Sono-Tek, a New York-based company specializing in ultrasonic coating systems, recently released its year-end earnings. While the headlines focus on record revenue and a large backlog, a less obvious metric could be signaling a potential explosion in share price: **Sono-Tek's rapidly expanding application engineering services revenue.**

This isn't just about selling machines; it's about building customer dependence. Sono-Tek's application engineering is becoming crucial in the company's transition from a capital equipment vendor to a full-fledged coating solutions partner. While small now, this recurring revenue stream could become a dominant force, driving the company's profitability to new levels.

Sono-Tek's traditional model involved selling ultrasonic coating machines with basic training. This model lacked recurring revenue, leaving the company susceptible to the fluctuations of capital equipment sales.

However, the shift to larger, more complex production systems created an opportunity for higher-value application engineering services. Customers with intricate coating challenges are turning to Sono-Tek's engineers for guidance, paying for their expertise to solve coating problems.

CEO Steve Harshbarger revealed that their New York lab has a 75% success rate in converting application engineering engagements into machine sales. This means three out of four customers who use Sono-Tek's lab for a coating challenge end up buying a machine.

This dynamic creates a powerful cycle: more application engineering projects lead to more large system sales, further driving demand for their expertise. Although current service revenue (including application engineering, contract coating, and other support packages) is under $1 million, it has the potential to grow significantly. Service contracts for large production systems are estimated at 10% of total order value annually, and spare parts packages could add another 5% to 15%.

Revenue Breakdown: Potential for Growth in Services

The following chart illustrates Sono-Tek's current revenue breakdown and the potential for growth in service-related revenue.

With four high-volume production systems scheduled for delivery in fiscal year 2025, each priced around $800,000, Sono-Tek anticipates $3.2 million in system sales. If service contracts alone generate 10% annually, that's an additional $320,000 in recurring revenue per year. As the demand for Sono-Tek's application engineering expertise grows, it will likely lead to more system sales, creating an upward spiral of recurring revenue.

If Sono-Tek's service revenue increases from $1 million to even $5 million annually, it could represent a significant portion of their current market cap. This, combined with system sales growth fueled by demand for their expertise, could lead to a dramatic share price surge.

Sono-Tek faces challenges in scaling up application engineering, including the need for skilled personnel and expanding the success rate of their international labs. Harshbarger acknowledges these hurdles but emphasizes the company's focus on bolstering engineering and sales engineer teams and replicating the New York lab's 75% success rate globally.

Despite the challenges, the potential is significant. Sono-Tek's application engineering services revenue, though often overlooked, could be the catalyst for a substantial increase in profitability and share price, surpassing the company's already impressive growth figures. Sono-Tek's focus on providing coating solutions, not just machines, could unlock explosive growth in the future.

"Fun Fact: Ultrasonic coating is a highly precise and efficient method used in various industries, including medical devices. For instance, Sono-Tek's ultrasonic coating systems are used to apply thin, uniform coatings to stents, tiny tubes inserted into arteries to improve blood flow. This technology ensures the stents are biocompatible and less likely to be rejected by the body."