Sono-Tek Q4 2024 Earnings Call Transcript

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Provided by Quartr
May 23, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Sonotech Year End Fiscal Year 20 24 Earnings Conference Call. All participants will be in a 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 Mr.

Operator

Karen Smith with PCG Advisory. Please go ahead, sir.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us today. Sonatek released their Q4 and full year of fiscal 2024 results at 7 am Eastern Time this morning.

Speaker 2

If you do not have

Speaker 1

a copy of the release, please go to the company's website at sonotech.com and click 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. Chris Cocchio, Sonitek's Executive Chairman Steve Harshberger, 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.

Speaker 1

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

Speaker 1

Good morning and thank you, Kieran,

Speaker 2

and thank you everyone for joining us. Today, we're going to discuss our Q4 and full year of fiscal year 2024 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 Harshberger, our new CEO and President, will then go through the business and operational results. Following his comments, we'll open the call for your questions.

Speaker 2

As a reminder, Sonotech currently holds 2 earnings calls for fiscal year. This is our full year call for the 12 months ended February 29, 2024. Our next earnings call will be for the 6 months of fiscal 2025 and that will be in October of 2024. As many of you already know, and for those that are new to Sonaeffect, the company developed a revolutionary method of applying precision thin film coating several decades ago. This proprietary technology involves the use of our advanced high frequency ultrasonic nozzles and they are incorporated into specialty motion control systems.

Speaker 2

They are able to achieve uniform and nanofin coatings onto our customers' products. Our solutions offer dramatic savings in the raw material, water and energy usage, and they are environmentally friendly. The principal advantage though of our ultrasonic coating system is the ability to apply precision thin films, and these are vitally important in today's world with thousands of products and micro components now requiring a functional or protective coating. The strategic shift that we made several years ago to offer more complete solutions has meaningfully broadened our addressable market, and that's resulted in significant growth in our average unit selling prices. Our larger machines now commonly sell for over $300,000 and system prices can reach over $1,000,000 and that can significantly impact quarterly revenue.

Speaker 2

This happened in the Q2 of this past year as supply chain constraints finally subsided and the trend has continued through the end of our fiscal year. I'm pleased to announce that this morning we reported record breaking backlog for the year ahead. This past year, we also shipped 2 of our newly developed large platform sophisticated production lines that together valued nearly $1,900,000 and sales reached $19,700,000 up from $15,100,000 or a 31% increase year over year. This is also our highest sales level ever. In addition to the record sales and backlog, backlog also increased to $9,100,000 a 7% increase compared to backlog on the previous year.

Speaker 2

This is in addition to last year's substantial backlog increase over its previous year. Now this growth was due to our strategic shift towards these large complex coding systems and platforms and also due to our focus on opening new markets for our unique technology. This includes 3 main areas that have very strong global growth we've talked about before microelectronics and semiconductors, medical devices and alternative or clean energy. We've served these sectors for many years and are continuing to advance our products and system solutions in these areas for the latest generation technology. Now clean energy, including fuel cells, green hydrogen generation, carbon capture and advanced solar cells, are markets we've been providing R and D on pilot lines for close to a decade.

Speaker 2

We're now experiencing a significant success with these customers as they transition to production scale systems. They have done prior R and D process with us and so that has allowed them to move up the scale now. Over the past year, we've announced over $2,100,000 from large orders from repeat customers transitioning to high volume protection systems. This is primarily from the electronics, microelectronics, alternative energy, medical and industrial sectors. Also in the first half of the year, we experienced our largest order valued at $2,190,000 and that is also the largest order from the clean energy sector to date.

Speaker 2

These orders are the first in our deliberate shift in strategy to large customized systems. Our proprietary ultrasonic atomization technology where Sonotech began more than 40 years ago remains the heart of all of our systems. We've been able to achieve this shift through our own R and D work, which we consider to be our lifeblood. We attribute the increase in sales both from the past year and to come, a direct result of our investments in R and D with a strong focus on product expansion. And to further support our growth and expansion for these large platform custom engineered systems, we've increased our headcount by approximately 15% this year with a strong focus on personnel to reuse our IT department.

Speaker 2

We've made continued investments into the front end of the organization to open new markets and applications. We want to ensure that stay fully staffed and in front of our needs. We're excited that these investments have begun to pay off. Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger systems with multiple and repeat orders. Looking ahead to the remainder of this year, we're confident that shipments of new orders will continue to positively impact sales.

Speaker 2

We're guiding towards a strong Q1 fiscal year 2025 of revenue growth above 30%, and that's against the weaker Q1 last year. We're also guiding towards an 8% to 10% year over year revenue growth for fiscal year 2025 ending February 28, 2025 despite strong quarterly comparisons and record shipments in 2024. Thank you and I'll now turn the call over to Steve Bailey, our CEO, who will provide additional details on our financial results. Steve?

Speaker 3

Thank you, Chris, and good morning, everyone. For the full year of fiscal 2024, net sales increased 31 percent to $19,700,000 from $15,100,000 reported for the full year of fiscal 2023. Steve Harshberger will provide more detail with respect to sales. Geographically, in fiscal 2024, approximately 55% of our sales were to U. S.

Speaker 3

And Canadian customers. This is compared to 45% in fiscal 2023. We continue to record strong sales from the U. S. And Canada, growing 60% for fiscal 2024.

Speaker 3

This achievement can be attributed to various factors, including proactive government initiatives such as the CHIPS Act and the Inflation Reduction Act. Additionally, the ongoing trend of onshoring for high technology products has significantly bolstered our sales performance in these regions. Gross profit increased $2,200,000 or 29 percent to $9,800,000 for fiscal 2024 compared with 7 point $7,000,000 in fiscal 2023. Gross profit margin decreased to 50% for fiscal 2024 compared to 50.8 percent for fiscal 2023. Overall, the gross profit margin on our products remains relatively consistent when compared to fiscal 2023.

Speaker 3

In fiscal 2024, the decrease in gross profit margin is due to increased indirect production salaries, an increase in transportation expenses, increased installation costs and increased warranty costs. In fiscal 2023, our warranty costs were lower than expected. Warranty costs will fluctuate year to year and are a function of product mix. In addition, our gross profit margin decreased due to the reallocation and recharacterization of specific labor expenses from the engineering department to cost of goods sold. Operating expenses increased 24% to $8,700,000 compared to $7,000,000 in the prior year.

Speaker 3

As Chris mentioned earlier, technical headcount increased approximately 15% across several areas. Research and product development costs increased 34% to $2,900,000 primarily due to increased headcount, 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. Marketing and selling expenses increased 17% to $3,700,000 for the year. The increase was due to increased headcount, salaries, commissions, travel and trade show expenses and these were partially offset by decrease in insurance expenses. General and administrative expenses increased 26 percent to $2,100,000 primarily due to increased salaries and professional fees, partially offset by a decrease in stock based compensation expense.

Speaker 3

In addition, in the Q4 of fiscal 2024, we were notified by the State of California that we were required to collect sales tax on our shipments to California. We are in the process of reviewing our sales to California and on a preliminary basis of our sales to California since April 2019, we have recorded an accrual of 138,000 dollars for estimated sales tax, penalties and interest that we may be required to remit to the State of California. Our operating income increased $499,000 or 73 percent to 1,200,000 in fiscal 2024 compared with $683,000 for the prior fiscal year. In fiscal 2024, the increase in operating income is a result of an increase in revenue and gross profit, offset by an increase in operating expenses. Operating margin for fiscal 2024 increased to 6% compared with 5% in the prior fiscal year.

Speaker 3

As a percentage of net sales, operating expenses decreased 200 basis points to 44% in fiscal 2024 compared with 46% in fiscal 2023. Interest and dividend income increased $390,000 to $530,000 for fiscal 2024 as compared with $140,000 for the prior fiscal year. The increase in interest and dividend income is due to the reallocation of our investments into U. S. Treasury securities and certificates of deposit combined with the increase in current interest rates.

Speaker 3

Our present investment policy is to invest in excess cash into highly liquid low risk U. S. Treasury securities and certificates of deposit. At February 29, 2024, the majority of our holdings are rated at or above investment grade. We recorded an income tax expense of $303,000 for fiscal 2024 compared with $154,000 for the prior fiscal year.

Speaker 3

The increase in income tax expense in fiscal 2024 is due to the increase in income before income offset by the application of available research and development tax credits. Net income increased $805,000 or 127 percent to $1,400,000 for fiscal 2024 compared with $636,000 for the prior fiscal year. The increase in net income in fiscal 2024 is a result of an increase in operating income and interest in dividend income, partially offset by an increase in operating expenses and an increase in income tax expense. We've continued to add to our cash holdings, cash, cash equivalents and marketable securities at February 29, 2024 were $12,000,000 over $400,000 higher than at the end of our last fiscal year and we continue to carry no debt on our balance sheet. CapEx for the full year was $800,000 approximately 350 $1,000 of this total was allocated towards substantial enhancements in our IT infrastructure, focusing on network upgrades, cybersecurity fortification and expanding server capacity.

Speaker 3

Additionally, investments were made in the expansion of the Sanotech facility to support current and projected growth initiatives. We expect to invest approximately $450,000 in new equipment and facility upgrades in our current fiscal year. And now I'll turn the call over to Steve Harshberger, CEO and President, for an operational review of

Speaker 4

the full year. Steve? Thanks, Steve, and good morning, everybody. Thanks for joining us today. As many of you know, Sonotech breaks down sales in 3 ways: by markets, by products and by geography, and my comments will flow in that order.

Speaker 4

Please see the short tables on the last page of our earnings press release for all those details. As Chris mentioned, for the full year, we reported net sales of 19 $700,000 up 31% annually. This was ahead of our midyear expectations of a minimum of 25% annual revenue growth. Our growth strategies are gaining significant momentum as we guide our customers from our R and D and pilot line machines towards our complex large scale production systems with elevated average selling prices or ASPs ranging from $600,000 to well over $1,000,000 This represents an approximate fourfold ASP increase compared to our historical production and pilot volume systems. In FY 2024, we achieved a milestone by successfully delivering and installing 2 high volume, high ASP production systems, the highest number in a single year in our company's history, significantly bolstering our FY 2024 revenue.

Speaker 4

The record growth was also propelled by heightened demand of our multi axis coating systems, which are commonly used in the clean energy sector, showing an increase of $3,300,000 which is a 48% increase, totaling over $10,000,000 for the year. Integrated Coating Systems sales also accelerated by 159 percent or $1,800,000 to 2,900,000 dollars due to continued success of our newly developed float glass coating platform. In addition, integrated coating systems was positively impacted by the debut and delivery of our first PLC based system, which was developed under an initiative that we call Project Al Terre. This first machine delivered under Project Al Terre was directed to a key strategic partner within the solar market, and we could not have captured this order without the significant investments we made into expanding our programming and controls engineering capabilities. In FY 2024, we were finally able to break out of last year's supply chain issues meaningfully increased shipments as a result of the intense efforts to broaden and deepen our supply chain, including by increasing our own vertical integration with the introduction of Novacoat, a multi access product line.

Speaker 4

This is a process that's ongoing, and we continue to build and broaden our in house manufacturing capabilities. Following high revenue for printed circuit board or PCB flexing systems for fiscal year ended February 28, 2023, PCB fluxing sales dipped by $455,000 for fiscal 2024. Over the years, we've installed thousands of our spray flux machines, and our customers continue to upgrade their equipment to their latest model spray fluxers as we advance the technology. So although there was a dip this year, we have a large customer base for these systems and our porting activities remain strong. Also, sales to our OEM PCB customers that integrate our ultrasonic nozzles into their own spray fluxers declined, causing OEM sales to decrease by 611,000.

Speaker 4

We believe the PCB spray fluxer market has slowed and dip in OEM sales was largely mitigated by a 17 annual percent increase of over $640,000 in spare parts and service related revenue, which is a growing revenue stream, and it's categorized in the other product category. Large platform, highest ASP production lines are growing in importance as we place more and more machines in the field. In fact, we believe the thought that these follow on service related packages could reach as much as 10% to 15% of the total order value on our high ASP production machines. Now we'll turn to the sales by market. Fiscal 2024 was highlighted by increasing sales to the alternative clean energy market, which grew by 96%, and were positively impacted by the growing number of Sonotech customers transitioning from our R and D machines to production scale systems that carry much higher average selling prices or ASPs again.

Speaker 4

Many of our recent large contract announcements are from this area, and these systems are commonly used in the manufacturing of critical membranes for carbon capture, green hydrogen generation, fuel cells and advanced solar cell applications. Sales this year included shipment of a $1,100,000 system delivered to a customer in the carbon capture arena and a $766,000 shipment of a production scale system to a customer in solar market with 3 additional systems valued at $730,000 each to the same customer that are in the backlog and scheduled to ship in fiscal 2025. Electronics market revenue experienced a modest uptick in FY 2024. This growth was primarily fueled by a notable $377,000 increase in the semiconductor market segment. However, this positive momentum was partially tempered by a $455,000 decrease in sales of our PCB spray flexors, as I mentioned earlier.

Speaker 4

Medical sales rebounded strongly in the second half of FY twenty twenty four and ended with 13% growth for fiscal 2024. This was driven by several large multinational companies taking delivery of specialty implantable medical device influenced by shipment of 2 next gen float glass coating systems totaling approximately $700,000 and the last two machines of a multi system order to a U. S.-based customer for 432,000 dollars By geography, in fiscal 2024, approximately 55% of our sales were U. S. And Canadian customers.

Speaker 4

This is compared to 45% in fiscal 2023. We continue to record strong sales from the U. S. And Canada, growing 60% for fiscal 2024. This achievement can be attributed to various factors, including proactive government initiatives such as the CHIPS Act and Inflation Reduction Act.

Speaker 4

Additionally, the ongoing trend of onshoring for high technology products has significantly bolstered our sales performance in these regions. In fiscal 2024, EMEA sales experienced a notable surge, marking a 20% increase, equivalent to $885,000 This upward trajectory was positively influenced by robust sales to Ireland, where we secured and shipped 2 unique machines catering to separate customers within the medical sectors. These systems are designed for specialized coatings of unique implantable devices, really reflecting our commitment to innovation in thin film coatings on next gen health care devices. Furthermore, Germany had continued sales growth of our electrolysis membrane coating systems impacted by government initiatives aimed at fostering expansion of that clean energy sector. Asia sales remained flat for fiscal 2024.

Speaker 4

While robust sales from the clean energy sector were shown from India, South Korea and Singapore, This was offset by China sales continuing a downward trajectory amidst this uncertain economic landscape prevailing in the region. In Latin America, we encountered a discernible decline of 21%, representing a reduction of $325,000 This dip can be largely attributed to the sluggish performance in the spray flexor segment. And this market is commonly associated with customers in that region base. Our backlog continued its year over year growth trend, and on February 29, it stood at $9,100,000 This is in addition to last year's substantial backlog increase over the previous year and reflects the increasing order activity from the clean energy sector in particular. Our customer deposits reached $3,400,000 at February 29, reflecting the continued receipt of the large new orders in our backlog.

Speaker 4

We generally require deposits of 50% or greater on orders valued at several $100,000 As we look forward, we're excited to reach another key milestone and record with 4 high volume production, high ASP systems scheduled for delivery in fiscal year 2020, 2025 with expectations of continued acceleration for additional high ASP orders entering our FY 2025 backlog for delivery in both the current fiscal year and fiscal year 2026. In closing, our outlook is strong and we are guiding to strong Q1 FY 2025 growth above 30% against, of course, a weaker Q1 last year. Additionally, we're anticipating a good fiscal 2025 with 8% to 7% year over year growth projected for the full fiscal year ending February 28, 2025, even with quarterly comparisons of record shipments for the year FY20 24. And we believe the investments we're making in our strategic growth initiatives will position us for higher revenue and increasing profits in the coming years. I'll now turn the call back over to the operator to open it up for questions.

Operator

Thank you. We will now begin the question and answer session. And our first question will come from Mr. Bill Nicklin with Circle N Advisors. Please go ahead.

Speaker 5

Good morning, Steve and Chris. You did a nice job unpacking these details. I appreciate it.

Speaker 2

Thanks, Phil. Thank you. I have

Speaker 5

some broader questions about kind of the characteristics of your business that will likely shape the future outcomes for the company and for its shareholders. The first one deals with kind of your competitive position. And I'm trying to get an understanding etcetera? The etcetera?

Speaker 4

This is Steve here, Bill. Yes, it's an interesting question because it was just actually just last week we actually just finished a competitive analysis on the orthosonic coating market. It takes us a while to do these because most of the companies that are our competitors many of them are not public. So it's been about 4 years I think since we've done our last thorough analysis. By the way, a side note, this analysis will be part of a new company presentation that we're going to be posting on our website sometime next month.

Speaker 4

But I can give you kind of a quick snapshot of our findings. Looking specifically at the ultrasonic coating marketplace today, the total pie is small, of course, right? It's a little over $40,000,000 in revenue, up about 30% from where it was 30,000,000 years $30,000,000 from where it was 4 years ago. And I should stress that, that $40,000,000 is the existing total sales of ultrasonic coating machines, not the total addressable market for thin film coating equipment where Sonotech is focused on capturing a larger chunk of the market of course. That's like an $8,000,000,000 market.

Speaker 4

What's very interesting is that 4 years ago back in pre COVID, our most significant direct ultrasonic competitor. They were, I think, out of Spain, followed by this large group of Sonotech copy companies from China and South Korea. Now that's all changed. We believe our 3 significant U. S.

Speaker 4

And European direct competitors have now all substantially shrunk in size or actually even going on to business in one case, while the China competitors have grown in size and numbers. So one might ask why did our U. S. Competitors and European competitors shrink or close instead of growing like Sonotech did? Well, when you dive into it, it's actually very easy to see what has happened.

Speaker 4

China got better at making very basic ultrasonic coating kits that were that while they are sophisticated in nature, are still relatively simple to cut and copy cut and copy type of machines, I would describe it as. And while they're nowhere near the quality of the U. S. And European based competition, they're becoming close enough to maybe to be acceptable. And this shouldn't be surprising.

Speaker 4

Making simple repeat vanilla products is what China has historically been good at. Our U. S. And European competitors continue to focus on making these relatively simple cut and copy machines. It's what worked for them historically, and they didn't recognize the urgency China gap closed in quality.

Speaker 4

And they really crushed them on price. So they failed to adapt to what China was good at, which in China what they're not good at is highly complex, highly customized large systems with very sophisticated application engineering knowledge. And this is where SonoTech heavily invested with significant development on these advanced coating platforms that are I mean they're really nearly impossible to copy. China can't keep up with us on these advanced machines. And even if they could, they'd have not near enough migrated over time.

Speaker 4

Okay. And then just a follow-up on the migrated over time.

Speaker 5

Thanks. It's occurred to me watching you folks over the years that your customers share a lot of their process knowledge as you make machines to that will address those needs. It would seem to me that if I was out looking for a machine, the last thing I'd want to do is give my process knowledge to the Chinese. Do you have any thoughts on that or would you rather not comment?

Speaker 4

It's a funny question. I mean, you're of course correct. If you're like an Apple or a Google or a Meta or a Tesla or some advanced technology company, do you really want to trust your thin film coating IP to be developed and shared and collaborated with a China based company? You might if you are a China based company or maybe you won't care if you're a small university that plans to share everything they learn anyway. But do you really want to risk that your development that you won't transfer those products to a product machine for China.

Speaker 4

And then also even if you do develop it on a production machine for China, they have no way to scale you to high volume production at the same time in addition to that. So there's a lot of risk. These companies in China, they come and go also. So the best case sorry, the worst case scenario is that you could fail to develop a thin film coating process on a cheaply made China machine. That's they don't make it successful and you go no work further.

Speaker 4

But the best case is that you develop a process, but you still can't scale it up. So for most of your larger multinational companies and institutes, the risk, to be honest, is really just too significant when you have to choose, are you going to go with Sonotech or are you going to go with this pot of ever evolving China based companies that you are risking your IP with?

Speaker 5

All right. Thanks so much. Next question has to do more with kind of how the business is run, the shape of pursuing new business and then fulfilling these orders. So I guess the question is how far ahead does Sonitec have to invest before expected revenues arrive from the initiatives that you're investing in?

Speaker 4

I think that's a good question from an investor standpoint. It's sometimes frustrating frustratingly long. It's not uncommon for us to spend 1 to 2 years to identify a market where we think we want to participate. And then another year to prove feasibility that our technology does bring significant advantages in that area. And then following that, then there's the hardware and software development phase that can be any place from, well, maybe sort of 6 months, but it can also go as long as 2 years.

Speaker 4

So really, I mean, the fastest possible cycle time with a simple product is maybe 18 months, with maybe 6 years being on the total outer edge. But I would say the average you're looking more like about a 3 year, 4 year cycle average cycle time for this to be completed.

Speaker 5

All right. So you're investing in R and D and so forth, mainly intangibles that will show up as an expense early on and then turn into revenues down the road, is that correct?

Speaker 4

Yes, yes. This is primarily an investment in R and D and sales personnel. The early phases are sales and application engineers to prove market feasibility, then followed after that by the engineering and programming development of the machinery. And then ultimately, then of course, it returns back to the sales force for market release and new product and develop the new product they're releasing to the customer base.

Speaker 5

All right. So the numbers show I believe you've been hiring aggressively over the in recent years about what percent of those hires are placed in R and applications, engineering and then also sales and marketing

Speaker 2

as a whole?

Speaker 4

Yes, let me just think about that. Over the, say, the past 2 years in particular, we've invested very heavily in personnel to bolster our growth ability. It's a significant investment because you tend to have almost a full year of training before the newest personnel really becomes highly effective. So for example, this past year, we hired, I think it was about 11 new people, of which 8 of those, I can think off top of my head were directly connected to new product or market development. Only a small fraction was more directed to overhead and manufacturing.

Speaker 5

Okay. Thanks. So one more, if you don't mind. Can you kind of describe what I would call the durability of revenues, meaning in my mind, repeat business, multiple machines, recurring returning customers, new needs for coding from existing customers. And then you started to mention, I think either you or Steve did, recurring revenues after or during and after these new builds.

Speaker 4

Yes. Okay. Well, I guess with the recent addition of our larger platform systems, repeat and returning customers have really been a big positive shift in our strategy. In the past, successfully coating a substrate on an R and D machine really might be the end of the sales cycle. Well, that's not any longer for us.

Speaker 4

We now want to guide that customer to our pilot line machines, followed them by our high volume production systems, which have of course those highest ASPs, the highest average selling prices. And once they've transitioned to those high volume production systems, they should often need repeat machines, unlike the R and D machines where one system might just be enough. So the other significant benefit when I think about it should also now be we're really in the very beginning phases when I say this of impacting our revenue stream in service contracts and spare parts packages. On our high ASP production type of platforms, we're seeing a greater acceptance of a reoccurring service contracts that so far on the service looks like they could add up to right around 10% annually on the machine. This is in the beginning phases, but it should gain momentum quickly because once you add a machine on this year, that machine should be every year 10%, 10%, 10%.

Speaker 4

And then once you have 2 more machines that you add on to that, then you should have 3 machines, 10%, 10%, and then of course you had 10 machines on. All of those just sort of compounds quickly. So we're optimistically thinking that's going to be a more significant reoccurring revenue stream in the future.

Speaker 5

All right. Sounds good. Thank you. That's all for me.

Speaker 4

Good catching up, Bill. Thanks.

Operator

Our next question will come from Dick Ryan with Oak Ridge Financial. Please go ahead.

Speaker 6

Thank you. Say, Steve, how should we look at the backlog, $9,100,000 Is that all anticipated to flow in this next or in fiscal '25? And then you indicated you had some larger ASP machines in there. Can you kind of give us a breakdown of that backlog? How much is concentrated in those larger machines versus maybe some more of the turns type of business?

Speaker 4

Sure. In the existing backlog today, most of those orders came in mid last fiscal year. So everything in that existing backlog is scheduled for this current fiscal year delivery. And I can say that with pretty high confidence. There's nothing that's really in question on that one that I don't believe will have no question marks really.

Speaker 4

There's enough time on those. And the reason I make that clear is that some of our machines can take up to a year, maybe even over a year to build for some of these large platforms. But all of these have been in and they're well underway. And in that backlog, I think right now we have 3 we have 4 exactly, 4 high ASP machines. 1 is a machine that's about a $1,100,000 machine and then there's 3 machines in there that are in the area of about 700,000 which are all for high volume production applications.

Speaker 4

And I guess what's significant for both of those 2 customers that's going over 2 customers, these are customers that they are in their early phases of development. They have already announced long term contracts that they've been putting out fairly publicly about where their production goals need to hit and where they're expanding to. So if they come anywhere close to what they're saying and somebody seem like they're pretty one of them in particular always seems like they always hit the mark of what they commit to publicly. It should result in significant upside for Sonotech for future repeat machines of the same or very similar configurations. So we're optimistic about that adding both into the second half of this year, maybe the 4th quarter revenue stream as well as and much more importantly, the revenue stream for next fiscal year.

Speaker 6

Okay. So when you look at the order or your quotation level, you obviously have the repeat business and then you've got the lab activity. Can you give us a sense of what's going on in the labs and what's your batting average of turning that demonstration or engineering work into orders?

Speaker 4

Yes. That's an area we're working really hard on. We have our New York based lab is really we have some talented engineers here and they're remarkably successful. When someone comes in here, there's about a 75% success rate where someone will buy a machine if they come in here to work on developing their process. So it's really successful for us.

Speaker 4

This year, especially now that the COVID is way behind us, we're putting a very concerted effort to really accelerate the success rate of our overseas international labs. We have a person actually we have just focused just to that task here for us. We need right now their success rate, just to be clear, is not anywhere near 75%, but we need to get them up towards that area and to be able to show that same success rate because that's just a super direct correlation to growing our revenue stream. And that's our goal for that area. There is another significant area that as I kind of mentioned earlier in the revenue stream that for a lot of this we actually will have paid application development.

Speaker 4

Many of our customers, if not most, pay SonoTech to help them develop their applications and coatings need. And that's very important because right now we're capital equipment, right? And we know capital equipment can be somewhat lumpy, both the backlog and the revenue streams going out. So we really, really want to bolster our services related still application engineering, contract coding and things along those lines right now, I think we're just a little under $1,000,000 which is not much right now. But there's a very clear focus for us to enhance that and make that a more significant part of our revenue stream, which will kind of help the lumpiness of just selling capital equipment all the time.

Speaker 6

Okay. One left for me. You specifically called out in the medical side a couple of systems being sent to 2 customers over in Ireland. Can you give us a sense, are these new medical applications that are being coded? Are they existing customers that were using your coding systems on previous devices that have expanded?

Speaker 6

Or can you provide a little more color on those shipments?

Speaker 4

Sure. Yes. These are I believe in both cases they were existing customers using our stent coating systems. That's an area of the stent coating that a huge chunk of the world use our stent uses SonoTech stent coating systems. We're kind of the industry standard there.

Speaker 4

But these are both customers, fairly sure in both of them that they had our stent coating systems, but now in both of these cases, they are not coating stents. This is a new implantable device in both cases. I can't say what it is because that would kind of give away the end customer in both cases. But there are a newly developed device. And the application engineering development process was not simple here for Somatik, just to be clear.

Speaker 4

These people came to our labs. Our engineers worked with them to develop this new unique process for these new unique devices. They're getting implanted into the body. This is again one of those talents that really only SonoTech can provide to our customers. And it's nice to see these customers that they've built the confidence in Sanitec to use our stent coating machines, but now they're saying, hey, why don't we use it for anything else that we're implanting in the bodies?

Speaker 4

And that's a very significant shift in our customer base to be able to say, hey, let's broaden it out. CyloTek, don't look at them just as a stent coating customer for medical devices. Look at them as a general coating of any device in the medical industry.

Speaker 6

Did they run off your coating capabilities against somebody else in these new systems? Or did this just come to you kind of your sole source and your expertise with their previous efforts?

Speaker 4

I think in both of these cases, the partnerships that we had built with these customers and this again, this happens over time. They were just so confident that Sonotech could handle this. I think they really just right off the bat came to us first. And that's something that wouldn't have happened in the past to be honest. But once you have these long term partnerships and that's how in particular in the medical device area, many of these guys are that we're not just really a vendor, we're a partner with them.

Speaker 4

They kind of come to us by default to start. And that's not to say we can do every single coating, but they know SonoTech well enough that if we can do it, we'll tell them we can. And if we can't, we'll probably refer them to somebody of another technology that can. But that's the kind of partnerships that we have with those to these guys.

Speaker 6

Great. Okay. Thank you. Congratulations on the strong performance.

Speaker 4

Nice catching up, Dixie. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Chris Cocceo for any closing remarks. Please go ahead.

Speaker 2

Thank you, Karen, and thank you everyone for joining us today. Simulosec's outlook is strong based on our ongoing success with our platform initiatives in the high-tech and clean energy markets. We look forward to our next call that will review our mid year fiscal 2025 results and that will be in October. In the meantime, please contact us directly if you have any questions. Wishing you a great rest of the day.

Speaker 2

Thank you very much.

Operator

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

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Earnings Conference Call
Sono-Tek Q4 2024
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