guys must be working hard because you're all sick. From a shareholder perspective, we really appreciate your sacrifice. So anyway, I just want to touch back quickly on the gross Margin thing, because you've been running about 50%.

Speaker 8

You're now doing the larger production machines, which have more spare parts Associated with the order and also service. So it would seem to me that your margins ought to stay As high as they were in the past, which therefore is keeps them above the 50 Percent margin, which I think analysts have in their models out there. So am I missing something?

Speaker 4

You bring up a good point there, Bill. One of the areas that we're just now starting to roll into our revenue stream is For these large ASP machines that we send out there in the field, we're finding that the customers are Buying 10% to 15% extra revenue from us for service contracts or spare parts And those are both obviously very high margin areas. Now today, we only have a handful of these $1,000,000 plus lines out there That are in operation. But as that fleet of machines starts to increase, we should start to see a much more significant revenue Coming where it will start to become significant and it should be a high margin revenue stream. It's going to take some time for that to build, But the more and more it is we put out in the field and that's a recurring thing too.

Speaker 4

It's not they don't just buy those service contracts 1 year, it's every year kind of recurring revenue stream Maybe for the life of the machine, 10, 15 years or something like that. So that should definitely impact our margins in a positive way.

Speaker 8

Thanks. Second question. This recent production equipment order, is this an anomaly or is this something you Back to fee going forward, something that has legs.

Speaker 4

Yes, I certainly don't think it's an anomaly that There's in particular in the green energy sector, right now the clean energy sector, there's so many of these customers that are transitioning To high volume production. They've got an established process with our machines for either R and D and pilot line scale. And now they have found the money all of a sudden from all these government initiatives and private industry I should say too that is complementing the government initiatives To immediately scale to high volume production. And that's a customer base that we've had for a long time. It's been a huge customer base of ours, But they've never had the financial backing to say I'm going to make that transition over to high volume production, but they do now.

Speaker 4

So we anticipate that to continue both with our existing customers that are already buying them, but also new customers. There's so many companies That you may not have heard of, say, 3 or 4 years ago, but they're now public companies, they're growing and they're saying, well, We are in the clean energy sector and we are scaling for high volume production right now. So I anticipate that to continue for some time to come. And it will also, I should say, continue in other sectors outside of the green energy sector for us. It just happens to be that green energy is the most Hot area for us right now.

Speaker 4

But once you have the ability to scale to high volume, you can really do that For any sector, whether it's the semiconductor sector or whether it's the industrial sector or medical sector, once you have that in house technical capabilities To scale for super high volume throughput, then it's easy to do so across all the industry sectors.

Speaker 8

Thank you. I heard that you're on the second part of one of your large orders. If you look out behind that into your sales funnel or pipeline, whatever you want to call it, Do you see these same customers having an appetite for Multiple machines in some instances or maybe many instances beyond what you've already got in your backlog?

Speaker 4

Yes. For our existing customers that are purchasing these large platform high ASP machines, All of them have indicated they are at the beginning phases of their requirements. That a couple of machines doesn't come anywhere close to meeting Their ultimate needs for production throughput requirements. So we're optimistically Anticipating that we'll see follow on sales from those customers for other manufacturing lines to continue. All right.

Speaker 8

And then another kind of a general question. You're talking about your transition. It seems Your customers are making an even more dramatic transition in their business. What is it that Sinotech has in their solutions that is

Speaker 4

Yes, I guess the important word you just used in your question was the word solutions. What are the SonoTech solutions that are vitally critical to our customers transitioning with our new or different coating need? When we partner with our customers to provide full system solutions, it entails all aspects of what we're Guiding them through to a successful transition to coat their products. Sometimes we're providing the solution with the proper application engineering Expertise or new ultrasonic coating equipment or providing complex parts handling or software or more likely even a combination of all of these together. So when you're at the forefront working with technology based customers introducing next gen products, Which is where Cenotec really finds itself very often these days.

Speaker 4

We're almost by default guiding these customers through a transition process. Some of our customers may be transitioning from a product that's never had a coating on it prior to their next gen product that now requires a functional coating on it. In other cases, such as what we're seeing in the clean energy sector, our customers may already have defined the coating process using Sonotech Machinery And they're simply just transitioning to high volume production machinery from us. And it's really actually a transition that both Sanotech customers are going through As well as the transition that Sonotech Corporation is going through with our customers simultaneously. We're simultaneously transitioning our organization To expand our capabilities to meet the needs of our growing customer base.

Speaker 4

So I know that was kind of long winded, but to swing back to your original question, It's really a multitude of critical deliverables that we're providing our customers to guide them through the transition to Sonotech machines. But at the end of the day, it's all focused around Sonotech providing the customer whatever is necessary to create the desired

Speaker 8

All right. So I think what I heard is that there's some commonality here In these transitions, but there are really many different transitions taking place across several different industries or markets

Speaker 4

That's exactly correct, Bill. There really is.

Speaker 2

If I may add a comment, Bill, the way it shows up in our business, our factory is both In the systems engineering aspect and the overall product engineering, I mean, a lot of it ends up being common Even if it and just going to a different market segment. So we're taking advantage of that. We're hiring a lot of people, as we mentioned, who have the skills To do that systems integration, the software and hardware integration. And that I think that will be a great asset for us as we go forward.

Speaker 8

And one final question and thanks, Chris. And one final question on the SingOne, which as you mentioned is kind of an early basic business where you've come out with a new product. And I had a specific question around displays in this whole mini LED TV transition is taking place in the display industry. It would seem to me that you folks would have some participation there. And if that's true, I'd like to know a little bit about it and how far down the road it is before you might see something affecting your fluxing

Speaker 4

Sure. We always are exploring new high-tech areas. And there's a particular Technology that's getting a lot of press these days, which is microLED. This is kind of what people are anticipating would be the next gen Monitors and TVs out there to come. And there is some processes In that area that could use coding applications and it is an area that Sanotech It is most definitely participating in and that we are have actively sold Some machines too in that area, received some orders from machines in that area.

Speaker 4

I'm not going to go into too much more detail for competitive reasons on that area, But it's certainly an area that we're anxious to participate in.

Speaker 8

All right. That's it for me. Thank you and

Operator

The next question comes from Ted Jackson of Northland. Please go ahead.

Speaker 4

Hey, Ted, you there? What is going on? We got you now, Tim. Okay.

Speaker 5

I'm about to throw my phone against the wall. Anyway, so I'm going to start with some just a little weedy thing, but it's the OpEx was Up quite a bit relative to, I'd say, my expectations. And obviously, you're investing in the business and that's what you need to do. But can you just provide a little color on how at least I should think about That's for the back half of this fiscal year and next.

Speaker 4

Yes. I mean, the OpEx was certainly the area They grew the most and it was certainly a result of we are doing so many more of these high ASP large platform custom engineered Solutions right now and anticipating based upon our quoting that we're going to be continuing that trend. And so what has occurred is we had to really beef up staffing in that area, mostly Both on the sales engineer area as well as the mechanical and EEs and The IT infrastructure guys, the programmers, that all of those areas needed to get beefed up in order to support Future growth of these custom engineered complex machines. So that's what we've done. We made a big investment there To support that.

Speaker 4

And we would only are doing that because we see that the customer base is growing for us in that area and we don't want those Customers to turn them away, we want to be able to say, yes, we can take on these large complex projects. We have the personnel and the capability to do that. So that was the big increase

Speaker 2

Yes, we're adding different types of engineers. But I would say, as Steve mentioned, the concentration Of additions is really in systems and controls engineering because the equipment is going from, Let's call it straightforward equipment to smart equipment. And things need to be integrated both within our the line that we supply, but also with the customers' Product line, manufacturing line. So that requires the addition of some other skills that we had not previously had. We would sell, Let's call it Microsoft based type of controls, basically digital computers.

Speaker 2

And a lot of our customers out there in those big plants have TLC types of controls. And so we're moving in that direction as well because we can access a much bigger market. So yes, There's upfront costs, if you will, in terms of hiring. But if you look at the whole picture, there's plenty of sales going forward to So that's what we're doing.

Speaker 5

Yes. And I don't question that at all. I mean, I think it's a very much an appropriate investment. I just wanted to more kind of understand, now that you've had a couple of times where you've had to put a you had a tick up in expenses At the operating line and that's been result of wage pressure, which is obviously still there and then hiring. And I guess I'm just kind of asking how I need to think about that as I In 2024, now that you have this higher base, is it a little more back to sort of like, You know what I'm saying, a normalized growth?

Speaker 5

Or is that something you're still going to be investing in and I should expect another good sized tick up in it as we think about kind of the coming quarters?

Speaker 4

I think it wouldn't I don't think it will be growing at the same rate that you just saw there over this past quarter, but I do anticipate that we will be growing because As an organization, we're going to be growing and we're always looking to develop that next thing that we haven't done yet. Always looking to expand upon our capabilities. So as long as we're heading down the growth path of the organization, that's going to be the one sector that I see continued growth will be required to be able to support that customer base growing.

Speaker 5

Okay. Then to some more like fun and kind of growth y questions. When you look at The medical and alt energy areas, you had a very robust quarter for both of them. And I'm curious with regards to that robustness, How much of that was from some of the delayed business that has been impacting the financials since the second half of last And how much of it was from stuff that's been more recently won? And then also maybe within both of those buckets, Some color in terms of the specific applications that drove the revenue.

Speaker 4

Yes, got you. It was It's probably about fifty-fifty split. We were just looking at that, what was things that we had hoped to ship out earlier and what was new stuff that was Coming into us, so as far as the split from that aspect, the Systems that we shipped a lot of this past quarter were to these big multinational medical companies where they were our customers for more simple Medical device systems, primarily our stent coating systems, but now they're just returning to us and buying our medical device For all these really complex new devices, new implantable systems, which they now recognize that we're not just a One application company for medical, they know that, hey, if it's any medical device and you want to code it, SonoTech is a good alternative that you should And that's what's happening. So they're just returning back to us these existing customers, but for new applications that they've never done before. And that takes a lot of work in the development lab with our application engineers to help define those processes.

Speaker 4

But they're beginning to look at us as their expert That we are in basic their coding arm for many of these large medical device companies and they're coming to us and saying, hey, help us. I don't take We don't want to figure this out, but you guys we know can. And that was the big impact for us primarily the medical the industrial ones Where's more new platforms that sold where of with people upgrading from their old platforms?

Speaker 5

Actually, I'd asked about kind of the Alt Energy, but I mean is that more in terms of delivery there, is that more carbon capture, Is that more thin film on panels? Is it clean hydrogen?

Speaker 4

Got you. The existing shipments that went up this past quarter was more focused towards the The critical membranes that are used in fuel cells, carbon capturing, green hydrogen generation, but our backlog has been Increasing fairly drastically, more in the thin film solar area. And that's been a very exciting turn for us because thin film solar kind of took a dive down Years ago, but there are some companies that are still very, very profitable and doing well in this area. And we've made some good partnerships In that area for the future for multiple systems heading forward, we believe.

Speaker 5

That's all very exciting, Steve. My last question and then I will get out of line if there's one left. And you touched on it already is The backlog up in the quarter and a really strong quarter, that's like very exciting. It really Makes me feel really good about not just the rest of the year, but next fiscal year. Can you give some color exactly kind of from an application Perspective, what comprises that backlog?

Speaker 5

That would be my last question.

Speaker 4

Sure. It's fairly mixed. However, the most heavily weighted is certainly going to be the clean energy sector. And again, that's just Where we're just seeing so much activity with the transition to high volume production machines. And I shouldn't even say, there's still A lot of companies coming in that are brand new companies coming in and asking for R and D machines as well in combination to the company's transitioning to high volume production machines.

Speaker 4

So I don't see that sector slowing down At least for the next several years, and maybe far beyond. But it seems like that's just a really good And if these high volume companies are able to successfully transition into high volume production all the way through it, I mean, The upside potential is very strong in that area for sure.

Speaker 5

Okay. Well, that's it for me. Congratulations on

Speaker 6

Thank you. The next question comes from Dick Ryan with Oak Ridge Financial. Please go ahead.

Speaker 9

Thank you. Congratulations on a strong quarter, guys.

Operator

Thanks, Dick.

Speaker 9

Steve, just another circle back on the backlog. There's a look sounds like there's a $1,100,000 in there And then the $2,190,000 is in there. So that's kind of 30% of the backlog. Are there any other $1,000,000 plus systems in that backlog and how should we look at the timing of that backlog being delivered?

Speaker 4

Yes. Those are the 2 most significant orders that are in the backlog presently. There are Several other orders that are in those that few $100,000 plus area, which is becoming kind of a more common type of machine for us to selling now these $300,000 plus machines. The backlog split right now and it's going to be somewhat close which is delivered Next fiscal year or this fiscal year, it's going to be good either way. But it's about a fifty-fifty split if we had to guess between what's going to be shipping this That's in the existing backlog and what's going to be shipping next fiscal year is a good ballpark, maybe sixty-forty 40 next year, 60 this year, but it's a pretty good chunk that's already planned for next fiscal year because the build time and the delivery of some of these large complex machines It takes quite a while.

Speaker 4

They can take 9, 12 months in many cases.

Speaker 9

Sure. Sure. You probably don't want to quantify it, but you talked about your quote activity picking up. Can you kind of describe how your quotation book looks now versus 6 months ago or if you would care to quantify that would be that would be helpful. And maybe tying into that, Does the traffic in the labs feed into the quote book?

Speaker 9

I mean, and if so, what's your traffic in your labs?

Speaker 4

Sure. We don't quantify the quotes out to public, but the one thing I will say is The closure rate on the quotes is increasing. So the percentage that we're quoting out excuse me, with actually buying machine is increasing and the quotes are for higher dollar values than typical compared to say last year, the higher ASPs. So that's what's significant there. The laboratory facility is jam packed right now.

Speaker 4

It's every week we're just always trying I think right now we're booked out 2 or 3 months and It's a challenge that we'll probably at some point we've expanded our lab several times now, but we'll probably have to expand the lab again at some point here To accommodate the growth that we're experiencing.

Speaker 9

Okay. One last one. You talked about your All the energy customers moving from R and D to higher levels of production, you're seeing that list broaden. I mean, are you dealing with 1, 2 or 3 customers there? Or are you kind of approaching double digits that This thing really can have some legs when we look out over the next few years.

Speaker 4

As far as customers that we're actually delivering or have delivered systems to, it's still just a handful right they're doing this in super high volume, but as far as where the quoting activity is for those customers to expand to becoming double digits, It's very high. What we're seeing right now, the customers that have already made the transition to our high volume production machines were really at the forefront. But there's a whole another wave of customers behind them, which are not there yet, but they're heading there. So we're optimistically thinking that that group of customers will transition at some point here in the future as well.

Speaker 3

Okay.

Speaker 9

I guess I had one last one. You talked about solar. What historically, how big was solar in its heyday for you guys? And is there opportunity to kind of get back to that level or grow from there?

Speaker 4

Yes. 10 years ago, before the solar wave Crashed. That's about 10 years ago, I think. I think Sinotech was doing $2,000,000 or $3,000,000 of solar there, Which was at that time we were a smaller company, so it was significant. I think that was, I don't know, 40% of our sales or something like that.

Speaker 4

But now $2,000,000 or $3,000,000 isn't really going to shift the levers significantly for us. The existing solar Customer base now that we are communicating with, I mean, I think we anticipated to be significantly larger than that. It was only $2,000,000 or $3,000,000 it would be a big disappointment for us. It has much larger potential and the primary reason We're not selling R and D machines there anymore. We're selling high volume production machines with high ASPs and that makes all the difference in the world.

Speaker 9

Yes. Okay, great. That's it for me. Thanks, Steve, and guys, and congratulations.

Speaker 4

Appreciate it, Dick. Good talking.

Speaker 2

Yes.

Speaker 6

This concludes our question and answer session. I would now like to turn the call back over to Chris Coceta for any closing remarks.

Speaker 5

All right.

Speaker 2

Well, thank you, and thank you, everyone, for joining us today. PhenoTech's outlook is strong based on our ongoing We look forward to our next call that will review our year end fiscal 2024 results Next May. Please contact us directly if you have any questions before them. Be well and stay safe.

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Earnings Conference Call
Sono-Tek Q2 2024
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