Sono-Tek Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 15, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Sonotech Fiscal Second Quarter and First Half twenty twenty five Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kieran Smith with PCG Advisory. Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us today. Sonotech released their Q2 6 months of fiscal 2025 results this morning. If you don't have a copy of the release, please go to the company's website at sono tech.com and click on the Press Release News tab in the Investors section. The 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.

Speaker 1

Chris Cocchio, Sonotech's Executive Chairman Steve Harshbarger, CEO and President and Steve Bagley, Chief Financial Officer. Before turning the call over to management, I would like to make the following remarks concerning forward looking statements. Please note that various remarks that may be made on this conference call 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.

Speaker 1

As a reminder, Sonotech currently holds 2 earnings calls per fiscal year. This is our mid year call for the 6 months ended August 31, 2024. Our fiscal year end is February. So fiscal 2025 will end on February 29, 2025. And our next earnings call for the 12 months of fiscal 2025 will be in May 2025.

Speaker 1

I would now like to turn the call over to Chris Cocceo, Executive Chairman of Sonotech. Chris, please go ahead.

Speaker 2

Thank you, Kieran, and good morning, and thank you, everyone, for joining us. Today, we're going to discuss our second quarter and also the first half of fiscal year twenty twenty five. The results were just released this morning before the market opened. I'll begin with some opening remarks and then Steve Harshberger, our CEO and President will go through a deeper business and operational review. Then that will be followed by Steve Bagley, our Chief Financial Officer.

Speaker 2

He will provide the financial review in more depth. Following their comments, we'll open the call for your questions. Now, many of you may already know, Symantec developed a revolutionary approach for applying precision thin film coating several decades ago. This proprietary technology involves the use of an advanced high frequency ultrasonic nozzle system, and that's all incorporated into specialty motion control systems. They are able to achieve uniform micron and nano thin coatings onto our customers' products.

Speaker 2

Now our thin film coating machines provide dramatic savings of the expensive liquids that are being applied and they are environmentally friendly by minimizing material usage and over spray. This often helps company come apply with increasingly stringent government regulations that are aimed at reducing hazardous waste entering the environment. But the real principal advantage of our ultrasonic systems is the ability to apply precision thin films. They are becoming and they are vitally important in today's world with thousands of products and micro components now requiring a functional or protective coating to be added to them. They're all around us in our modern world.

Speaker 2

The strategic shift that we made several years ago to offer more complex as well as complete solutions has meaningfully broadened our adjustable market, resulted in significant growth in our average unit selling prices at the same time. Our larger machines now commonly sell for over $300,000 and the system prices can reach $1,000,000 or more. That can significantly impact our quarterly revenue as you can imagine. Additionally, our move into the clean energy sector is showing transformative results in next generation solar cells, fuel cells, green hydrogen generation, as well as carbon capture applications as we help other companies shape a sustainable future. So this is what we started to see in this fiscal year and has continued into the Q2, where we saw our largest customer order in our history, followed by another one of the same size several weeks later.

Speaker 2

For the first half of this fiscal year, we experienced 10% annual revenue growth and for the Q2, we saw a 3% sequential increase, which is in line with our prior guidance. On top of that, our first half net income grew 13% year over year. We're very excited for continued growth ahead of us, which is reflected in our record backlog that increased 26% from the end of last year to up $11,700,000 It's the highest in our history, by the way. We're excited that our investments have begun to pay off. Our outlook for growth has been greatly enhanced by the early success of our strategy shifting into these larger, more complex systems aimed at production applications, of course, with multiple and repeat orders, plus our focus on opening new markets for silicon film coating technology is also helping.

Speaker 2

So looking ahead to the second half, we're expecting a continued growth for fiscal year 2025. Thank you. And now I'm going to turn it over to Steve Harshbarger, our CEO and President. Steve, please go ahead.

Speaker 3

Okay. Thank you, Doctor. Cocchiou, and thanks everyone for joining us today. Firstly, I just want to echo Chris' enthusiasm. It's extremely gratifying to see our investments be really beginning to hit their stride.

Speaker 3

Our first half fiscal sales increased 10% year over year and our Q2 revenues increased 3% sequentially, which is in line with our guidance and on top of a strong rebound of sales that we saw in Q2 and Q3 of last year as supply chain issues began to become resolved. Clean energy, including fuel cells, green hydrogen generation, carbon capture and advanced solar cells are markets that we've been providing R and D and pilot lines for close to a decade and we're now having a lot of success with these customers transitioning to our production scale systems as a result of the prior process development work they did with our team of experienced application engineers. The increase in revenue for the first half of year twenty twenty five was strongly influenced by a shipment to a substantial customer from the clean energy sector, who received shipment of 3 integrated coating systems totaling 2,190,000. All three of these systems are a reflection of our successful first stage project, Project Altair, which rolled the capabilities for sophisticated PLC based systems into our product offering and significantly expanded our addressable market. There are 6 more high ASP systems in our backlog for Project Altair and we do project more to follow.

Speaker 3

The increase in integrated coating systems we experienced was somewhat offset by our product division, which can fluctuate from time to time. Multi access coating systems, which are commonly used in the clean energy and medical device markets, saw sales of $4,600,000 for the first half of the year. These full system solutions contain some of our newest and highest average selling prices or ASP platforms. Meaningfully, expanding our capabilities for design and build internally made multi access platforms has been a focus for Sonotech over the past 3 years under a project we call Ares. Ares has broadened our product offering while deepening our supply chain and increasing vertical integration starting with our Novocoat multi access series of machines.

Speaker 3

This is

Speaker 2

an

Speaker 3

ongoing process and we continue to build and expand our in house capabilities in this area. Bloxing systems dip for both the second quarter and the first half of fiscal twenty twenty five influenced by a softening of activity in the printed circuit board manufacturing sector and a continuing decline of activity from China really due to that struggling Chinese economy that's happening right now. OEM sales were lower in the second quarter and first half, which we had expected as many of our OEM partners built up excess inventory to combat their own supply chain concerns last year, as well several of our China based customers that were our OEM partners experienced declining sales of their products. Although spare parts and services slightly dipped for the 1st 6 months, disk basket continues to be a focused area for growth. As we place more and more of our high ASP large platform machines in the field, we believe these systems could potentially result in follow on services and spare parts packages reaching as much as though that 10% to 15% area of the total value.

Speaker 3

By market, sales to the alternative clean energy market grew by 37% in Q2 over the prior year quarter and grew 80% in the 1st 6 months of this fiscal year compared to the prior year period. These sales were positively impacted by the growing number of Sonotech customers transitioning from our R and D and pilot line machines to production scale systems. And these carry much higher average selling prices, again, or ASPs. Many of our recent large contract announcements from this area are for systems used in the manufacturing of advanced solar cells and critical membranes for carbon capture, green hydrogen generation and fuel cell applications. Sales this quarter included 2 high ASP systems to a large customer totaling 1,460,000 dollars Our electronic sales increased 51% in the 2nd quarter versus the same quarter of last year and 30% in the first half versus the first half of last year.

Speaker 3

Both periods benefited from shipments of a newly developed coating primarily driven by lower demand for our stent and balloon coating systems. However, based on our current backlog and our order activity, we expect balloon coating system sales to recover in the second half of the current year. In contrast, stent coating system sales are likely to remain subdued as several customers in this market have reported slower business activity. Industrial sales were down 30% in Q2 versus last year, partially influenced by a float glass coating system that shipped in the prior fiscal year and did not repeat in the current fiscal year. By geography, in the first half of this fiscal year, approximately 65% of our sales were to the U.

Speaker 3

S. And Canada compared to 40% in the comparable period of fiscal 2024. Sales to the U. S. And Canada increased by 9% and 18% in Q2 and the first half respectively compared to the prior year period and were positively impacted by the continuing momentum of several U.

Speaker 3

S. Government initiatives that are investing in the clean energy sector and other research markets. These include the things like the CHIPS Act and the Inflation Reduction Act, which we talked about many times before. The difference now is that the cash is starting to reach our customer base and they're starting to spend it on equipment such as ours. Latin America sales were down 78% 65% respectively for Q2 and fiscal twenty twenty five and the first half of fiscal twenty twenty five.

Speaker 3

This is primarily due to a float glass coating system that I just mentioned earlier that was sold into Mexico in Q2 of the prior fiscal year and did not repeat in the current fiscal year. APAC sales decreased by 32% and 21%, respectively, for the Q2 and the first half of fiscal twenty twenty five. This dip was influenced by continued to reduce sales to China, while other areas of Asia remain more resilient. We are working to regain our prior significant presence in China. But with the weakening Chinese economy and the high level of cheaply priced low cost competitors in this market, we are not predicting that this geographic area will recover in the short term.

Speaker 3

Reflecting our excitement for the remainder of fiscal 2025 and beyond is that at the end of Q2 FY 2025, our total equipment and service related backlog increased 7% year over year and 50% sequentially to a record $11,700,000 compared to $10,900,000 at the end of Q2 FY 2024. This is the highest reported backlog in our history and it reflects the increasing order activity from the clean energy sector in particular. This includes 2 orders of $2,950,000 each that were recently announced, which are the largest orders from this sector to date and also the largest order in Sonotech history. Customer deposits reached $3,200,000 at August 31, reflecting the continued receipt of these large new orders. We generally require deposits of 50% or greater in orders valued at over several $100,000 We attribute the increase in sales and backlog as a direct result of our investment in R and D with a strong focus on product expansion.

Speaker 3

In the first half of this year alone, we invested $190,000 compared to $246,000 in the year ago period and anticipate our total CapEx for this year to be about $460,000 In closing, our outlook is strong and we expect a solid second half with continued sales growth and profitability for the full fiscal year 2025 ending next February. Our momentum stems from our deliberate strategy the strategic shift to large customized systems with accelerating ASPs and our proprietary ultrasonic technology, who are still remaining at the core of all of our systems. And we've been able to achieve this significant shift organically through our own development efforts. With that said, I will hand the call over to Mr. Steve Bagley, our CFO, to review the financials in more detail.

Speaker 3

Steve, please proceed.

Speaker 4

Thank you, Steve, and good morning, everyone. I will first walk through our fiscal 2025 second quarter results, followed by our first half results. Net sales for the quarter decreased by 8% or $477,000 to $5,200,000 compared to the Q2 of fiscal 2024. However, net sales for the Q2 increased by 3% or 131,000 compared to the Q1 sales of fiscal 2025 of $5,031,000 Gross profit decreased 10% year over year or 285,000 dollars to $2,500,000 and the gross profit percentage decreased by 100 basis points to 48.7 percent and this is due to product mix and the reallocation of specific labor expenses from the engineering department to our cost of goods sold and that reallocation started in the Q4 of fiscal 2024. However, as with our sales, gross profit for the 2nd quarter increased 2.4% to $2,520,000 from $2,460,000 when compared to the Q1 gross profit.

Speaker 4

Operating expenses decreased just slightly to $2,230,000 when compared to $2,235,000 in the prior year's Q2. Research and product development costs decreased to $696,000 versus $789,000 in the prior year quarter, primarily due to a decrease in salaries and the reallocation of specific labor expenses from engineering to course of goods sold. Marketing and selling expenses increased slightly to 988,000 for the quarter versus 945,000 in the prior year. And this increase was due to increased commissions and travel and trade show expenses. General and administrative expenses increased slightly to $546,000 for the quarter compared with $501,000 in the prior year.

Speaker 4

This increase is primarily due to increased salaries, legal and order fees and other corporate expenses. Operating income decreased $280,000 or 49 percent to $286,000 compared with $566,000 in the prior year. The decrease in operating income in the Q2 of fiscal 2025 is primarily due to decreases in revenue and gross profit. This is partially offset by the reversal of a sales tax accrual that occurred in fiscal year 2024. However, our operating income for the quarter increased 20% to 286,000 compared to 238,000 for the Q1 of fiscal year 2025.

Speaker 4

Interest and dividend income decreased by 39,000 to 85,000 in the Q2 of fiscal 2025, as compared with $124,000 for the Q2 of fiscal 2024. In the Q2, we recorded a tax provision of $74,000 compared to $142,000 in the prior year. Our net income for the quarter was $341,000 or $0.02 per share compared with $541,000 or $0.03 per share for the prior year period. The decrease in net income is primarily due to the current period's decrease in gross profit. And now the financial results for the 1st 6 months of our fiscal year 2025.

Speaker 4

Total sales for the first half of fiscal twenty twenty five increased by 10 percent or $951,000 to approximately $10,200,000 and this was strongly impacted by increased sales from the alternative energy market due to the shipment of the 3 high ASP systems to a large solar company, and those sales totaled $2,200,000 Gross profit increased $393,000 or 9 percent to 4 point $971,000,000 and that's as a result of increased sales. The gross profit percentage decreased 70 basis points to 48.8%, primarily due to product mix, and that's inclusive of a decrease in OEM system sales and spare parts, and these typically have a much higher profit margin. And once again, the reallocation of specific labor expenses from engineering to cost of goods sold. Our operating income increased 50,000 to 524,000 and that's compared with 474,000 prior year period, and that's due to the increase in gross profit, partially offset by an increase in operating expenses. Operating margin for the first half of fiscal twenty twenty five and 2024 was 5%.

Speaker 4

In the first half of fiscal twenty twenty five, interest and dividend income decreased $2,000 to $228,000 compared with $230,000 for the first half of 2024. Our present investment policy is to invest excess cash in highly liquid, lower risk US Treasury securities. And at August 31, 2024, the majority of our holdings are rated at or above investment grade. Additionally, unrealized gain on some of our marketable securities increased 51,000 to 54,000 as compared with 11,000 in the first half of fiscal twenty twenty four. Net income increased 13% to $672,000 or $0.04 per share for the first half of fiscal twenty twenty five compared with $595,000 or $0.04 per share for the first half of fiscal twenty twenty four.

Speaker 4

Diluted weighted average shares outstanding decreased slightly to approximately 15,800,000 shares. And we do continue to maintain a very strong cash position with cash, cash equivalents and marketable securities totaling $11,600,000 at August 31, 2024, and we continue to have no debt on our balance sheet. CapEx for the 6 months was $191,000 and all of which is directed to ongoing upgrades of our manufacturing and development lab facilities. And we expect to invest approximately $460,000 in new equipment for the full fiscal year. And now, we'll open the call for any questions from the audience.

Speaker 4

Gary, please go ahead.

Operator

We will now begin the question and answer session. Our first question is from Ted Jackson with Northland Securities. Please go ahead.

Speaker 5

Good morning. Congratulations on a solid quarter.

Speaker 3

Hey, Ted. Good morning. Thanks for joining us.

Speaker 5

So, got a few questions. I want to start on the Alta Energy and really with the quarter. So, you had 3 large systems shift during the quarter, dollars 2,200,000 Can you talk to me it sounds like 2 of the systems went to

Speaker 4

at least 2 of the

Speaker 5

systems went to a singular customer and a third, if I'm kind of parsing through your commentary, went to maybe another customer. What were the end markets for those 2 customers?

Speaker 3

Yes, they did ship to different locations, but the same customer is a customer that's located at multiple locations throughout the world, It's a big multinational company. And the end market is clean energy sector and it is an advanced solar application that we're involved there. And that also, Ted, is the follow on orders that we've seen, which are now scheduled in our FY 2026 deliveries. That $6,000,000 or almost $6,000,000 of orders are following from that same customer as well.

Speaker 5

Well, that went into my next thing. So, those orders then I assume that $6,000,000 is in your backlog and we should expect to see that $6,000,000 roll through the income statement next fiscal year?

Speaker 3

Yes, correct. If I had to project it, I would probably say it's going to probably be pretty evenly split between our Q1, Q2 and Q3, but all of it is certainly shipping in the next fiscal year of that 5,900,000

Speaker 5

dollars Okay. And then that's just you have more behind that, that's what you have visibility on. The customer, from what I'm hearing, you've talked about this situation for a number of months, but you're part of their like standard production manufacturing line and depend upon like how many lines they have, you're a part of it and they're in the process of rolling you out into their various manufacturing lines for panels. Is that correct?

Speaker 3

Yes. What I would describe this out is this is the rollout of Phase 2. Phase 1 was what I would describe as our R and D and pilot line phase, which just proved feasibility for our technology. And then Phase 2, which has now begun with these first machines that are the first ones that are now installed and it's got installed this month are actually true production high volume machines being installed. And that's still continuing on through the beginning of next year or the first half of next year.

Speaker 3

And that's when it's going to be being rolled out into multiple locations around the world. But it's only being rolled out as the first machines in these multiple locations. So, there's still a Phase 3 and Phase 4 to follow, which is really just the implementation of filling up all the plants and then the potential new plants that are likely to occur and need our machinery following that

Speaker 5

well. Okay. That's very exciting. Yes. It's a perfect

Speaker 3

moment for us.

Speaker 5

With regards to and I won't get into too much detail with it, but with regards to the second half of this year, that so the huge portion of your backlog is actually for next fiscal year. You are looking for growth in this fiscal year. I mean, do you see the second half of 'twenty five being of a similar magnitude in terms of sales as the first half of 'twenty five? Do you think it will at least remain flat and or up or down from that? And then what are the verticals that will sustain that for you in the second half of this fiscal year?

Speaker 3

Yes. For the current fiscal year, we certainly have given guidance to protect growth for the current fiscal year. The amount of growth we haven't really laid out too specifically at this point, and that's partially because our ability to ship things out is always a little bit more questionable, both from the customer aspect and the Sanotech internal aspect of when the customer will be ready for these products to be sent out and when we'll be ready to ship them. So these are all long lead time items in general that we're talking about. But we feel at this point confident with our projections to show growth for the current fiscal year, while adding significant backlog in for next fiscal year.

Speaker 3

And I think that's what we're even much more excited for that if we can start adding more and more of these really high ASP systems into the backlog now, that we'll be able to ship in next fiscal year. So, I think that's the more exciting moment for Sanitec is the coming fiscal year. I mean, this current fiscal year is going to be good. I mean, we'll show growth. We're going to be profitable.

Speaker 3

But I think it's more important that we're positioning ourselves for a much more rapid acceleration of growth next fiscal year.

Speaker 5

So thinking then in terms of the second half of this year, it sounds that you feel that it's likely that you will exit with a higher level of backlog maybe than you exited this current quarter, this last quarter that you'll see your backlog continue to grow?

Speaker 3

I would hope so. We haven't given a projection that way, but I would hope so. I mean, one thing that's it's so staggering for us now because we're now selling these large high ASP systems that are rolling into the backlog on a more frequent basis now, all it takes is like 1 or 2 of these big machine orders to come in for $3,000,000 $4,000,000 and to be like, oh, that just shut our backlog way up for the coming year. And we have more than one customer that could potentially be filling that next big order to come in and rolling in and beefing up our backlog for next fiscal year. So, I would hope so.

Speaker 3

I don't know. We haven't given a projection on that, but I think we'd certainly like to see that. And I think it's realistic. I mean, we still have 5 months in this current fiscal year to be adding things to the backlog.

Speaker 5

Okay. Then that brings me to kind of another question. Remind me as it relates to the capacity you have at the current location. I mean, I know you've kind of consistently been expanding it. And as you look at your facility today as it's currently set up, how much revenue do you think you can run through it?

Speaker 5

And then I know there's some space at your facility that you still haven't taken over, how much at what point will you if you were to how much revenue can you potentially run through your existing property before you actually really run out of space?

Speaker 3

Yes. So within the existing buildings that we presently occupy, because we still are renting one very large building that we don't occupy. We've taken over 5 of our buildings now. We still have the one left. And that within our existing footprint, today, we believe we can get up to around $24,000,000 $25,000,000 but with some efficiencies to our floor, which we have actually brought an outside consultant in to help with both efficiency and growth, we believe we can probably approach that closer to the $29,000,000 mark within our existing footprint that we're in.

Speaker 3

And we'll know that number more precisely pretty soon upon the completion of this outside consultant we brought in to help us do new layout of our factory. But then beyond that, once we hit to that $29,000,000 $30,000,000 area, we will be needing to take over the remaining building. And with that building, it's a large sized building. I think we'll be able to be somewhere in that $40,000,000 to $44,000,000 area. Once we started to look at how to lay things out in a more efficient manner and effective manner from a product flow standpoint, we started to realize we could actually do a little bit more than we thought.

Speaker 3

So, maybe that number might even increase slightly, but somewhere in that area of that $40,000,000 to $44,000,000 area within our existing footprint of what we own for the whole facility if we take over all the buildings.

Speaker 5

Okay. And then my last question for you. On the emerging R and D line item, it's fallen off, if you would, the last few quarters. And I guess I'm curious, with the drop off there, is there something to be concerned with? I mean, if you aren't bringing in new kind of potential customers through the smaller systems, those R and D systems, isn't that the pipeline for longer term growth for Sonatek?

Speaker 3

Yes, that's a good question. I had asked by a few other investors recently also. What's actually happened, as we've matured as an organization and it brought on new capabilities to transition to production machines, the cycle of something staying on our radar as an emerging R and D application has become shorter. Because all of a sudden now, once we've gotten a hold of, hey, here's what they're doing, we could say, all right, let's transition that over to a product line and into one of our market baskets to really go after. So, where something might have in the past sat out there in that merging R and D area for us for 3, 4, 5, maybe even 6 or 7 years sometimes, because we really didn't know how to transition it over to production, that's not the case anymore.

Speaker 3

So, what we tend to see is products go through that at a much faster rate and then transition into one of the other baskets for us relatively quickly or one of the other subsections of the baskets for us relatively quickly.

Speaker 5

Okay. All right. Well, again, congratulations for the quarter and thank you for taking my questions and I will step aside.

Speaker 3

It was good chatting. Thanks.

Operator

The next question is from Dick Ryan with Oak Ridge Financial. Please go ahead.

Speaker 6

Thank you. Steve, just to look at the other half of the backlog then, you got the roughly half that's going to deliver in 1st, 2nd, Q3. What's the makeup of the other half of the backlog, either market wise or kind of product segment wise? And what's the delivery, what's your expectation for delivery on that?

Speaker 3

Yes. So looking at our existing record high backlog, it's pretty much split into those 2 large orders, which are almost $6,000,000 going into next fiscal year and pretty much the other half of that backlog, the majority of that all shipping in the current fiscal year. And it just so happens in that mix, we do end up having a high level of medical that is in that mix, in addition to some clean energy stuff too. But it just happens to be a very healthy medical backlog for us right now and a lot of custom medical machines that are flowing through that and some new product machines. So I think it may not be as high of emerging R and D as it is the first half of the year, but it's kind of nice to see a good mix where it's not just all emerging or high clean energy sector when I say that.

Speaker 3

It's going to be a lower probably lower clean energy sector, but that's okay. It's nice to have a mix of electronics and medical mixing in with that clean energy sector.

Speaker 6

Yes. You've worked on the diversification. That's key. What if you turn the clock back for the year and a half, 2 years ago, whatever, you had vendor issues that kind of limited your capacity to get product out the door and then you were trying to internalize some of those capabilities. Can you just kind of update us on that effort and if you think your supply chain is in good shape going forward to handle this backlog?

Speaker 3

Yes. It actually what I would consider a very successful program. It was not an easy program for us to go through. That was bringing in our whole NovoCo product line, which required us to bring in a lot of in house expertise, a lot of controls, engineers, programmers. But it did 2 things for us really.

Speaker 3

It made us so we would not run into one of these supply chain issues with an outside vendor again. We have it's much more within our control now. But we are now starting to see just a little bit of benefit on the gross margin side also. There was a lot of initial upfront cost to make those transitions to bring some of those product lines in house. But now that we're through a big chunk of that curve of bringing that in, I think we'll start to be able to start to see some increased margins on some of these products that we were historically outsourcing and now we're bringing internally within Sanotech.

Speaker 3

And it is certainly most definitely an ongoing project that's happening. It's still, I would describe it maybe 50% to 70% of the way complete through the process. I mean, we're shipping products through it, but we could ship more. So, I think this will be happening for the next year to 2 years. We'll be continuing to expand that internal capability for us here, again, which should increase margins and make us less dependent on the outside suppliers.

Speaker 6

Okay. When you look at your lab traffic or conversations with customers about order pipeline, any commentary out there from them that they're looking at the economy that might be weakening or election cycle or funding piles of money may not be flowing. Any concerns on any of those sides?

Speaker 3

Yes. I would say our older, more established markets, something like printed circuit board, manufacturing, some of the industrial areas, they have definitely expressed some softening in their product sales, their end product sales. Fortunately for us, the high-tech sectors, the medical, the microelectronics and the alt energy sectors have not expressed that same slowing. And those are very clearly the more focused markets for us anyway. They are older, more mature markets.

Speaker 3

We like them. We enjoy the flow business we get from them. But we are most certainly more focused on growing our high ASP complex platforms to these next gen machines. I mean, that's where we're going to be able to get the highest margins and really show the benefits of our technology. But there is certainly an underlying slowness and it makes me very happy now that we did make this strategic shift to focus on these large platform, high ASP, very complex machines because they're really older established machines from the more mature markets, there is a slowing of those.

Speaker 3

And that's actually shown even in our sales that we're probably seeing a little slowness in our small platform machines, which are the low ASP machines coming from those more mature markets, but we're seeing the acceleration in these big platforms, highly complex machines. So, it's really a fortunate strategic shift we made to move over to that direction.

Operator

The next question is from Bill Nicklin with Bill White Insights. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking my call. Actually, Ted and Dick cover a lot of what details of what I was interested in, but I do have kind of an overarching question. In that, I think it's pretty obvious that you've been investingspending heavily over the last few years, increased R and D, adding new capabilities, as you've described, expanding your total addressable market, shifting into new markets with higher ASP and we're there possibly providing better visibility and predictability down the road as you get these long lived type contracts. Maybe you could describe in some detail the journey surrounding these achievements that you've made And then how you see them affecting Sonotech's growth and profitability trajectory over the next couple of years?

Speaker 3

Sure, sure. Right, as you know, Bill, it's been quite a journey for us. The focus to drive the ASP higher and higher on our machines, and I've got to tell you, it's been one of those things that I don't think any of us predicted we could have done what we've done. When we went from saying, hey, let's sell this $10,000 nozzle into $100,000 machine and then, hey, can we make that $100,000 machine a $250,000 machine and then can we make it $1,000,000 machine? We're still with the ultrasonic nozzle at the heart of every one of those machines.

Speaker 3

I think it's actually was somewhat of a surprise to us even that we've that, that was a possibility to sell $1,500,000 machine with this $10,000 nozzle at the heart of it. But once we started heading down that path, we found it really wasn't that difficult as long as you had the application engineering know how and expertise to become the customer's partner in creating these precision thin film coatings on next gen products. The customers really desired it and they even desired it before we had the capabilities. They were asking us for this, but we just didn't realize that we had the capabilities to do it. And it just took us a while to say, let's really spend that the resources and upfront money to develop that in house capabilities to make these very complex systems for these thin film coatings.

Speaker 3

And we've now done that. Some of these latest projects like ARIES and Altair, I mean, these are huge projects. They took a lot of money that we spent and a lot of investment in R and D. But now we're shipping products that are just like we hoped. They're $500,000,000 orders that we're getting.

Speaker 3

And that's what we want. We feel like we're kind of coming out of the area where $100,000 are no longer going to be the norm. We want to make these $500,000 orders our normal flow business. And that's our strategy there and that we'll still sell those $100,000 machines and $50,000 machines. But the goal of those $50,000 $100,000 machines is only to get to sell the $1,000,000 machine that we've got to be selling the R and D and pilot line machine to reach the production machine.

Speaker 3

And very significantly, we may only sell 1 or 2 R and D machines or a pilot line machine for $50,000 or $100,000 But when you go time it becomes time to sell the production machines, the customer doesn't want just 1 or 2 typically. They typically want multiple machines to meet their end throughput requirements for their product. So excitingly, that same customer that buys 1 R and D and then 2 pilot line machines, they might buy 10 or 20 production machines at very high ASPs. So that's the strategy that we've really been plowing through. And at some point, as long as we keep on seeing that we can sell higher and higher ASPs with more and more machines, maybe we'll just keep kicking that R and D, that profit right back into a growth of our company.

Speaker 3

But if we ever chose to, if we ever said, hey, let's just become make a lot more money, we could do that at any point. We could say, that, hey, listen, flip the lever the other way and make a lot more money. But right now, we see such a big open road for growth of the company that it really we want to take advantage of that while it's there.

Speaker 7

Thank you very much. Sounds good. Congratulations. I've been watching you folks for a while and you're getting the job done. I appreciate that.

Speaker 3

Thanks, Bill. It was good chatting.

Speaker 2

Thank you, Bill.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Steve Harshbarger for any closing remarks.

Speaker 3

Okay. Thank you everyone for joining us today. SimulTeq's outlook is strong and based on our ongoing success with our large platform initiatives in these high-tech markets and the clean energy markets. And we really look forward to our next call. We will review our full fiscal 2025 results, and that's going to be in May.

Speaker 3

But please, anybody can feel to contact us directly if you have any questions before then. And on behalf of Doctor. Cocceo, Steve Bagley and myself, we hope you all have a great rest of your day. And we look forward to talking to you again in another 6 months.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Sono-Tek Q2 2025
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