Sono-Tek (US:SOTK)2023-10-12 17:41Financial Data and Key Metrics - Net sales increased 50% YoY to $5.64 million in Q2 FY2024, up from $3.6 million in Q1 FY2024 [23] - Gross profit increased 48% YoY to $2.8 million, with a gross profit margin of 49.7%, slightly down from 50.4% in the prior year due to product mix [24] - Operating expenses increased 30% YoY to $2.2 million, driven by higher R&D, marketing, and administrative costs [25][26][27] - Operating income surged 218% YoY to $566,000, with operating margins improving to 10% from 5% in the prior year [28] - Net income was $541,000 or $0.03 per share, up from $162,000 or $0.01 per share in Q2 FY2023 [29] - Cash, cash equivalents, and marketable securities stood at $12.3 million as of August 31, 2023, with no debt on the balance sheet [30] Business Line Performance - Multi-axis coating systems sales grew 96% YoY to $2.9 million, driven by demand in clean energy and medical device markets [34] - Integrated coating systems sales doubled to $853,000, supported by the new Float Glass Coating platform [36] - Fluxing systems sales dipped due to tough comparisons with the previous year's strong sales of the SonoFlux X2 platform [37] - OEM sales were lower as partners built up excess inventory, but spare parts and service revenue grew 64% [38] - Service and spare parts revenue from large systems could reach 10%-15% of total order value, contributing to high-margin recurring revenue [39] Market Performance - Clean energy market sales grew 161% YoY, driven by large orders for carbon capture, green hydrogen, and fuel cell applications [40] - Medical device sales rebounded strongly with 117% growth, driven by large multinational companies adopting specialty implantable device coating systems [41] - Industrial sales grew 104% due to new generation systems, including a large float glass coating machine delivered to Latin America [41] - U.S. and Canada sales increased 94% YoY, benefiting from onshoring trends and government initiatives like the CHIPS Act and Inflation Reduction Act [42] - Asia-Pacific sales decreased 35%, primarily due to lower sales in China, though other regions in Asia remained strong [43] Strategic Direction and Industry Competition - The company's strategic shift to larger, complex systems has broadened its addressable market and increased average selling prices, with systems now commonly selling for over $300,000 and reaching up to $1 million or more [14][15] - Investments in R&D totaled $1.4 million in the first half of FY2024, up from $1 million in the year-ago period, supporting product expansion and market growth [20] - Headcount increased by approximately 10%, mainly in engineering, R&D, and sales, to support growth and expansion [20] - The company expects at least 25% YoY sales growth for FY2024, driven by shipments of delayed and new orders [22] Management Commentary on Operating Environment and Future Outlook - Management highlighted the early success of the strategy to shift to larger, more complex systems, with multiple and repeat orders driving growth [21] - The company is confident in its outlook, expecting to return to its pre-COVID growth path, supported by strong demand in clean energy, medical devices, and industrial markets [22] - The backlog reached a record high of $10.7 million, up 26% from six months ago, reflecting increasing order activity, particularly in the clean energy sector [16][44][47] Other Important Information - The company's proprietary ultrasonic coating technology remains central to its systems, with ongoing R&D efforts driving innovation and market expansion [19] - Customer deposits reached $3.4 million, reflecting the receipt of several large new orders, with deposits typically 50% or greater for orders over several hundred thousand dollars [48] Q&A Session Summary Question: EBITDA Comparison - EBITDA for Q2 FY2024 was approximately $994,000, calculated by adding back depreciation and amortization to income before taxes [72] Question: Quarterly Earnings Calls - Management is considering transitioning to quarterly earnings calls, as the current semi-annual format may not fully reflect the company's growth and counter-cyclical performance [73][75] Question: Gross Margin Outlook - Gross margins are expected to improve as the company optimizes costs for new products like the NovoCoat platform and benefits from operational leverage [78][82] Question: Capacity Utilization - The company has sufficient capacity to grow revenue to $25-$30 million within its existing facility, with potential to expand to $40-$45 million by relocating tenants [83][84] Question: Clean Energy and Medical Markets - Growth in clean energy and medical markets was driven by both delayed shipments and new orders, with a 50/50 split between the two [124] - Clean energy growth was primarily in fuel cells, carbon capture, and green hydrogen, while medical growth came from complex implantable device systems [125][128] Question: Backlog Composition - The backlog is heavily weighted towards the clean energy sector, with significant orders like the $2.19 million system and other high-value projects [135][138] - The backlog is split approximately 50/50 between shipments expected in FY2024 and FY2025 [140] Question: Solar Market Potential - The solar market has significant potential, with the company expecting revenue to exceed historical highs of $2-$3 million due to the shift to high-volume production systems [147][148]