Q2 2025 Sono-Tek Corp Earnings Call

Operator: Good morning and welcome to the Sonotech fiscal second quarter and first half 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded.

Kirin Smith: I would now like to turn the conference over to Karen Smith with PCG Advisory. Please go ahead. Thank you, operator, and thank you, everyone, for joining us today.

Speaker: Sonotech released their second quarter and six 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 sonotech.com and click on the Press Release Flash News tab in the Investor section. The product of market and geography sales tables on the last page of the release will be part of today's discussion.

Speaker: With me on the call to A or Dr. Chris Cochio. Sonotech's Executive Chairman Steve Harshberger, CEO and President, and Steve Badgley, Chief Financial Officer.

Speaker: For 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. 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. Company assumes no obligation to update the information contained in this conference call.

Speaker: As a reminder, Sonotech currently holds two earnings calls per fiscal year. This is our mid-year call for the six months ended August 31, 2024. Our fiscal year end is February. So fiscal 2025 will end on February 29, 2025.

Speaker: And our next earnings call for the 12 months of fiscal 2025 will be in May 2025.

Christopher Coccio: I would now like to turn the call over to Chris Cogeo, Executive Chairman of Sonotech. Chris, please go ahead. Thank you, Kirin, and good morning. Thank you, everyone, for joining us. Today we're going to discuss our second quarter, and also the first half of this year 2025. The results were just released this morning before the market opened.

Speaker: I'll begin with some opening remarks, and then Steve Harshbarger, 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. He will provide financial review, and more depth.

Speaker: Following their comments, we'll open the call for your questions.

Speaker: Now, many of you may already know Sono Tek developed a revolutionary approach for applying precision film coding 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. Now our think-home coding machines provide dramatic savings of the expensive liquids that are being applied, and they're environmentally friendly by minimizing material usage and overspray. This often helps company comply with increasingly stringent government regulations that are aimed at reducing hazardous waste entering the environment.

Speaker: But the real principal advantage of our ultrasonic system 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 coding to be added to them. They're all around us in our modern world.

Speaker: Now, 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 cell in prices. At the same time, our larger machines now commonly sell for over $300,000, and the system prices can reach a million dollars or more. That can significantly impact our quarterly revenue, as you can imagine.

Christopher Coccio: 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 second quarter, but we saw our largest customer order in our history, followed by another one of the same size several weeks later. For the first half of this fiscal year, we experienced 10 percent annual revenue growth, and for the second quarter, we saw a 3 percent sequential increase, which is in line with our prior guidance.

Speaker: On top of that, our first half net income grew 13 percent year over year.

Speaker: We're very excited for continued growth ahead of us, which is reflected in our record backlog. That increased 26 percent from the end of last year to up 11.7 million. It's the highest in our history, by the way. We're excited that our investments have begun to take off.

Speaker: 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 unique film coding technologies is also helping. So looking ahead to the second half, we're expecting continued growth for fiscal year 2025.

Steve Harshbarger: Thank you, and now I'm going to turn it over to Steve Harshbarger, our CEO and President. Steve, please go ahead. Okay, thank you, Dr. Coccio, and thanks everyone for joining us today. Firstly, I just want to echo Chris's enthusiasm. It's extremely gratifying to see our investments be really beginning to hit their stride. 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 last year as supply chain issues began to become resolved.

Steve Harshbarger: Clean energy, including fuel cells, green hydrogen generation, carbon capture, and advanced solar cells, are markets that we've been providing R&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 2025 was strongly influenced by a shipment to a substantial customer from the Clean Energy sector, who received shipment of three integrated coding systems totaling 2.19 million.

Steve Harshbarger: 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 dressable market. There are six more high ESP systems on our backlog for project Altair, and we do project more to follow. The increase in integrated coding systems we experienced was somewhat offset by our product division, which can fluctuate from time to time. Multiaxis coding systems, which are commonly used in the clean energy and medical device markets, saw sales of 4.6 million for the first half of the year.

Steve Harshbarger: These full system solutions contain some of our newest and highest average selling prices or ASP platforms. Meaningfully, expanding our capabilities for design and built internally-made multi-axis platforms has been a focus for San Josec over the past three years under a project we call ARIs. ARIs has broadened our product offering while deepening our supply chain and increasing vertical integration, starting with our NovaCode Multiaxis Series and machines. This is an ongoing process, and we continue to build and expand our in-house capabilities in this area. Luxing systems get for both the second quarter and the first half of fiscal 2025, influenced by a softening of activity in the printed circuit board manufacturing sector.

Steve Harshbarger: And a continuing decline of activity from China, you know, 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 OEM partners experienced to finding sales of their products. Although spare parts and services slightly dipped for the first six months, this basket continues to be a focused area for growth. As we place more and more of our high ASP-large platform-form 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 10-15% area of the total value.

Steve Harshbarger: By market, sales to the alternative clean energy market grew by 37% in Q2 over the prior year quarter and grew 80% in the first six months of this fiscal year compared to the prior year period. These sales were positively impacted by the growing number of Sono Tek customers transitioning from our R&D and pilot line machines to production scale systems, and in these carrying 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 or green hydrogen generation of fuel cell applications.

Steve Harshbarger: Sales this quarter included two high ASP systems to a large customer totaling $1.46 million. Our electronic sales increased 51% in the second quarter versus the same quarter of last year, and 30% in the first half versus the first half of last year. Both periods benefited from shipments of a newly developed coding system that includes wafer shuttling capabilities directed at the semiconductor market. Let's see, medical sales declined by 70% in the first half of FY 2025, primarily driven by lower demand for our stent in balloon coding systems. However, based on our current backlog and our order activity, we expect balloon coding systems sales to recover in the second half of the current year.

Steve Harshbarger: In contrast, stent coding systems 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 flow class coding 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 US and Canada compared to 40% in the comparable period of fiscal 2024. Sales to the US and Canada increased by 9% and 80% in Q2 and the first half, respectively, compared to the prior year period and were positively impacted by the continuum momentum of several US government initiatives that are investing in the clean energy sector and other research markets.

Steve Harshbarger: 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% and 65%, respectively, for Q2 and Fiscal 2025 and the first half of Fiscal 2025. This is primarily due to a flow-glass coding 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.

Steve Harshbarger: APAC sales decreased by 32% and 1%, respectively, for the second quarter and the first half of Fiscal 2025. 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 wiggining Chinese economy and the high level of cheaply priced low-cost competitors in this market, we are not predicting that this geographic or really cover in the short term.

Steve Harshbarger: Reflecting our excitement for the ring for the remainder of fiscal 2025 and beyond is 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 11.7 million dollars compared to 10.9 million 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 two orders of $2.95 million each that were recently announced, which are the largest orders from the sector today and also the largest order in Sound Attack history.

Steve Harshbarger: Customer deposits reach 3.2 million 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 $700,000. We attribute increase in sales and backlog as a direct result of our investment in R&D with a strong focus on product expansion. 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.

Steve Harshbarger: In closing, our outlook is strong and we expect a solid second half with continued sales growth and profitability for the fully fiscal year 2025 ending next February. Our momentum stems from our deliberate strategy to strategic shift to large customized systems with accelerating ASPs, and our proprietary ultrasonic technology 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.

Stephen Bagley: With that said, I will hand the call over to Mr. Steve Bagley, our CFO, to review the financials in more detail. Steve, please proceed.

Stephen Bagley: 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 of the quarter decreased by 8% or 477,000 to 5.2 million compared to the second quarter of fiscal 2024. However, net sales for the second quarter increased by 3% or 131,000 compared to the first quarter sales of fiscal 2025 of 5,000,000, 31,000. Gross profit decreased 10% year over year or 285,000 to 2.5 million, and the gross profit percentage decreased by 100 basis points to 48.7%. And this is due to product mix and the reallocation of specific labor expenses from the engineering department to our course of goods sold, and net reallocation started in the fourth quarter fiscal 2024.

Stephen Bagley: However, as with our sales, gross profit for the second quarter increased 2.4% to 2,500,000 from 2.46 million when compared to the first quarter gross profit. Operating expenses decreased just slightly to 2.23 million when compared to 2.235 million in the prior year's second quarter. 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, slightly to 988,000 for the quarter versus 945,000 in the prior year.

Stephen Bagley: 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 510,000 in the prior year. This increase is primarily due to increased salaries, legal and other fees, and other corporate expenses. Operating income decreased 280,000, or 49%, to 286,000 compared with 566,000 in the prior year. The decrease in operating income in the second quarter 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.

Stephen Bagley: However, our operating income for the quarter increased 20% to 286,000 compared to 238,000 for the first quarter of fiscal year 2025. Interest in dividend income decreased by 39,000 to 85,000 in the second quarter of fiscal 2025 as compared with 124,000 for the second quarter of fiscal 2020. 44. In the second quarter, 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 two cents per share, compared with 541,000, or three cents per share, for the prior year period. The decrease in net income is primarily due to the current period's decrease in gross profit.

Stephen Bagley: And now the financial results for the first six months of our fiscal year 2025. Total sales for the first half of fiscal 2025 increased by 10% or 951,000 to approximately 10.2 million, and this was strongly impacted by increased sales from the alternative energy market due to the shipment of the three high ASP systems to a large solar company, and those sales total 2.2 million. Gross profit increased 390,000 or 9% to 4.971 million, 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. Once again, the reallocation of specific labor expenses from engineering to cost of goods sold.

Stephen Bagley: 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 2025 and 2024 was 5%. In the first half of fiscal 2025, 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, low-risk US Treasury securities, and at August 31, 2024, the majority of our holdings are rated at or above investment grade.

Stephen Bagley: 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 2024. Net income increased 13% to 672,000, or 4 cents per share, for the first half of fiscal 2025 compared with 595,000, or 4 cents per share, for the first half of fiscal 2024. Deluted weighted average shares outstanding decreased slightly to approximately 15.8 million shares, and we do continue to maintain a very strong cash position with cash equivalents and more affordable securities totaling 11.6 million at August 31, 2024, and we continue to have no debt on our balance sheet.

Stephen Bagley: CapEx for the six months was $191,000, and all of which is directed to ongoing upgrades of our manufacturing and development lab facilities.

Stephen Bagley: And we expect to invest approximately $460,000 in new equipment for the full fiscal year.

Operator: And now we'll open the poll for any questions from the audience, and Gary, please go ahead. But we will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Ted Jackson: Our first question is from Ted Jackson with Northland Securities.

Speaker: Please go ahead. Good morning. Congratulations on a solid quarter. Hey, Ted, good morning. Thanks for joining us. So I've got a few questions.

Steve Harshbarger: I want to start on the alt energy and play with the quarter. So you had three large systems shipped during the quarter, 2.2 million. Can you talk to me? It sounds like two of the systems went to, at least two of the systems went to a single dealer customer, and a third, if I'm kind of parsing through your commentary, went to maybe another customer. What was the end market for those two customers? Yeah, they did ship to different locations, but the same customer, a customer that's located at multiple locations throughout the world to a big multinational company.

Steve Harshbarger: 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 FY2026 deliveries. Those that $6 million or almost $6 million or orders are following from that same customer as well.

Steve Harshbarger: Well, that went into my next thing. So, you know, so those orders that I assume that $6 million is in your backlog and we should expect to see that $6 million roll through the income statement next fiscal year. Yeah, correct. If I had to project it, I would probably say it's going to probably be pretty evenly split between our first quarter, second quarter, and third quarter, but all of it is certainly shipping in the next fiscal year of that $5.9 million. Okay. And then that's just, you know, you have more behind that. That's what you have visibility on.

Steve Harshbarger: You know, the customer, you know, from what I'm hearing, you talk about this situation for a number of months, but you're part of their, like, standard production, you know, manufacturing, you know, line, and, you know, it depends 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?

Steve Harshbarger: Yeah, but what I would describe this out is this is the rollout of phase two. You know, phase one was what I would describe as our R&D and pilot line phase, which just proved feasibility for our technology. And phase two, which is now begun with these first machines that are the first ones that are now installed, that 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, 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 you know, the first machines and these multiple locations. So there's still a phase three and phase four 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 machine to refollowing that as well.

Speaker: Okay, it's very exciting.

Steve Harshbarger: And then for us, with regards to, and you know, I mean I won't get into too much detail with it, but with regards to the second half of this year, you know that so the huge portion of your backlog is actually for next fiscal year. You are looking for growth in this fiscal year, you know, I mean, you know, do you see the second half of 25 being of a similar, you know, magnitude in terms of sales as the first half of 25? Do you think it, you know, will at least remain flat and or, you know, up or down from that? And then what are the verticals that will sustain that for you in the second half of this year.

Steve Harshbarger: Yeah, for the current fiscal year we certainly have given guidance to project growth for the current fiscal year. You know, 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 Sonotech 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, because 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. And I think that's what we're even much more excited for, that you know, if we can start adding more and more of these really high ASP systems into the backlog now, then we'll be able to ship in next fiscal year.

Steve Harshbarger: So I think that's the more the more exciting moment for Sonotech 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. But I think it's more important that we're positioning ourselves for a much more rapid acceleration at growth next fiscal year. So thinking then in terms of the second half of this year, it sounds that you feel that it's... It's likely that you will exit with a higher level of backlog maybe, then you exit in this current quarter, this last quarter, but you'll see your backlog continue to grow.

Steve Harshbarger: I would hope so. You know, 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 one or two of these big machine orders to come in for, you know, $34 million, and to be like, oh, that just shot our backlog way up for the coming year. And we have more than one customer that could potentially be filling that next old big order to come in and rolling in and beefing up our backlog for next fiscal year.

Steve Harshbarger: So, I would hope so. 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 a realistic. I mean, we still have five months in this current fiscal year to be adding things to the backlog.

Steve Harshbarger: Okay, then that means me to kind of another question, and 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? And then I know there's some space at your facility that you still haven't taken over. How much, you know, at what point will, you know, will you, if you were to, you know, how much revenue can potentially run through your existing property before you actually really run out of space?

Steve Harshbarger: Yes, well, 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 five 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, 25 million, 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 million mark within our existing footprint that we're in, and we'll know that number more precisely pretty soon upon the completion of this outside consultant we brought in to help us with do a new layout of our factory.

Steve Harshbarger: But then beyond that, once we hit to that $29.30 million area, we will be needing to take over the remaining building, and with that building, it's a large size building. I think we'll be able to be somewhere in that $40 to $44 million area. You know, once we started to look at how to lay things out in a more efficient manner, an effective manner from a product flow standpoint, we started to realize we could actually do a little bit more than we thought.

Steve Harshbarger: So maybe that number might even increase slightly, but somewhere in that area of that $44 million area within our existing footprint of what we own for the whole facility if we take over all the building.

Speaker: and then my last question for you. You know, in the emerging R&D line item, you know, it's, you know, fallen off if you wouldn't, you know, the last few quarters. And I guess I'm curious, you know, with the drop-off there, is there something to be concerned with? I mean, if you aren't bringing in new, you know, kind of, you know, potential customers through the smaller systems, those, you know, R&D systems, you know, isn't that the pipeline for longer-term growth for Sono Tek? Yeah, that's a good question. I had to ask a few other investors recently also.

Steve Harshbarger: What's actually happened as we matured as an organization and brought on new capabilities to transition to production machines? The cycle of something staying on our radar as an emerging R&D application has become shorter. Because all of a sudden now, you know, 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 we're something might have in the past set out there in that merging R&D area for us for three, four, five, maybe even six or seven years sometimes, because we really didn't know how to transition it over to production.

Speaker: That's not the case anymore. 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: Okay. All right, well again, congratulations for the quarter, and thank you for taking my questions. I will step aside. Oh, it was good chatting. Thanks.

Dick Ryan: The next question is from Dick Ryan with Oak Ridge Financial. Please go ahead. Thank you. See, just to look at the other half of the backlog, then you got the roughly half that's going to deliver in first, second, third quarter. 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? Yeah, so looking at our existing record-high backlog, it's pretty much split into those two large orders, which are almost $6 million going into the next fiscal year, and pretty much the other half of that backlog, the majority 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 this happens to be a very healthy medical backlog for us right now.

Steve Harshbarger: I learned a lot of custom medical machines that are flowing through that in some new product machines. So I think it may not be as high of emerging R&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 R&D or some high clean energy sector when I say that. 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.

Steve Harshbarger: You've worked on the diversification; that's key. If you turn the clock back for a year and a half, two years ago, whatever, you have 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? Yeah, it actually, I would consider a very successful program. It was not an easy program for us to go through. That was bringing in our whole NOVO product line, which required us to bring in a lot of in-house expertise, a lot of control engineers, programmers.

Steve Harshbarger: But it did two things for us, really. 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. You know, 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 Sonotech.

Steve Harshbarger: And it is certainly most definitely an ongoing project that's happening. You know, 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 can ship more. So I think this will be happening for the next year to two years. We'll be continuing to expand that internal capability for us here. Again, which should increase margins and it's less dependent on the outside suppliers.

Steve Harshbarger: Okay. When you look at your lab traffic or conversations with customers, you know, about order pipeline, any commentary out there from them that, you know, 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? Yeah, 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, you know, the medical, the microelectronics, and the all energy sectors have not expressed that same slowing.

Steve Harshbarger: And those are very clearly the more focused markets for us anyway. They're older, more mature markets. You know, 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 the really older established machines from the more mature markets, there is a slowing of those.

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

Speaker: Okay, good. Take care of it for me. Thanks, Steve, and congratulations. Thanks, Nick. Good talk to you.

Bill Nicklin: The next question is from Bill Nicklin with Bill White Insights. Please go ahead. Hey, good morning. Thanks for taking my call. Actually, Ted and Dick cover a lot of what details of what I was interested in.

Steve Harshbarger: But I do have kind of an overarching question. I think it's pretty obvious that you've been investing, spending heavily over the last few years, increased R&D, adding new capabilities as you've described, just spending 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 journeys surrounding these achievements that you've made, and then how you see them affecting Sonotex growth and profitability trajectory over the next couple of years. Sure, sure.

Steve Harshbarger: You know, right now, it's as you know, Bill, it's been quite a journey for us. You know, 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. You know, when we went from saying, hey, let's sell this $10,000 nozzle into a $100,000 machine, and then, hey, can we make that $100,000 machine a quarter million dollar machine, and I think can we make it a million dollar machine, still with the ultrasonic nozzle at the heart of every one of these machines.

Steve Harshbarger: I think it actually was somewhat of a surprise to us, even that that was a possibility to sell a million and a half dollar machine with this $10,000 nozzle at the heart of it. But once we started heading on a path that 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. You know, the customer has 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.

Steve Harshbarger: 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. And we've now done that; you know, some of these latest projects, like Aries and Altaire. I mean, these are huge projects. They took a lot of money that we spent and a lot of investment in R&D, but now we're shipping products that are just like we hoped. They're half a million million dollars orders that we're getting. And that's what we want. You know, we feel like we're kind of coming out of the area where $100,000 are no longer going to be the norm.

Steve Harshbarger: You know, we want to make these half a million million dollar 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 and $100,000 machines is only to get to sell the million dollar machine. You know that we've got to be selling the R&D and pilot line machine to reach the production machine. And very significantly, we may only sell one or two R&D machines, you know, or a pilot line machine for $50,000 or $100,000. But when it becomes time to sell the production machines, the customer doesn't want just one or two typically.

Steve Harshbarger: They typically want multiple machines to meet their end throughput requirements for their product. So, excitingly, that same customer that buys one R&D and then two 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, you know, as long as we keep on seeing that we can sell higher and higher ASPs with more and more machines, we'll just keep picking that R&D, that profit right back into our growth or our company.

Speaker: 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. Thank you very much.

Speaker: I found good congratulations. I've been watching you folks for a while, and you're getting the job done. I appreciate that. Thanks, Bill. I was good chatting. Thank you, Bill.

Speaker: This concludes our question and answer session.

Steve Harshbarger: I would like to turn to the conference back over to Steve Harshbarger for any closing remarks. All right. Well, thank you everyone for joining us today. You know, Sono Tek's outlook is strong and based on our ongoing success with our large platform initiatives and these high tech markets and the clean energy markets. And you know, we really look forward to our next call that we will review our full fiscal 2025 results, and that's going to be in May. But please, anybody can feel free to contact us directly if you have any questions before then.

Speaker: And on behalf of Dr. Coccio, Steve Bagley, and myself, I hope you all have a great rest of your day, and we look forward to talking to you again in another six months.

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