Sono-Tek Corporation (SOTK) Earnings

Management highlights

### Overall Financial Performance - Fiscal 2026 full-year revenue hit $20.9 million, marking the second consecutive year of revenue above $20 million and third consecutive year of annual revenue growth. - Sonotech achieved its 16th consecutive year of profitability, with significant margin expansion: gross margin increased to 51% (up from 48% in fiscal 2025), operating income grew 81% to $1.82 million, and net income grew 42% to $1.8 million. - 8 consecutive quarters of revenue above $5 million, with Q4 2026 revenue of $5.6 million (up 10% YoY), gross margin of 50%, and net income of $557,000 (up 70% YoY). - Cash, cash equivalents and marketable securities totaled $14.8 million (up from $11.9 million YoY), with zero outstanding debt; operating cash flow grew sharply to $3.2 million from $525,000 in the prior year. - End-of-year backlog was $9.12 million, near historically high levels, providing good visibility into fiscal 2027. ### Strategic Execution - The company's strategic shift to higher-value, high average selling price (ASP) production systems continues to drive revenue quality and margin expansion. - The R&D investment focused on product expansion has supported higher sales and a strong backlog, with capabilities developed for the clean energy sector successfully transferred to growing medical and microelectronics markets. - The company's diversification strategy has proven resilient amid clean energy demand declines, enabling a rapid shift to faster-growing end markets. - The company now engages in customer-centric product development: starting with existing offerings, then asking customers what additional capabilities they need, leading to much larger order sizes than initially quoted. ### Operational Updates - The company is planning a manufacturing capacity expansion: Phase 1 will add a mezzanine in the existing facility for ~$500,000-$600,000, increasing annual revenue capacity to ~$35 million, with construction planned for 2026. A second phase could expand capacity to ~$45 million if needed. - Sonotech is seeking support from New York State economic development programs to fund the expansion, with the goal of keeping all manufacturing in New York. - The company is ahead of the curve in adopting AI and automation tools across administrative and operational functions to improve scalability, allowing for revenue growth without proportional headcount increases.

Guidance

- Management expects continued revenue growth and profitability for the first half of fiscal 2027, driven by strong momentum in the medical and microelectronics sectors. - For full-year fiscal 2027, management expects revenue to be relatively flat to modestly higher compared to fiscal 2026's $20.9 million. - Visibility beyond the first half of fiscal 2027 is limited, due to uncertainty in the clean energy sector and the nature of high ASP orders: larger, more complex systems have longer lead times and less predictable shipment timelines that create quarterly revenue volatility. Any high ASP orders received two months from the start of Q2 2027 will likely ship in fiscal 2028 rather than fiscal 2027. - The 300 millimeter wafer processing machine for semiconductor fabs is on track for launch at Semicon Europe in late 2026; orders may begin in fiscal 2027, but deliveries are expected to fall in fiscal 2028.

Segment performance

By End Market: - Medical: Revenue grew 54% year-over-year, driven by strong demand for balloon catheter coating systems and stent application equipment; this was the standout performing end market. - Electronics: Revenue grew 16% year-over-year, supported by demand for electrically active coatings for diagnostic device applications. - Clean Energy: Revenue declined 19% year-over-year due to reduced electrolysis-related demand from government policy shifts, partially offset by earlier solar system shipments. - Industrial: Revenue declined, with typical variability from large glass coating orders. By Product Segment: - Inline Coating Systems (formerly Integrated Coating Systems): Revenue grew 91% year-over-year, driven by solar-related system shipments. - Multi-axis Systems: Revenue declined due to lower clean energy sector demand. - Fluxing Systems: Revenue grew 53% year-over-year, supported by strong demand from Asia. By Geographic Segment: - US & Canada: Revenue grew 12% year-over-year, contributing 67% of total company revenue (the largest share, which improves margins due to lower international logistics costs). Shipments of five high ASP systems totaled $3.85 million in the fiscal year. - International: Results were mixed, with softness observed in the Asia and Latin America markets.

Risks & headwinds

- Clean energy electrolysis sector demand has declined significantly due to recent government policy shifts, creating uncertainty about the timing of any recovery in this market. - The shift to larger, high ASP, complex production orders creates revenue lumpiness and reduces long-term revenue visibility, as order timing and shipment timelines are harder to predict. - International markets, particularly Asia and Latin America, have experienced recent softness that has weighed on overall revenue growth. - M&A opportunities are available but have high valuations, requiring the company to remain highly selective to avoid overpaying for acquisitions.

Analyst Q&A

• Q: Dick Ryan (Colliers) asks what the current order pipeline composition looks like for fiscal 2027, and what progress has been made on 300mm semiconductor wafer coating systems, plus what the company's plans are for its accumulated cash for buybacks and M&A.

  A: Management confirms the backlog has completely shifted away from clean energy, and is now heavily concentrated in medical and microelectronics. Capabilities developed for clean energy transferred directly to these new markets, and growth is coming from increasingly larger, higher ASP orders that can reach $1-3 million per unit. Development of the 300mm wafer system is progressing (slightly behind original timeline) and will launch at Semicon Europe in late 2026; deliveries are expected to start in fiscal 2028. The company has executed minimal buybacks to date, remains highly selective on M&A, and retains cash to be ready for high-quality opportunities, given organic growth already has a long runway.

• Q: Ted Jackson (Northland Securities) asks if the recent low bookings number reflects a broader business slowdown beyond clean energy, when high ASP opportunities will convert to bookings to strengthen the second half of fiscal 2027, and if the smaller APAC revenue share will improve overall top-line growth.

  A: Management notes that lower sequential backlog is just due to the lumpiness of large high ASP orders, not a broader slowdown; backlog is still near all-time highs year-over-year. There is a strong pipeline of opportunities in medical and microelectronics, but the timing depends on when orders are received: orders in the next month will ship in fiscal 2027, while orders later will slip to 2028. Management confirms that the reduced APAC drag, plus the upside potential from just one or two large high ASP orders, means there is significant upside to top-line growth, and management intentionally guides conservatively to leave room for upside surprises.

• Q: Bill Nicklin (Bill Will Insights) asks why bottom-line growth lagged margin expansion historically, and what the status and impact of planned manufacturing capacity expansion is, plus what headcount will look like at $35-45 million in annual revenue.

  A: Management confirms the slower bottom-line growth was intentional: the company prioritized reinvesting in application engineering and integrated system capabilities to position for larger, more sophisticated production opportunities, rather than chasing near-term profits. Contrary to expectations, moving to higher ASP integrated systems has not squeezed margins, as customers pay a premium for Sonotech's process expertise and turnkey solutions, keeping gross margins steady in the upper 40% to low 50% range. The first phase of expansion will increase capacity to $35 million, with investment of $500,000-$600,000 starting in 2026. If revenue doubles from current levels, headcount (currently ~90) will only grow 30-40% due to operational leverage and AI-driven productivity improvements, with most new hires in manufacturing and field engineering.

• Q: David McGinnis (private investor) asks why the company has used its stock buyback program so little when the share price traded at depressed levels, and what the long-term outlook is for clean energy demand amid global energy security concerns.

  A: Management notes the company keeps large cash reserves to retain flexibility for strategic M&A opportunities, which are now more plentiful but have higher valuations than in the past. The board continues to evaluate the timing of additional buybacks, and increased buyback activity is possible in the future. Management agrees that long-term global demand for clean energy (driven by energy independence policy goals) will eventually recover to prior levels or higher, but timing remains uncertain due to current policy shifts.