Sono-Tek - Earnings Call - Q2 2026

Executive Summary

• Q2 FY26 net sales were $5.163M, flat year over year (+$0.001M) and up sequentially from $5.13M; gross margin rose to 50% (49% prior-year) and diluted EPS was $0.03, with operating margin at 8% and net margin at 8%.
• Management raised full-year FY26 guidance slightly to “modest revenue growth” (from “relatively flat” after Q1) amid clean energy policy/tariff uncertainty; backlog increased 50% sequentially to $11.21M, supported by strong medical device orders.
• Two large medical orders announced: $5M MediCoat systems (deliveries begin CY2026 over ~12 months) and a separate >$2.8M ExactaCoat MD order (deliveries beginning early CY2026 through 1H CY2026), reinforcing momentum in medical devices.
• Versus S&P Global consensus, Q2 EPS beat ($0.03 vs $0.025*) while revenue slightly missed ($5.163M vs $5.246M*); management cited product mix and lower OpEx as EPS drivers, while in-line systems were delayed to Q3 by a customer.
• Geographic mix shifted: U.S./Canada down 22% y/y while APAC +153% and EMEA +25%; medical sales +150% y/y to $1.00M, offsetting clean energy softness and a non-repeat industrial order.

What Went Well and What Went Wrong

What Went Well

• Medical market strength: Q2 medical sales +150% y/y to $1.004M, with balloon catheter systems shipped to the U.S., Europe, and China.
• Margin performance and profitability: Q2 gross margin increased to 50% (49% prior-year); operating income up 47% to $421K and net income up 24% to $424K due to higher gross profit and lower OpEx.
• Strategic wins: Announced $5M MediCoat and >$2.8M ExactaCoat MD orders, broadening high-ASP opportunities and validating medical device strategy; “We continue to see the success of our growth strategies with customers moving into complex large-scale production systems…” — CEO Steve Harshbarger.

What Went Wrong

• U.S./Canada weakness: Q2 sales down 22% y/y (-$775K) due to slowing U.S. clean energy momentum.
• Industrial decline: Q2 industrial sales down 68% y/y (-$517K) on non-repeat of a large FY25 European glass coating order.
• In-Line Coating Systems (formerly Integrated) down 24% y/y (-$493K) on a customer-requested delivery delay in clean energy, shifting shipments into Q3.

Transcript

Operator (participant)

Good day, and welcome to the Sono-Tek Second Quarter and First Half of Fiscal Year 2026 Results Conference Call. All participants will be in a 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Kirin Smith with PCG Advisory. Please go ahead, sir.

Kirin Smith (President)

Thank you, Operator, and thank you, everyone, for joining us today. Sono-Tek released their Second Quarter and First Half Fiscal 2026 results 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 the Press Release/News tab in the Investor 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 Executive Chairman, Steve Harshbarger, CEO and President, 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. As a reminder, Sono-Tek 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 12 months ended February 28, 2026, and will be held next May.

I would now like to turn the call over to Chris Coccio, Executive Chairman of Sono-Tek. Chris, please go ahead.

Chris Coccio (Executive Chairman)

Good morning, and thank you, Kirin, and thank you, everyone, for joining us today. We're 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. This will be followed by Steve Bagley, our Chief Financial Officer, who will provide the financial review. Following their comments, we'll open the call to your questions. 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 developed a revolutionary method of applying precision thin film coatings several decades ago. The proprietary technology involves the use of our advanced high-frequency 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 on 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 has meaningfully broadened our addressable market and resulted in significant growth in our average unit selling price. Our larger machines now commonly sell for over $300,000, and system prices can reach $1 million or more. This can significantly impact our quarterly revenue. Additionally, our movement to 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 million to a company in the medical device industry. And just yesterday, we announced another large order of over $2.8 million 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, but these changes take place in relationships with trading partners and the redirection of climate policy and related government spending.

On the trade issues, Sono-Tek builds our key ultrasonic hardware at our factory in Milton, New York, and a large portion of our other materials use our U.S. base. 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 million. On top of that, our first half revenue made a new record high at $10.3 million, 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 $11.2 million and strong balance sheet with $10.6 million 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 through 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. There are multiple and repeat orders, as well as our focus on opening new markets for a 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 (CEO and President)

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 on-planned 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 continues 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 million. That was led by balloon coating systems shipped to the U.S., Europe, and China. Regarding the second quarter, revenue was up slightly to $5.16 million and increased subsequently compared to $5.13 million in the first quarter of fiscal 2026. That's marking the sixth consecutive quarter of revenue over $5 million. Gross profit for the quarter increased 3% year over year to $2.6 million compared with $2.5 million last year. That's 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, and that's compared to $340,000 last year. And that's 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. And that's 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 coating system sales, which we're now referring to as inline coating systems, decreased by $493,000, or 24%, to $1.53 million.

And that was primarily driven by that same customer-requested 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-axis coating systems increasing by $99,000, or 5%, to $2.03 million. Fluxing sales increased by $46,000, or 39%, to $165,000. And that's reflecting our increased demand for our fluxers from Asia. Additionally, OEM sales increased by $188,000, or 92%, to $394,000. And that's driven by strong shipments to our fluxer OEMs and new optics-related OEM wins. And the spare parts, services, and other sales category increased by $161,000, or 18%, to $1.04 million. By end market, as I highlighted earlier, the medical market increased by 150% year over year, or $602,000, to $1 million.

That was again 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 $2.43 million, supported by strong clean energy backlog going into FY 2026. The electronics markets declined by 1% year over year, down $22,000, to $1.46 million. The industrial market declined 68%, or $517,000, down to $288,000. And that's influenced by a large FY 2025 European glass coating order that didn't repeat. Regarding our first half of fiscal 2026 results, we reported record revenues of $10.3 million compared to $10.19 million in the year ago period. Gross profit increased 6% year over year to $5.3 million compared with $5 million. 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 the first half of fiscal year 2026 was driven by a 65%, or $1.82 million increase in sales from inline coating system sales, reflecting shipments of six high-ASP systems to a major solar customer totaling $4.42 million. While we're not projecting further near-term orders from this customer in FY 2026, we do remain optimistic about potential future demand depending 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.

MEA 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 $1.82 million, or 65%, to $4.58 million, driven by shipment of six high-ASP systems to a major solar customer totaling $4.42 million. Fluxing sales increased by $64,000, or 25%, driven by strength in Asia. Multi-axis coating systems declined by $1.89 million, or 41%, to $2.71 million 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 90% 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 the first half of fiscal 2026 with a solid equipment and service-related backlog of $11.2 million, 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 $1.3 million in R&D compared to $1.4 million in the year ago period, and our balance sheet remains strong, as of August 31st, our cash, cash equivalents, and marketable securities totaled $10.6 million, still again with no outstanding debt. In closing, we're updating our prior guidance to reflect modest growth for revenue, and this outlook balance continues caution as the market digests recent 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 (CFO)

Very good. Thank you, Steve. 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 $5.16 million compared to the second quarter of fiscal 2025, and also increased sequentially compared to the first quarter sales of fiscal 2026 of $5.13 million. Gross profit increased 3% year over year, or $74,000, to $2.6 million, 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 $2.17 million when compared to $2.23 million 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.

The decrease is primarily due to 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 related to our sales application lab. 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 the second quarter of fiscal 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.

Now for the financial results for the first six months of fiscal 2026. Total sales for the first half of fiscal 2026 increased year over year by $103,000 to a record $10.3 million. Gross profit increased, excuse me, $283,000, or 6%, to $5.3 million. 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 $4.35 million when compared to $4.45 million in the prior year's first half. Research and product development costs decreased to $1.3 million versus $1.4 million in the prior year first half. That's primarily due to decreases in research and development materials and supplies and salary expense.

Marketing and selling expenses decreased to $1.7 million for the first half, and that compares to $1.9 million in the prior year. The decrease was due to a decrease in salary expense related to the departure of a 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 $1.3 million compared with $1.1 million in the prior year. The increase is primarily due to increases in salaries, corporate expenses, and stock-based compensation expense. 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. This underscores the operating leverage from our stronger gross profit and a decrease in operating expenses.

Operating margin for the first half of fiscal 2026 was 9% compared to 5% in the prior year. In the first half of fiscal 2026, interest and dividend income decreased by $4,000 to $224,000, and that compares with $228,000 in the first half of fiscal 2025. Additionally, unrealized gain decreased $52,000 to $2,000 as compared with $54,000 in the first half of fiscal 2025. Net income increased $35,000 to $909,000, or $0.06 per share for the first half of fiscal 2026, compared with $672,000, or $0.04 per share for the first half of fiscal 2025. Diluted weighted average shares outstanding decreased slightly to approximately 15.7 million shares. We continue to maintain a strong cash position with cash, cash equivalents, and marketable securities totaling $10.6 million 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 and development lab 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 (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster, and your first question today will come from Ted Jackson with Northland Securities. Please go ahead.

Ted Jackson (Analyst)

Thanks. Good morning. Congratulations on the quarter.

Steve Harshbarger (CEO and President)

Hey, morning, Ted.

Ted Jackson (Analyst)

So my first question, Steve, is I want to maybe wade in a little bit on the medical device strength and the Chinese exposure that's from it. You know, in the past, I know that China has been a bit of a difficult market for you because there have been, you know, sort of copycat, you know, ultrasonic, you know, coating vendors there that have been trying to undercut you in price. And, you know, so I am a little curious in terms of how the business came about and, you know, kind of the competitive dynamics for the win. And, you know, does this mean that we are going to see you have, you know, a better profile in China going forward and, you know, maybe some discussion with regards to, you know, 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 (CEO and President)

Sure, sure. Yeah. Well, China's certainly still always on our mind, and I should start by saying that even when we send our, you know, our advanced coating systems over to China, they actually are not getting our most advanced coating systems. You know, that we actually keep those pretty close to home, so they're actually usually getting like one generation behind us just from a proprietary standpoint, but we were fortunate that in the medical device industry in particular, that 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.

So they actually made decisions to pay, you know, it'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 here in the U.S. And that's even with the significant tariff implications that are happening. So, you know, it's a real compliment, I guess, to us from the standpoint of, you know, the quality of our systems. And it's the one industry that, you know, defects are much more critical than, say, like on a printed circuit board. You know, a defect is a life in those industries. So, you know, 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, you know, that's an area that we believe that we're 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 if they want to be heading into that market for medical devices.

Ted Jackson (Analyst)

Are these customers Chinese? Are these actually Chinese entities? They're not Western companies manufacturing in China?

Steve Harshbarger (CEO and President)

Yeah, these particular ones happen to be Chinese manufacturers, which is unusual also, just as you're pointing out. You know, it would be much more common for us to say have a Western entity manufacturing in China that is buying Sono-Tek. 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 anyway." You know, and that's certainly without encouragement by the Chinese government. You know, 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 made manufacturing equipment.

Ted Jackson (Analyst)

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, you know, outside of China?

Steve Harshbarger (CEO and President)

Yeah, it is. You know, it's kind of similar to the stent industry, which we're very familiar with, and 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. You know, and although it's all proprietary and confidential and nothing's ever supposed to get out, you know, 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, you know, we're capturing the major leaders in this particular niche. And I think it's snowballing across the globe. You know, geographically, it's snowballing, whether it's to Japan or to China or to Europe or on our home base in the U.S. You know, they are, we're becoming the industry standard in this niche.

Thankfully, this is a niche that's just starting to, you know, 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 (Analyst)

I've got two more questions on medical, and then maybe one more. I have others behind it, but I'll get out of line because I can always come back in. 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 in that over what period of time? And you see what I'm saying? Just kind of so we can get a sense to that. And then the question behind that is, you know, you've had, you know, tremendous success within stents. 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 for some questions. There's a couple of other questions.

Steve Harshbarger (CEO and President)

Sure. Appreciate that, Ted. For sure. We are definitely trying to emulate the success that we had in stent. 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-$80,000. Now, those machines probably could have sold for $150,000-$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, due 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 these 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 coating part of it. You know, it's the capabilities of manipulating the product. It's the capabilities of curing or cleaning. And, you know, having this fully integrated systems, which drives our ASP up, and we're now finding is 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, 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 (Analyst)

Sounds exciting. I'll come back to you. I know I have more questions, but I'll stop at that. Thanks.

Steve Harshbarger (CEO and President)

Thanks, Ted. Good talking to you.

Operator (participant)

Your next question today will come from Bill Nicklin with Bill Will Insights. Please go ahead.

Bill Nicklin (Analyst)

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

Steve Harshbarger (CEO and President)

I got you, Bill. Good morning.

Bill Nicklin (Analyst)

Hey, 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 is intentionally and strategically taking 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 strategy is the functional equivalent of what's been popular, been known as FDE 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 (CEO and President)

Sure, sure. That's a great question, and it really, I would say, it gets at the heart of why, you know, we continue down a path of what we're now actually starting to refer, just as you referenced, as forward-deployed engineering. You know, 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 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. You know, our forward-deployed engineering model builds around what we originally called our custom engineered solutions team and is really core to scaling our growth.

It just 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 coating systems. And this hands-on approach, it really accelerates system adoption. You know, it maximizes the real-world coating performance, and it really very much strengthens our long-term partnerships. And all of these ultimately are key drivers in expanding our high ASP production platforms.

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

Bill Nicklin (Analyst)

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

Steve Harshbarger (CEO and President)

Yeah, we've long tracked, you know, the percentage of revenue tied to like laboratory testing and application development, which I think is right around currently around 60%-70% of our shipments are tracked to that right now. And we also certainly measure the revenue tied to the high ASP systems, which now represents roughly two-thirds of our total sales. And almost all of these big complex systems, you know, pass through that FDE group, that forward-deployed engineering team. And while, you know, 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, you know, over the next one to two years as more and more of these large accounts move into full-scale production.

That's similar to the multi-system orders for these high ASP systems that we delivered earlier this year, you know, for the solar industry, which can end up coming through with really strong margins. I would expect that to continue with this model.

Bill Nicklin (Analyst)

All right. 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 (CEO and President)

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

So I think, you know, we're going to see that roll over into margin expansion fairly quickly for us, you know, because as they become higher and higher developed and going 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 (Analyst)

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 (CEO and President)

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

Operator (participant)

Your next question today will come from Dick Ryan with Oak Ridge Financial. Please go ahead.

Steve Harshbarger (CEO and President)

Hey, morning, Dick.

Dick Ryan (VP and Senior Research Analyst)

Hey, morning, Steve. Thanks for taking the questions and also congrats on the success of the diversification kicking in.

Steve Harshbarger (CEO and President)

Appreciate that. Thank you.

Dick Ryan (VP and Senior Research Analyst)

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

Steve Harshbarger (CEO and President)

Yeah, 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 where Sono-Tek, I would say, has a great depth of knowledge. But these guys do have a significant depth of knowledge and that if we can get embedded with them, we will start to learn a lot more about that industry and that field. And that's very valuable for us. You know, often we need a partner to accelerate our entrance into these newer types of applications because otherwise it could take us, you know, with a partner, we might be able to get in one to two years, but without a partner, we might take us, you know, four or five years to really understand the area effectively. So I think it's going to be significant.

It's 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 (VP and Senior Research Analyst)

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

Steve Harshbarger (CEO and President)

Yeah. Well, until this past month, I 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, you know, what was the differentiator, you know, 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.

We did make some more significant investments into the show to make sure we showed that, you know, and displayed that at the show. We had a larger size booth with actual machinery there running, but it really paid off for us. 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. That's still got a long way from stopping the upper peak on this. You know, 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 (VP and Senior Research Analyst)

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

Steve Harshbarger (CEO and President)

You know, 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, you know, I think right now we have got the right strategic partners aligned with us. We've kind of worked out all the details to enter into there this year pretty quickly.

Dick Ryan (VP and Senior Research Analyst)

Good. 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 (CEO and President)

Always good talking to Dick. Thanks.

Operator (participant)

Your next question today is a follow-up from Ted Jackson of Northland Securities. Please go ahead.

Ted Jackson (Analyst)

Welcome back, Ted.

I just have a couple more left.

Steve Harshbarger (CEO and President)

Sure.

Ted Jackson (Analyst)

One is just a backlog near a record. Like, over what time frame will that revenue be recognized?

Steve Harshbarger (CEO and President)

Yeah. The largest orders that we have just recently announced, which was that $5 million last month and the almost $3 million 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, you know, after March. But there'll probably be some level, maybe 10%-15% of that may ship out in the current fiscal year, you know, just the beginning orders for those. So that's the bulk of it that was 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, you know, like I said. So we'll come in at modest growth. You know, had the clean energy sector kept on full steam like we anticipated, 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 (Analyst)

And then on the second half of 2026, you know, 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, you know, your second half sales be a little more weighted in the third quarter vis-à-vis the fourth quarter because of that?

Steve Harshbarger (CEO and President)

Yeah. I think they're not going to be way off from each other, but it's probably going to be a little bit heavier in Q3 versus Q4 because of that one system that did get, at their customer request, get pushed into Q3. So I would suspect Q3 would probably be slightly higher than Q4. But they both should be pretty solid for us.

Ted Jackson (Analyst)

Do you think that you can take your streak of five million-plus revenue quarters from six to eight?

Steve Harshbarger (CEO and President)

We haven't given any projections there yet, but, you know, I think I would be disappointed if we don't do it. But we haven't given any formal projections there, but I would be disappointed if we don't do that.

Ted Jackson (Analyst)

Okay. All right. Well, that's it for me. Everything else got asked by other people. Thanks.

Steve Harshbarger (CEO and President)

You're welcome. See you, Ted.

Operator (participant)

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 (CEO and President)

Okay. Sorry about that. I dropped all my papers here. 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. You know, Sono-Tek's long-term outlook remains strong, supported by the continued success of our newly developed high ASP platforms across advanced technology markets. We look forward to sharing our 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. 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 (participant)

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