Sono-Tek Corporation (NASDAQ:SOTK) Q4 2023 Earnings Call Transcript

Sono-Tek Corporation (NASDAQ:SOTK) Q4 2023 Earnings Call Transcript May 25, 2023

Sono-Tek Corporation beats earnings expectations. Reported EPS is $0.04, expectations were $0.01.

Operator: Good morning, and welcome to the Sono-Tek Fiscal Year End 2023 Earnings Conference Call. All participants will be in a listen-only mode for the duration of the call. After today’s presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Stephanie Prince with PCG Advisory. Please go ahead.

Stephanie Prince: Thank you, Gerald, and thank you to everyone joining us today. Sono-Tek released their fourth quarter and year end fiscal 2023 results earlier this morning. If you don’t have a copy of the release, please go to the company’s website at sono-tek.com and click on the press release/news tab in the Investors section. The product, market and geography sales tables on the last page of the release will be part of today’s discussion. With me on the call today are Dr. Chris Coccio, Sono-Tek’s Chairman and CEO; Steve Harshbarger, President and COO; and Steve Bagley, Chief Financial Officer. Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company’s filings with the SEC. The company assumes no obligation to update the information contained in this conference call. I would now like to turn the call over to Chris Coccio, Chairman and CEO of Sono-Tek. Chris?

Christopher Coccio: Good morning and thank you, Stephanie and thank you for everyone for joining us. Today we’re going to discuss our fourth quarter and year end fiscal 2023 results that we released this morning before the market opened. I will begin with some opening remarks and then Steve Bagley, our Chief Financial Officer will provide a financial review. Steve Harshbarger, President and COO will then go through the business and operational results. Following his comments, we’ll be happy to open the call for your questions. As a reminder, Sono-Tek currently holds two earning calls per fiscal year. This is our fiscal year end call, which ended on February 28, 2023. Our next earnings call for the first half of fiscal year 2024 will be in October of 2023.

Now briefly for those who are new to us, Sono-Tek developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of patented, high frequency ultrasonic nozzles incorporated into motion control systems that are able to achieve uniform micron thin coatings for our customers. Our solutions offer dramatic savings in raw material, water and energy usage, and is environmentally friendly among other advantages. The principle advantage is the ability to apply precision thin films which is very important in today’s world. The strategic shift that we made several years ago to offer more complex complete solutions versus component sales has broadened our addressable market and has resulted in significant growth in our average unit selling prices.

Photo by Redd on Unsplash

Our larger machines now commonly sell for over $300,000 and systems prices can reach $1 million, which can meaningful impact quarterly revenue. Most recently, we remained focused on opening new markets for our technology. This includes three main areas with very strong global growth; microelectronics and semiconductors, clean energy including fuel cells and carbon capture, and medical devices. All three of these sectors are experiencing strong demand from long-term societal needs, and they all benefit from Sono-Tek’s unique thin film coating technology and systems. Now as our capabilities continue to advance, more and more of the over $8 billion global coating market opens to our advanced solutions. Our investments in these areas have begun to pay off, with the receipt of our first $1 million order in August.

The order valued at $1.1 million was also the first from the clean energy sector and also one of the largest in Sono-Tek’s corporate history at that time, all important milestones. Since then we have received another $1.1 million order from the same customer as well as two other initial orders that are expected to total $7 million each when the respective production lines are complete. Revenue for the fiscal year declined by 12% to $15.1 million and like many high tech equipment manufacturers we encountered a fair number of supply chain issues that impacted our growth. As a result and in an effort to avoid this issue again, we’ve aggressively taken several actions. First, we resolved the large chunk of the supply chain issues by significantly increasing inventory levels and creating very early reorder points, even with simple items that you would never expect to have problems with availability.

Some of this is reflected in the $870,000 year-over-year increase in inventories that we just reported. After implementing this inventory change, we next isolated the remaining key supply chain issue which we’re addressing by increasing our in-house capabilities to make similar products for our own needs. We actually started this process prior to COVID-19 and today we internally produce about 25% of the components that we need in that area. By year end we hope to produce about 40% with the long-term goal to manufacture about 60% of the components we need in-house. We hope that these actions will mitigate any future supply chain issues that may arise. The delay in receiving critical components we need can be seen in our backlog, which increased 60% during the year end and totaled $8.5 million at fiscal year-end.

This is where you can see that several of our largest orders have been held up. We expect this bubble of shipments to work their way through to delivery in fiscal year 2024 beginning in our second fiscal quarter that starts on June 1. However, due to supply chain delays that lingered into the first quarter of fiscal 2024 which is ending next week on May 31, Q1 net sales are expected to be slightly below net sales of $3.7 million in Q4 fiscal 2023.

LD Micro Conference in Los Angeles on Wednesday, June 7, at 11 AM Pacific Time or 2 PM Eastern Time. It’s our first time attending and we look forward to meeting some of you there.: Now Steve Bagley will provide additional details on our financial results. Steve?

Stephen Bagley: Thank you, Chris and good morning everyone. For fiscal 2023, total sales decreased 12% to $15.1 million, and this was due to delayed shipments resulting from supply chain challenges and Steve Harshbarger will go more into detail concerning this. During the year, approximately 55% of sales originated outside of the United States and Canada compared with 68% in fiscal 2022. Our gross profit decreased 11% to $7.7 million when compared with fiscal 2022. The gross profit margin was 51% compared with 50% in the prior year. The increase in the gross profit margin was due to less than anticipated warranty costs and a favorable product mix when compared to the prior year. For fiscal 2023, our total operating expenses increased 4% to $7 million compared with 6.7 million in the prior year period.

Our research and product development costs increased 24% to $2.1 million for the year, and that is primarily due to increased salaries and the higher costs of research and development materials and supplies, which are for use in the development of new products for new and existing markets. Marketing and selling expenses decreased 6% to $3.2 million for the year. The decline was primarily due to decreases in commissions, salaries, and related costs and these decreases were partially offset by increased travel and trade show expenses. General and administrative expenses increased 2% to $1.7 million, primarily due to an increase in stock-based compensation expense, which was partially offset by decreases in corporate expenses and bad debt expense.

Operating income decreased to $683,000 for the year primarily due to the decrease in gross profit combined with the increases in operating expenses. Operating margin for the year was 5% compared with 11% in the prior year. For fiscal 2023, net income was $636,000 or $0.04 per share compared with $2.5 million or $0.16 per share for the prior per fiscal year. The decrease in net income is due to the current period’s decrease in operating income and income tax expense combined with the $1 million paycheck protection program loan forgiveness that was recorded in fiscal 2022. Diluted weighted average shares outstanding, increased slightly to approximately 15.8 million shares. Cash, cash equivalents and marketable securities at February 28, 2023 were $11.4 million, an increase of approximately $700,000 when compared to February 28, 2022.

At February 28, 2023 there continues to be no debt on our balance sheet. Capital expenditures for the year were approximately $600,000, all of which is directed to ongoing upgrades of our manufacturing and product development lab facilities. And now I’ll turn the call over to Steve Harshbarger, President and COO, for an operational review of the year. Steve?

Stephen Harshbarger: Thanks Steve, and good morning everybody. Thanks for joining us today. I want to dive a bit deeper into our record high backlog and supply chain going into FY 2024. Let me first explain that Sono-Tek records full revenue recognition at the time of shipment. We only hold back some very small financial allocation for installation activities, so our revenue stream can look lumpy in particular as we saw more and more of these $1 million plus platforms. Now turning to our results, I wanted to remind you that Sono-Tek breaks down our sales in three ways; by market, by product, and by geography and that’s how I’m going to address my comments and you can refer to the short tables on the last page of the earnings press release for all of these details.

For FY 2023 total sales decreased by 12% compared to last year to $15.1 million. This decline was primarily due to delayed shipments that resulted from supply chain challenges, some of which Dr. Coccio talked about. All of these delayed orders rolled over into the new fiscal year that began on March 1.

SonoFlux: Importantly we’ve begun to see that these follow on sales of spare parts could reach that 10% to 20% of the total order value. By market, key this year, of course, is the impact of supply chain issues which clearly can be seen in the revenue declines from these three markets. The alternative energy, electronics, and medical market sales each decreased by 17%, 23% and 15% respectively. This is because large portions of all of these markets use our multi-axis coating systems which have been particularly impacted by the delayed deliveries that resulted from these challenges. As I mentioned, all shipments have shipped into the current fiscal year, and we have not received a single cancellation. The industrial market grew by 131% due to the shipment of 71% of a large multisystem order in fiscal 2023.

The remaining 29% of that order is scheduled for shipment in the current fiscal quarter. The 62% decline in the merging R&D and other category reflects the shift into other market basket sectors for new applications that have become successfully established. By geography, approximately 45% of sales originated in the U.S. and Canada in fiscal 2023 compared to 32% in fiscal 2022. This shift was positively impacted by several U.S. Government initiatives to invest in the green energy sector and other research markets. For the year APAC revenue decreased by 39% impacted we believe, by reduced sales to China as a result of several China based manufacturing sites moving operations back to the U.S. and Mexico. In addition, the strong U.S. dollar temporarily made our products more expensive in Japan and South Korea where we have good customer relationships, but this resulted in several delayed purchases.

Backlog on February 28, 2023 was $8.5 million, which is 60% higher than as it was last year end, and reflecting the delayed shipments of several large orders, as we’ve talked about. Customer deposits more than doubled to $2.8 million from $1.2 million, a 143% year-over-year increase and this increase reflects the new orders we’ve been receiving during this fiscal 2023. In closing, and as Chris mentioned earlier, our expectations for our first quarter that ends May 31, the supply chain challenges will still impact our deliveries in the current quarter resulting in lower revenue compared to Q4 FY 2013. We expect higher revenue in subsequent quarters over the balance of the year as we ship new orders and as well as the large number of orders that are presently in our backlog.

I’ll now turn back to the operator to open this up for our Q&A.

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Q&A Session

Operator: And our first question here will come from Bill Nicklin with Circle N Advisors. Please go ahead with your question.

Bill Nicklin: Good morning.

Christopher Coccio: Good morning, Bill. Thanks for joining us.

Bill Nicklin: Right, thanks for taking my questions. I have three questions all focused on revenue expansion, visibility. The first is kind of the nature of the order that you’re getting now, I’ve noticed that in your most recent announcements we see the terminology multiphase program for additional systems and multi-systems. What appears to be taking place is quite different than the size and cadence of Sono-Tek’s orders in the past or at least as long as I’ve been following the company. The announcements also indicate that individual systems within the order are each priced higher than most orders in the past and my guess is this is likely because they’re from production equipment. So my question is, can you get a little more granular on what is taking place and what this means for the visibility of revenues and revenue growth out over the next few quarters and even years?

Stephen Harshbarger: Yes, yes. You’re correct. The word — wording of multiphase is significant for most of these large platform machines would have the very high ASPs that we’re now starting to sell more often. The manufacturing cycle is much longer than our smaller $100,000 machines that we have been traditionally been selling. So, when our customers need the fastest possible deliveries to meet urgent requirements, they need to share this with Sono-Tek, and they start to coordinate their schedules for production requirements. Really, it can be a good year in advance of when they actually need our machines to reach the manufacturing floor. This does create a situation where we start to get much better visibility of what’s likely to come down the pipeline for future orders.

And this is what we’re seeing in particular from the clean energy sector, I would say, you know, customers are placing their first orders for high volume manufacturing systems and presenting their planned configurations for the follow-on machines to meet their ultimate production needs say that they would have. Sono-Tek, we don’t share these current forecast requirements until their production plans of course transitions into a PO for us. But I can tell you that most of our customers buying these large platform systems in the clean energy sector, they aren’t just looking to buy one or two machines. They often have the need to buy five to 10 systems to meet their production requirements over the next one to two years. The urgency of these green energy customers, in particular, going from R&D to pilot lines, to multiple high volume production lines, it’s really like nothing that I’ve ever seen.

And it’s certainly of course driven by these massive amount of money that’s being put into this particular industry sector.

Christopher Coccio: And did that answer your questions, bill?

Bill Nicklin: Yes, okay. I heard a beep kind of coverage you up, yes. Getting even more specific given what you’re looking at now, what’s the largest number of production machines you expect from a single customer? And then on other customer orders, are there similar situations that were maybe somewhat smaller number of systems?