Sono-Tek (SOTK) Q2 2026 Earnings Call Transcript

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DATE

Tuesday, October 14, 2025 at 10:30 a.m. ET

CALL PARTICIPANTS

Executive Chairman — Dr. Chris Coccio

President and Chief Executive Officer — Steve Harshbarger

Chief Financial Officer — Steve Bagley

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TAKEAWAYS

Total Revenue -- $5,160,000 for the second quarter of fiscal year 2026, up slightly from $5,130,000 in Q1 FY2026, marking six consecutive quarters above $5,000,000 in revenue.

Gross Profit -- $2,600,000 gross profit for Q2 FY2026, a 3% increase year over year, with gross margin rising to 50% due to favorable product mix and warranty expenses.

Net Income -- $424,000 for the second quarter of fiscal year 2026, or $0.03 per share, up from $341,000, or $0.02 per share for the second quarter of fiscal year 2025, a 24% increase in net income compared to the second quarter of fiscal year 2025.

Medical Market Growth -- Q2 FY2026 medical segment sales rose 150% year over year to $1,000,000, driven by balloon coating system shipments to the U.S. Europe, and China.

Regional Sales Shifts -- U.S./Canada sales declined 22% year over year in Q2 FY2026, offset by a 153% increase in Asia and 25% increase in EMEA sales; Latin America sales were down by $74,000 year over year in the second quarter.

Backlog -- Order backlog stood at $11,200,000 at quarter end, described as near record level, with substantial visibility into future revenues.

Major Orders -- Notable medical device equipment orders exceeded $5,000,000 and $2,800,000, with management clarifying that most revenue recognition will occur in FY2027.

Semi Market Expansion -- Investment in larger, more complex systems and expansion into the 300mm semiconductor segment is expected to increase addressable market and average selling prices.

Operating Expenses -- Total operating expenses decreased to $2,170,000 from $2,230,000, reflecting lower marketing, selling, and R&D costs.

Balance Sheet -- Cash, cash equivalents, and marketable securities totaled $10,600,000 with no outstanding debt.

Forward Deployed Engineering -- Management highlighted the strategic use of a forward deployed engineering model, stating that "roughly two-thirds of our total sales" now come from high ASP systems routed through this group.

Guidance -- Management raised full-year FY2026 guidance to "modest growth" based on momentum in the medical devices segment offsetting expected clean energy order declines.

SUMMARY

Sono-Tek Corporation (NASDAQ:SOTK) delivered another quarter of sequential and year-over-year revenue growth, with particular strength in the medical device market leading to record first-half results. Operating margin expansion resulted from higher gross profit combined with reduced operating expenses and a favorable shift to higher average selling price systems. Management confirmed that recent multi-million-dollar orders and a near-record backlog of $11,200,000 provide strong visibility into FY2027 revenues, though noted that revenue from these will be weighted toward FY2027 due to long production cycles. The company emphasized the competitive advantage gained from its forward deployed engineering strategy and expansion into new product categories, particularly in the semiconductor sector with the move to 300mm coating systems.

CEO Harshbarger said, Medical market sales increased by 150% year over year, or $602,000, to $1,000,000. This was led by balloon coating systems shipped to the U.S. Europe, and China.

President Harshbarger characterized increased pricing power and margin expansion as a direct result of embedding experienced engineers with customers: "it elevates our role from equipment supplier to really become a technology partner. And that supports strong pricing and really strong pricing power."

Management stated, "The largest orders that we have just recently announced were the $5,000,000 last month and almost $3,000,000 order that came in just yesterday. The bulk of those will be shipping in our FY2027, so after March," clarifying revenue timing for significant backlog.

R&D investment for the first half was $1,300,000, down from $1,400,000 in the prior year period

The company identified a decrease in U.S./Canada sales mainly due to a slowdown in the clean energy sector, but this was offset by rapid medical segment growth and increased sales in Asia and EMEA year over year.

INDUSTRY GLOSSARY

ASP (Average Selling Price): The typical sales price per system, reflecting the company's shift toward higher-value, more complex equipment.

Forward Deployed Engineering (FDE/FDA/FTE): A strategy in which engineering teams work directly at customer sites to accelerate adoption, optimize solutions, and deepen account relationships—described by Sono-Tek Corporation as essential to scaling high-ASP system sales.

Balloon Coating System: Specialized equipment designed to apply thin film coatings to medical balloon catheters, a high-growth segment for Sono-Tek Corporation.

300mm Environment: Refers to semiconductor manufacturing environments where 300mm wafers are processed, representing a newer, higher-volume market opportunity for coating systems.

Full Conference Call Transcript

Dr. Chris Coccio, Sono-Tek Corporation's Executive Chairman, Steve Harshbarger, CEO and President, and Steve Bagley, Chief Financial Officer. 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.

As a reminder, Sono-Tek Corporation currently holds two earnings calls per fiscal year. This is our mid-year fiscal 2026 call for the second quarter and first half ended August 31, 2025. Our next earnings call will be our full-year call for the twelve months ended February 28, 2026, and will be held next May. I would now like to turn the call over to Dr. Chris Coccio, Executive Chairman of Sono-Tek Corporation. Chris, please go ahead.

Dr. Chris Coccio: Good morning and thank you, Kirin. And thank you, everyone, for joining us today. We are going to discuss our second quarter and first half fiscal 2026 results. They were released this morning before the market opened. I'll begin with some opening remarks and then Steve Harshbarger, CEO and President, will go through a deeper business and operational review. Following their comments, we'll open the call to your questions. We will be followed by Steve Bagley, our Chief Financial Officer, who will provide the financial review. This past August, we held our Annual Shareholder Meeting at our company headquarters and manufacturing facility in Milton, New York.

I'd like to thank all the shareholders who attended and were able to see firsthand the core technology, the key advantages, and how it's being utilized by our customers in various industries. They were also able to see how bustling our facility is as we continue to grow. For those newer investors in our company, we welcome the opportunity to showcase our products and technology with an open invitation. As a refresher for the newer and prospective investors on the call today, Sono-Tek Corporation developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of our advanced high ultrasonic nozzles incorporated into specialty motion control systems.

They are able to achieve uniform micron and nano thin coatings onto our customers' products. Our unique value proposition and key differentiator is that our thin film coating machines provide dramatic savings of the expensive liquids being applied and are environmentally friendly by minimizing material usage and reducing overspray. Importantly, this often helps companies comply with increasingly stringent government regulations aimed at reducing hazardous waste entering the environment. But the real key advantage of our ultrasonic coating systems is the ability to apply precision thin films, which are vitally important in today's world. With thousands of products and micro components now requiring a functional or protective coating to be added to them.

A major strategic shift that we made several years ago to offer more complex and complete solutions that meaningfully broaden our addressable market and resulted in significant growth in our average unit selling price. Our larger machines now commonly sell for $300,000 and system prices can reach $1,000,000 or more. This can significantly impact our quarterly revenue. Additionally, our move into the clean energy sector has shown excellent results in the next generation solar cells, fuel cells, green hydrogen generation, and carbon capture applications. As we help shape a sustainable future.

This is what we saw last fiscal year where we saw the largest customer order in our history, followed by an additional order of the same size two weeks later. More recently, and in line with our diversification strategy, we announced a very large order of over $5,000,000 to a company in the medical device industry. And just yesterday, we announced another large order of over $2,800,000 from another major U.S. medical device manufacturer. The beauty of our technology is the immense value it brings across many industries, including the electronics market, life sciences, and clean energy, to name a few.

The New Year has presented some changes and uncertainties for most businesses, such as changes taking place in relationships with trading partners and the redirection of climate policy and related government spending. On the trade issues, Sono-Tek Corporation builds our key ultrasonic hardware at our factory in Milton, New York, and a large portion of our other materials used are U.S.-based, so we see minimal concern there. On the export side, more than half of our current sales are to the U.S. market, and we have been exposed to tariffs in certain other countries for many, many years. So we could be affected for better or worse depending on the outcome of negotiations taking place.

Clean energy continues to represent a significant portion of our sales. Fortunately, a large share of these sales come from commercial customers, such as U.S.-based solar panel manufacturers and carbon capture and conversion companies. The solar customers are supported by commercial users and the carbon capture customers by airlines and other corporations focused on reducing their carbon footprint. This includes efforts to develop sustainable aviation fuel and other carbon-based products. While we do anticipate a decline in clean energy orders this year, our diversification strategy helps us to mitigate and offset potential declines.

This is being driven by ongoing enhancements to our equipment across all sectors, including new expanded features and functionalities that are supporting sales in the medical and semiconductor markets. I'm pleased to report that we're seeing strong momentum in the medical device industry, particularly in growing interest for our high-volume production systems and increased demand for our balloon catheter coating machines. It's important to note that we have used a form of forward-deployed engineering with a number of customers now to help them in their subsequent system purchases from us. For the first half of our fiscal year, we experienced modest annual revenue growth, and the second quarter marked the sixth consecutive quarter in a row of revenue over $5,000,000.

On top of that, our first half revenue made a new record high at $10,300,000, and net income came in at $917,000, which is up about 36% from the previous year. We remain encouraged by the path ahead, supported by a solid backlog of $11,200,000 and a strong balance sheet with $10,600,000 in cash and no debt. For the full fiscal year, we are increasing our prior guidance to reflect modest revenue growth. This outlook balances continued caution as the market adjusts to the recent shifts in government clean energy and tariff policies, which we expect will be positively offset by growing demand from the medical device industry.

We will continue to refine our guidance as we gain more clarity the remainder of the year. In closing my part, we are excited that our investments have begun to pay off and our strategies have positioned us well for continued success and long-term value creation. Our outlook for growth has been greatly enhanced by the early success of our strategy to shift to larger, more complex systems and platforms for production applications, our multiple and repeat orders, as well as our focus on opening new markets for our unique thin film coating technology. Thank you. I'll now turn the call over to Steve Harshbarger, our CEO and President. Steve, please go ahead.

Steve Harshbarger: Thanks, Chris, and good morning, everybody. Appreciate you all joining us here today. Let me start by saying that we are very pleased with our overall performance and the strategies we have put in place to help shield us from these macro factors with a unique value proposition and clear product offering that solves critical problems for many diverse industries. It's extremely gratifying to see our investments hitting their stride. Our sales for the second quarter and first half met our guidance, with flat to slight revenue growth. That's even with an unplanned customer-requested shipment delay that moved one system into the third quarter.

This comes on the back of a strong fiscal 2025, which benefited from growth in the clean energy sector. The strength and resilience of our business continue to grow, and it's exciting to see our diversification strategy paying off with momentum now building in the medical device industry. Our second quarter medical market sales increased by 150% year over year, or $602,000, to $1,000,000. This was led by balloon coating systems shipped to the U.S., Europe, and China. Regarding the second quarter, revenue was up slightly to $5,160,000 and increased sequentially compared to $5,130,000 in the first quarter of 2026, marking the sixth consecutive quarter of revenue over $5,000,000.

Gross profit for the quarter increased 3% year over year to $2,600,000 compared with $2,500,000 last year. This is mainly due to a favorable product mix of mature high ASP systems with reduced costs and some favorable warranty expenses in the current period. Net income for the quarter increased 27% to $431,000 compared to $340,000 last year, reflecting a combination of higher gross profit and lower operating expenses. Now I'll provide a few other key highlights of the quarter. By geography, U.S./Canada sales decreased 22% year over year, or $775,000, driven by slowing momentum in the U.S. clean energy industry.

However, this was positively offset by sales in Asia, which increased by 153% year over year, or $562,000, with major growth in China and other parts of Asia. Additionally, we saw EMEA sales increase 25%, or $288,000, while Latin America sales were down by $74,000. By product category, Integrated Coatings Systems sales, which we're now referring to as inline coating systems, decreased by $493,000, or 24%, to $1,530,000. This was primarily driven by the same customer-requested delivery delay that I just mentioned, which came from the clean energy sector and has since now shipped in our Q3 FY 2026. Here as well, we saw a positive offset with multi Coating Systems increasing by $99,000, or 5%, to $2,030,000.

Fluxing sales increased by $46,000, or 30%, to $165,000, reflecting our increased demand for our flexors from Asia. Additionally, OEM sales increased by $188,000, or 92%, to $394,000, driven by strong shipments to our Fluxer OEMs and new optics-related OEM wins. The spare parts, services, and other sales category increased $161,000, or 18%, to $1,040,000. By end market, as I highlighted earlier, the medical market increased by 150% year over year, or $602,000, to $1,000,000, led by Balloon Coating System sales shipped to both the U.S., Europe, and China. Alternative clean energy decreased slightly by 3% year over year, or $65,000, to $2,430,000, supported by strong clean energy backlog going into FY 2026.

The electronics markets declined by 1% year over year, down $22,000, to $1,460,000. The industrial market declined 68%, or $517,000, down to $288,000, influenced by a large FY 2025 European glass coating order that didn't repeat. Regarding our 2026 results, we reported record revenues of $10,300,000 compared to $10,190,000 in the year-ago period. Gross profit increased 6% year over year to $5,300,000 compared with $5,000,000, and net income increased 36% year over year to $917,000, or $0.06 per share, compared with $672,000, or $0.04 per share.

The increase in revenue for 2026 was driven by a 65%, or $1,820,000, increase in sales from inline coating system sales, reflecting shipments of six high ASP systems to a major solar customer totaling $4,420,000. While we're not projecting further near-term orders from this customer in FY 2026, we do remain optimistic about potential future demand dependent on the customer's execution of expansion plans. The increase in inline coating systems we experienced was somewhat offset by our product division, which can fluctuate from time to time.

U.S./Canada sales decreased 5% year over year, or $324,000, driven by slowing momentum in the clean energy industry, but was positively offset by increased sales in Asia with 74% growth year over year, or $647,000, led by strong medical sales in China and strong alternative energy sales in Japan and South Korea. EMEA sales were relatively flat, declining $60,000, and Latin America sales down $160,000 due to slowing fluxing sales in Mexico. By product category, as I mentioned before, inline coating system sales increased by $1,820,000, or 65%, to $4,580,000, driven by shipment of six high ASP systems to a major solar customer totaling $4,420,000. Flexing sales increased by $64,000, or 25%, driven by strength in Asia.

Multi Axis Coating Systems declined by $1,890,000, or 41%, to $2,710,000 following a strong FY 2025 for semiconductor systems that didn't repeat, and slower clean energy activity in FY 2026. OEM sales were slightly down by $13,000, or 2%, and spare parts and services and others were up by $126,000, or 6%. By end market, the medical market rose by 44%, or $553,000, driven by strong balloon coating systems shipped to the U.S., Europe, and China, and increased stent coating activity in Europe and China. Alternative energy rose 19% year over year to $901,000 by the shipment of the six high ASP solar coating systems I mentioned earlier.

The electronics market declined by 21% year over year, or $646,000, following strong FY 2025 semiconductor sales and FY 2026 timing for similar machines. The industrial market declined 67%, or $711,000, influenced by a large FY 2025 European glass coating order that didn't repeat. We closed 2026 with a solid equipment and service-related backlog of $11,200,000, which was near record levels. The backlog clearly represents the strength of our overall business and reflects encouraging order activity. We attribute the increase in sales and the strong backlog as a direct result of our investment in R&D, with a strong focus on product expansion.

For the first half, we have invested $1,300,000 in R&D compared to $1,400,000 in the year-ago period, and our balance sheet remains strong, whereas of August 31, our cash, cash equivalents, and marketable securities totaled $10,600,000, still again with no outstanding debt. In closing, we're updating our prior guidance to reflect modest growth for revenue, and this outlook balances continued caution as the market digests shifts in the U.S. government clean energy and tariff policy, which we expect will be positively offset by our growing demand from the medical device industry. And most importantly, we remain very confident in our long-term growth prospects.

Our momentum stems from our deliberate strategy and shift to large customized systems with accelerating ASP, and our proprietary ultrasonic nozzle technology remains at the core of our systems for all these diversified industries. And we've been able to achieve this significant shift organically through our own development efforts. With that, I will hand the call over to Mr. Steve Bagley, our CFO, to review our financials in more detail. Steve, please proceed.

Steve Bagley: Very good. Thank you, Steve, and good morning, everyone. I will first walk you through the fiscal 2026 second quarter results, followed by our first half results. Net sales for the quarter increased slightly to $5,160,000 compared to the 2025, and also increased sequentially compared to the first quarter sales of fiscal 2026 of $5,130,000. Gross profit increased 3% year over year, or $74,000, to $2,600,000, and the gross profit percentage increased to 50% due to a favorable mix of product mix of mature high ASP systems with reduced costs and favorable warranty expenses in the current period. Operating expenses decreased to $2,170,000 when compared to $2,230,000 in the prior year's second quarter.

The decrease is primarily due to reduced marketing and selling expenses. Research and product development costs decreased to $627,000 versus $696,000 in the prior year. And the decrease is primarily due to the decreases in research and development materials and supplies and salary expense. Marketing and selling expenses decreased to $871,000 for the quarter versus $988,000 in the prior year. The decrease is due to a decrease in salary expense related to the departure of a salesperson and a decrease in trade show expenses and travel expenses. These decreases were partially offset by an increase in salaries, which related to our sales application land.

General and administrative expenses increased to $670,000 for the quarter compared with $546,000 in the prior year. The increase is primarily due to an increase in salaries, corporate expenses, and stock-based compensation expense. These increases were partially offset by decreases in legal and accounting fees. Operating income increased $135,000, or 47%, to $421,000 compared with $286,000 in the prior year. In 2026, an increase in gross profit combined with a decrease in operating expenses were key factors in the increase of operating income. Interest and dividend income remained steady at $82,000 in the second quarter. That compares with $85,000 in the prior year's quarter. Our present investment policy is to invest excess cash in highly liquid low-risk U.S. Treasury securities.

At August 31, 2025, the majority of our holdings were rated at or above investment grade. In the second quarter, we recorded a tax provision of $103,000 compared to $74,000 in the prior year. Net income for the quarter was $424,000, or $0.03 per share, and that compares with $341,000, or $0.02 per share, in the prior year period. The increase in net income is primarily due to the current period's increase in gross profit and decrease in operating expenses. And now for the financial results for the first six months of fiscal 2026. Total sales for 2026 increased year over year by $103,000 to a record $10,300,000.

Gross profit increased $283,000, or 6%, to $5,300,000, and that's primarily due to product mix and favorable warranty expenses in the current period. The gross profit percentage increased to 51% from 49% in the prior year period. Operating expenses decreased slightly to $4,350,000 when compared to $4,450,000 in the prior year's first half. Research and product development costs decreased to $1,300,000 versus $1,400,000 in the prior year first half. And that's primarily due to decreases in research and development materials and supplies, and salary expense. Marketing and selling expenses decreased to $1,700,000 for the first half, and that compares to $1,900,000 in the prior year.

The decrease was due to a decrease in salary expense related to the departure of the salesperson and decreases in commission expense, trade show expenses, and travel expenses. These decreases were partially offset by an increase in salaries related to our sales application lab. General and administrative expenses increased slightly to $1,300,000 compared with $1,100,000 in the prior year. The increase is primarily due to increases in salaries, corporate expenses, and stock-based compensation expense. And these increases were partially offset by decreases in legal and accounting fees. Operating income increased considerably by 72% to $381,000 to $905,000, and that compares with $524,000 in the prior year period.

And this underscores the operating leverage from our stronger gross profit and a decrease in operating expenses. Operating margin for 2026 was 9% compared to 5% in the prior year. In 2026, interest and dividend income decreased by $4,000 to $224,000, and that compares with $128,000 in 2025. Additionally, gain decreased $52,000 to $2,000 as compared with $54,000 in 2025. Net income increased $35,000 to $909,000, or $0.06 per share, for 2026, compared with $672,000, or $0.04 per share, for 2025. Diluted weighted average shares outstanding decreased slightly to approximately 15,700,000 shares.

We continue to maintain a strong cash position with cash, cash equivalents, and marketable securities totaling $10,600,000 at August 31, 2025, and we continue to carry no debt on our balance sheet. CapEx for the six months was $113,000, and all of that is directed to ongoing upgrades of our manufacturing development labs facilities, and we expect to invest approximately $300,000 in new equipment for the full fiscal year. And now we'll open the call for any questions from the audience. Operator, please go ahead.

Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Ted Jackson with Northland Securities. Please go ahead.

Ted Jackson: Thanks. Good morning. Congratulations on the quarter.

Steve Harshbarger: Hey, good morning, Ted.

Ted Jackson: So my first question, Steve, is I want to maybe augur in a little bit on the medical device strength and the Chinese exposure that's from it?

In the past, I know that China has been a bit of a difficult market for you because there's been sort of copycat, you know, ultrasonic, you know, coding vendors there when try to cut you in price and so I'm a little curious in terms of how the business came about and kind of the competitive dynamics for the win and does this mean that we're going to see you have a better profile in China going forward and maybe some discussion with regards to tariffs around China and any kind of concerns you might have there? That's kind of a mouthful, but that's my first question.

Steve Harshbarger: Sure, sure. Yes. Well, it is certainly still always on our mind. I should start by saying that even when we send our advanced coating systems over to China, they actually are not getting our most advanced coating systems. We actually keep those pretty close to home. They're usually getting like one generation behind us, just from a proprietary standpoint. But we were fortunate that in the medical device industry in particular, we've been able to capture some significant orders where these customers evaluated these Chinese copycat companies and they just found out that the quality just did not meet the bare minimum requirements to compete with Sono-Tek Corporation.

So they actually made decisions to pay what's about maybe three or four times per machine if they could buy that same machine from a Chinese manufacturer to get it through Sono-Tek Corporation here in the U.S. And that's even with the significant tariff implications that are happening. So it's a real compliment, I guess, to us from the standpoint of the quality of our systems. And it's the one industry that defects are much more critical than, say, like on a printed circuit board. A defect is a life in those industries.

So there is some level of paying a premium in those sort of particular niches for us right now, and in the balloon area in particular, that's an area that we believe that we are going to dominate similar to the stent manufacturing area that we've had in the past. So I think China's jumping on that knowing that they need Sono-Tek Corporation if they want to be heading into that market for medical devices.

Ted Jackson: And then, so then are these customers or these are these actually Chinese? They're not Western companies manufacturing in China?

Steve Harshbarger: Yes. These particular ones happen to be Chinese manufacturers, which is unusual also just as you're pointing out, it would be much more common for us to say have a Western entity manufacturing in China that is buying Sono-Tek Corporation. That would be a much more common scenario. But in these particular cases, it's actually surprisingly Chinese manufacturers that are saying, hey, the quality is so low of our domestically made stuff that we're going to buy Sono-Tek Corporation anyway. And that's certainly without encouragement by the Chinese government. The Chinese government has a big push right now to buy made in China.

But there are certain technologies that they just are not able to perfect enough that they have to be buying from the U.S. even at these very premium prices over domestic manufacturing equipment.

Ted Jackson: And then is there a similar industry in, you know, like, in terms of balloon catheters within the Western world and do you have exposure to there or is this driving interest for you outside of China?

Steve Harshbarger: Yes, it is. It's kind of similar to the stent industry, which we're very familiar with, and it's that's one of those areas that we dominate the marketplace that if you capture the two or three major manufacturers of that particular application, you'll tend to get the second-tier manufacturers following them. And although it's all proprietary and confidential and nothing is ever supposed to get out, personnel travel from companies to companies. And so it does tend to snowball upon itself. And I believe right now we're in a position that we're capturing the major leaders in this particular niche. And I think it's snowballing across the globe.

Geographically, it's snowballing, whether it's to Japan or to China or to Europe or in our home base in the U.S. They are we're becoming the industry standard in this niche. And this is thankfully, this is a niche that's just starting to grow. So what's great is that this is in the beginning phases. So there's a lot of growth ahead of us here for this area.

Ted Jackson: And then, so got two more questions on medical and then maybe one to arrive at. Behind it, but I'll get out of line so I can always come back in. So using stent as kind of a like let's call it a guidepost to how the balloon catheter market might turn out. Can you walk us through like when you got your first order and in that market and how it evolved, you know, and then, like, how many systems have you sold that over what period of and you see what I'm saying, just kind so we can get a sense to that.

Then the question behind that is, you've had tremendous success within The States It looks like you're positioned well for Balloon. What other stuff is out there for you in the medical market? And then actually I will step aside and I'll come back in to queue know, for some I'm sure there's a couple of

Steve Harshbarger: Sure. I appreciate that Ted. For sure, we are definitely trying to emulate the success that we had in Stend. I guess one of the big differences between the stent market and our newest markets like balloon catheter coating the drug eluting balloons. Is that our product offering at the time of stents was very limited and it was smaller ASP machines that were selling for maybe $50,000 to $80,000 Now those machines probably could have sold for 150,000 to $200,000 if we had the capabilities to add more offerings and more capabilities onto those machines. But we didn't at the time.

But fortunately for us now, to all these investments we've made over the last several years, we are now able to offer a much more sophisticated platform for balloon coating than we would have ever been able to offer for stent coating at the time. And that has driven the ASP up higher on the machines. But even more importantly, it's resulted in a much more satisfied customer that's really able to see our capabilities beyond just the coding part of it. It's the capabilities of manipulating the product It's the capabilities of curing or cleaning and having this fully integrated systems which drives our ASP up and we're now finding it's starting to help improve gross margins as well.

Is really significant for us And it opens us up where that customer now recognizes, oh, Sono-Tek Corporation they're not just a stent coating company anymore. They have manufacturing capabilities for coating just about any one of your medical devices. And although balloons is the one that's kind of taking off for us right now, there's a lot of other things in the hopper that we are also involved with, which we want to repeat and emulate that same process for as well.

Ted Jackson: Sounds exciting. I'll I'll I'll I'll come back in queue. I know I have no questions. Thanks, Ted. Good talking to you. And your next question today will come from Bill Nicklin with Bill Will Insights. Please go ahead.

Bill Nicklin: Hey, Steve. I'm on a cell phone in not a great area. So can you hear me?

Steve Harshbarger: I got you, Bill. Good morning.

Bill Nicklin: Good morning. Looking at the recent orders you have and kind of what's been taking place over the last few years, there's strong indications that Sono-Tek Corporation has intentionally and strategically taken a path of building out your applied engineering model. And I think it's pretty evident through customer accessibility to your lab and involvement in your lab testing infrastructure, new hires you've made, leadership promotions, and so forth. And it appears to me this is the strategy is the functional equivalent of what some popular known as FDA or forward deployed engineers.

So in line with that, could you walk me through how the application engineering build-out fits into your broader growth strategy and what specific capabilities or customer outcomes are you building toward?

Steve Harshbarger: Sure, sure. That's a great question. And it really I would say it gets at the heart of why we continue down a path of what we're now actually starting to refer just as you referenced as forward deployed engineering. That actually came out of the software term, but it's changed and it's grown over time. The definition of it, it's really a key part of our growth strategy and it touches on everything from customer adoption to sales efficiency and competitive pricing. And I'll do my best to walk through those areas that you just mentioned. Our forward deployed engineering model builds around what we originally called our custom engineered solutions team.

And it really is core to scaling our growth. This team was created a couple of years ago now. And it was actually an expansion of our application engineering group and has already grown from one senior engineer now to three individuals showing the strong demand for what we see in this capability area. And it enables our most experienced engineers to work directly within the customer production environments to deploy and optimize customized and production scale quoting systems. And this hands-on approach really accelerates system adoption. It maximizes the real-world coding performance and it's very much strengthens our long-term partnerships. And all of these ultimately are key drivers in expanding our high ASP production platforms.

And by embedding our FTE engineers directly with customers, we're hoping to expect to see shortened sales cycles and improve our win rates because the solutions are already proven in per production where they're not just proven in our labs. So over time, this should allow a lower customer acquisition cost since those same embedded engineers, they should often uncover new opportunities within our existing accounts. So I think that may kind of explain where they're coming from. So the really big thing for this model just sets us gets us closer to our customers. We move faster and turn that collaboration into bigger business for both sides.

Bill Nicklin: Alright. Thanks. Maybe following on a little, what are the key performance indicators you're tracking internally to measure whether the FDA group is delivering a return on investment and what's the expected timeline for margin expansion or growth acceleration because of that?

Steve Harshbarger: Yes. We've long tracked the percentage of revenue to like laboratory testing and application development. Which I think is right around currently around 60% to 70% of our shipments are tracked to that right now. And we also certainly measure with revenue tied to the highest ASP systems, which now represents roughly two-thirds of our total sales. And almost all of these big complex systems pass through that FTE group, that forward deployed engineering team. And while ROI and things are a little bit difficult to quantify directly, we certainly see positive results as more R&D and pilot line systems transition into these large multi-system production lines.

And I would strongly expect margin benefits to build gradually over the next one to two years as more and more of these large accounts move into full-scale production. And that's similar to the multi-system orders for these high ASP that we delivered earlier this year for the solar industry. Which can end up coming through with really strong margins. So I would expect that to continue with this model.

Bill Nicklin: Alright. And one more quick one. How does the application engineering investment affect your competitive position if you can give me some specifics and are customers selecting you over competitors specifically because of this capacity? Or capability? And how does that translate into pricing power and margin expansion?

Steve Harshbarger: So, FDA, it's absolutely a clear differentiator. Customers increasingly are going to choosing Sono-Tek Corporation because we bring process engineering expertise directly right into their production floor. So it elevates our role from equipment supplier to really become a technology partner. And that supports strong pricing and really strong pricing power when you think about it, it's going to give us much deeper account penetration and more possibilities for recurring revenue from product expansions, as well as those same returning customers considering us for new projects, which they may not have otherwise.

So I think we're going to see that rollover into margin expansion fairly quickly for us, as they become higher and higher developed and gone through our process, we've seen here historically that the margins will start to expand on those high ASP machines once the first round of them have gone through our manufacturing process.

Bill Nicklin: Thanks, Steve. It's good to see all this hard work and money spent come to fruition and good luck the rest of the year.

Steve Harshbarger: I appreciate that, Bill. It's been a big significant investment for us and we're happy to see it taking off for us. So it should be an exciting time.

Operator: And your next question today will come from Dick Ryan with Oak Ridge Financial. Please go ahead.

Dick Ryan: Morning, Dick. Hey, morning, Steve. Thanks for taking the question. And also congrats on the success of the diversification kick in.

Steve Harshbarger: Appreciate that. Thank you.

Dick Ryan: Just most things have been asked, but just a couple of questions specific. You mentioned two new related OEMs. Can you give a little detail? Is that are these significant wins? I mean, any win is worthy. But can you provide a little more detail on those two new OEMs?

Steve Harshbarger: Yes. They are in the optics area, the lens area. What I would describe as significant for them is that right now they are not in a wheelhouse for Sono-Tek Corporation I would say has a great depth of knowledge. But these guys do have significant depth of knowledge. And that if we can get embedded with them, we will start to learn a lot more about that industry in that field. And that's very valuable for us. Often we need a partner to accelerate our entrance into these new newer type of applications. Because otherwise, it could take us you know?

But we with the partner, we might be able to get in one to two years, but without a partner it might take us four or five years to really understand the area effectively. So I think it's going to be significant. Probably not going to be significant from a revenue standpoint short term, but it could be significant from a new market entrance long term.

Dick Ryan: Okay. That sounds good. What's going on in the semi side? That market seems to be holding up well. The front end has got some higher expectations of spending in 2026. What are you seeing on the semi side of the business?

Steve Harshbarger: Yes. Well, until this past month, was thinking more almost flattish, but then we just came out of a trade show semicon it's called, in Arizona it was. And it was by far the best trade show we've ever had And the best interest of leads and customers talking to us very seriously about equipment. And when I asked about what was the differentiator although it was a very good year in general for semiconductor at the show, but they said really it was our product line expansion this year was significant enough that it was growing our addressable market at the show.

So customers that would have walked by us last year or the year before now are starting to recognize, oh, these guys have a lot more capabilities than they had over the last several years. And we did make some more significant investments into the show to make sure we showed that and displayed that at the show. You had a larger sized booth. With actual machinery there running, but it really paid off for us And I think that we're going to start to see that become a fairly significant growth area for the organization over the next year or two, as a result of this.

And that's still got a long way from stopping the upper peak on this. We're going to be showing some significant new product additions this year, and I think it will be ongoing like that for the next several years that we'll continue to grow that product offering.

Dick Ryan: Okay. Have you been able to quantify what the addressable market opportunity might be for you guys?

Steve Harshbarger: We haven't put a dollar figure to it, but I will say this is that our next strategic shift is moving from what is mostly a 200 millimeter high-tech lab environment over to 300 millimeter environments, which are mostly fab directed. And that's the expansion of our product line offering right now is heading in that direction. And that seems to be where most of the investment is heading and where we could bring the biggest benefit and impact So I think it's going to be again higher ASP machines that are more complex. But I think right now we have got the right strategic partners aligned with us.

We've kind of worked out all details to enter into there this year pretty quickly.

Dick Ryan: Fred, Well, congrats on that. That's a significant opportunity. Moving into the 300 millimeter space. I think that's it for me. Good job. Appreciate it. Thanks, Steve.

Steve Harshbarger: Always good talking, Dick. Thanks.

Operator: And your next question today is a follow-up from Ted Jackson of Northland Securities. Please go ahead. Welcome back, Ted.

Ted Jackson: Hey, I just have a couple more left. So, one is just a backlog near record, like, over what time frame will that revenue be recognized?

Steve Harshbarger: Yes. The largest orders that we have just recently announced, was that $5,000,000 last month and almost $3,000,000 order that came in last week, or this week, I should say, just yesterday. The bulk of those will be shipping in our FY 2027 year, so after March. But there will probably be some level, maybe 10% to 15% of that may ship out in the current fiscal year, just the beginning orders for those So that's the bulk of it, those going to be heading into next year. And that's why right now we're only projecting modest growth for the current fiscal year and that's just because the build time on these machines is significant.

So although we'll be able to ship some of them, we won't be able to ship anywhere near a significant portion of them in the current fiscal year. But we're in good shape for this year. Like I said, so we'll come in at modest growth Had the clean energy sector kept on full steam like we anticipated was we probably would have shown huge growth this year. But hey, we deal with what we got. And fortunately, our team here were able to shift really quickly over to capitalizing on the investment we made into building these highly complex machines and just shifting it over to the medical sector very, very effectively.

Ted Jackson: And then on the 2026, you are projecting modest growth for the year. Given that you had a piece of business slip from the second quarter to the third quarter, would we expect to see your second half sales be a little more weighted in the third quarter vis a vis the fourth quarter because of that?

Steve Harshbarger: Yes. I think they're going be way off from each other, but it's probably going to be a little bit heavier in Q3 Q4 because of that one system that did get at their customer request get pushed into Q3. So I would suspect Q3 will probably be slightly higher than Q4. But they both should be pretty solid for us.

Ted Jackson: Do you think that you can take your streak of $5,000,000 plus revenue quarters from 6 to 8. We haven't given any projections there yet, but

Steve Harshbarger: I think I would be disappointed if we don't do it, but we haven't given any form projections there, but I would be disappointed if we don't do that.

Ted Jackson: Okay. Alright. Well, that's it for me. Everything else got asked by other people. Thanks.

Steve Harshbarger: You're welcome. See you, Ted.

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

Steve Harshbarger: Okay. Sorry about that. Dropped all my papers here. Well, I just want to thank everybody for joining us today. And to tell you all that we look forward to having you come back for our next conference call. Sono-Tek Corporation's long-term outlook remains strong. Supported by the continued success of our newly developed high ASP platforms across advanced technology markets. So we look forward to sharing full fiscal year 2026 results during our next call in May. In the meantime, we will be presenting at some key upcoming investor conferences. Next week, we're actually at LD Micro in California. And please don't hesitate to reach out to us with any questions.

And thank you again and enjoy the rest of your day everybody.

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

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