Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by our conference will be getting momentarily.
Once again, thank you for standing by our conference will begin momentarily.
Greetings and welcome to the NAPCO Security technologies Inc. fiscal first quarter 2020 earnings release Conference call.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host Patrick Mckillop Director of Investor Relations you may begin.
Good morning, My Name's, Patrick Mckillop, I'm, the director of Investor Relations for NAPCO security.
Thank you all for joining us on today's conference call to discuss our financial results for our fiscal first quarter 2020.
By now all of you should have had the opportunity to review the press release discussing the results. If you have not a copy of the release is available on the Investor Relations section of or web site.
VW Dot NAPCO security Dot com.
On the call today is rich draw way, President and CEO NAPCO security technologies.
Can we shells senior vice President and CFO .
Before we again, let me take a moment to read the forward looking statement.
This conference call may contain forward looking statements that involve numerous risks and uncertainties.
Actual results performance or achievements may differ materially from those anticipated in such forward looking statements as a result of certain factors, including those set forth in the company's filings with the FCC.
During the call. We May also present certain non-GAAP financial measures such as adjusted EBITDA in certain ratios that are used with these measures.
In the press release in on the financial tables issued earlier today, you'll find the definition of these non-GAAP financial measures.
A reconciliation of these non-GAAP financial measures with the closest GAAP financial measure as well as a discussion about why we think these non-GAAP financial measures are relevant to our results.
These financial measures are included for the benefit of investors and should not be considered instead of GAAP measures.
I will turn the call over to dig in a moment, but before I do I just wanted to mentioned a few things on the IR front.
In terms of upcoming Investor outreach, we will be marketing in Montreal in November 7th.
Saint Louis on November 14th.
San Francisco and Portland on November Twentyth and 21st.
Also on November Twentyth, and 21st we will be showcasing our product that the I guess he east trade show in New York.
If you would like to attend please contact me for an invite.
During the month of December we will be attending the benchmark conference and the Raymond James Technology Conference.
Investor outreach is crucial, especially for a small cap companies such as NAPCO now we'd like to thank all of those folks that assist us in these conferences and marketing trips.
With that out of the way, let me turn the call over there, but it's all the way President and CEO NAPCO security technologies.
<expletive> the floor is yours.
Thank you Patrick.
Good morning, everyone welcome to a conference call.
Thank you for joining us today [laughter] Skus out results.
The fiscal first quarter 2020 marked another record revenue and profitability performance can that go.
Our SAS recurring revenues continue to grow at a rapid rate.
Our recurring revenues annual run rate is now 21.9 billion as of September .
Our focus on targeting mostly commercial end markets and professional installation is driving this continuous growth.
Our balance sheet remains healthy and with no debt as of this report and I cash balances continue to grow.
Capitalizing on key industry trends.
Remains our focus.
These trends include school security solutions wireless fire and intrusion alarm communicators enterprise access control systems and architectural locking products.
Management here at NAPCO continues to focus on the key metrics of growth.
Profits and returns on equity.
These metrics are important for us as well as our shareholders.
Our business strategy is executing well at our interests are aligned with our shareholders as senior management of NAPCO, almost 38% of the equity.
Before I go into further detail I'll now turn the call over to our CFO Kevin to show.
He will provide an overview of our fiscal first quarter financial results.
I'll be back with more on our strategies and outlook Kevin.
Thank you <expletive> and good morning, everybody.
The first quarter net sales increased 12% to $26.3 million, which was a record quarterly performance.
The 21st consecutive quarter over year over year record sales.
As compared to 23.4 million.
Same period a year ago.
The increase in sales for the quarter were primarily related to increased sales of our along communication services.
Intrusion and access products and door locking products.
Recurring monthly revenue from the alarm division increased 42% for the quarter recurring revenue now has an annual run rate or 21.9 million based on September 2019 recurring revenue.
Gross profit for the first quarter increased 20% to $11.5 million, where the gross margin of 44%.
As compared to $9.5 million, where the gross margin of 41% last year.
The 300 basis point, increasing gross margins year over year was primarily driven by the 42% increase in recurring revenue where the gross margin was 79%.
As well as increased equipment sales and the leverage that we get from our Dominican Republic manufacturing facility, but no sales exceed $20 million any given quarter.
R&D expenses for the quarter remain relatively constant at $1.7 million worth 6.5% of sales.
Compared to $1.7 million or 7.5% of sales last year.
Selling general and administrative expenses for Q1 remained relatively constant at $6.1 million.
As compared to $6 million at the same period a year ago.
Selling general and administrative expenses as a percentage net sales decreased to 23.4% for Q1.
As compared to 25.9% for the same period a year ago.
The decrease as a percentage of sales for the three months ended September Thirtyth 2019.
Was due primarily to the increase in net sales.
Operating income for the first quarter increased 105%.
The $3.6 million.
As compared to $1.7 million last year.
Income tax expense for the quarter increased by $121000.
The $369000 as compared to $248000 last year.
Increase and the provision for income taxes for the three months was caused primarily by an increase in income before provision for income taxes.
As a result, the company's effective tax rate was 10%.
Versus 14% for three months ended last year.
Net income for the first quarter increased 115% to a first quarter record of $3.2 million or 17 cents per diluted share.
As compared to 1.5 million or eight cents per diluted share last year.
The change in net income for the quarter ended September 32019 was primarily due to the items previously mentioned.
Adjusted EBITDA for the quarter as outlined in the schedule included in today's press release increased 91% to $4 million were 22 cents per diluted share compared to $2.1 million or 11 cents.
Diluted share last year.
Moving onto the balance sheets.
Cash balance at September 32019 was $10.8 million as compared to $8 billion at June 32019.
Our working capital as of September 32019 was $53.6 million as compared with $51.1 million at June 32019.
Current ratio was 4.6 to one at September 32019, as compared to 4.6 to one at June 32019.
And that remains at zero at September 32019.
Net cash provided by operating activities for the quarter was $2.9 million.
Inventory levels are higher than normal as we continue to gear up for several new product launches that we mentioned on previously called previous calls, including ice secure our new marks anti ligature locks and our new line of Eightseventy LT Starlink radios.
[noise] Capex was $181000 during the quarter versus $424000 in the year ago period.
That concludes my formal remarks that I would now like to return the call back today.
Kevin Thank you.
NAPCO continues to have strong growth and its business and we believe that growth trend will remain vibrant.
A lot of communications, including fire intrusion.
And growth of the smart home category are driving demand for our recurring revenue products.
The school security market remains a significant opportunity that continues to have positive tailwinds with the new funding coming to help the schools paid for the upgrades they need.
Tragic events of 2018 live with US forever, and we always worried that it could happen again.
In the U.S. there are 100000, K through 12 schools and 10000 colleges and universities.
NAPCO is dedicated to providing the schools with the solutions and products they need help protect the students and faculty.
Recently at the end of October the Department of Justice announced that it had awarded a total of $85 million in grants to schools for security projects. The school violence protection and mitigation Act of 2019 legislation was proposed by.
Representatives Williams and do age and the U.S. House of Representatives in July 2019.
The legislation would authorize $2 billion over 10 years to identify and address any shortfall in school security.
And as we have mentioned in the past many states are actively passing funding legislation as well.
These are examples of the changes happening in the school security market, which we believe will create a positive tailwind for our business.
We continue to see a robust pipeline for school security projects, and we'll continue to announce new wins as allowed for by the each schools approval process.
[noise] increased violence, such as actress shooters and public places like houses of worship and other meeting areas have been taking place as well.
These and its incidences have seen the need to expand the use of our savvy audit for locations other than schools the need for more security with a locking in access control products in these areas is clear.
Recently, we began launch of our new L. T E. Starlink line of Universal fire intrusion alarm and I O T communicators.
Our store link communicators now offer the widest L. T E coverage in the U.S. to the deal is in our network with both Verizon and 80 and T. service.
Starlink fire L T for rising and 80 anti power communicators continued to exhibit strong sales growth.
During our last earnings call in September we also highlighted the newest anti ligature locks for remarks Division, which account currently being rolled out to the dealer community across the us.
These anti leakage or locks meet a D.A., that's Americans with disability Act requirements and the highest b H M a standards.
The loxo designed to restrict the attachment of Lions, laces et cetera to dogs and leavers.
We offer these blocks in multiple styles in model combined with the ability for easy installation and retrofit for oil popular door construction.
We continue to be very excited about the upcoming launch of our latest product the ice secure the ice securus design for the new breed of professional installers and savvy consumers. It as quick installation time and rich feature sets further advance smart home that.
Our end demand today.
Hi, secure one the NBP most valuable product award in the home controls category at the IC West Trade show earlier, this year and drew lots of traffic from the dealers into our Tradeshow booth.
Our fire link fire alarm control panel with cellular communicator inside was launched earlier this year and continues to see good sales growth fire link is an all in one eight to 32 zone firebomb control with a built.
Then cellular L T starlink powered alarm communicator.
Looking into the future the R&D team here at NAPCO is working on leveraging our Starlink cellular communication technology.
Experience into other product categories, we have such as electronic locks and enterprise access control in order to generate more recurring revenue for these product lines.
It is our business to have new recurring revenue products and services by fiscal 2021 of these product lines.
We will begin our Q in Asia session portion of this call in a moment.
Fiscal Q1, 2020 was a very successful record breaking quarter for us and as we continue to grow the company and deliver strong profits.
Our shareholders have been rewarded with very healthy returns and stock performance.
Snap goes into strong position to continue its growth and sales and profits going forward.
We're excited about the remainder of fiscal year 2020 and beyond.
NAPCO Senior management maintains a high level of ownership in our equity approximately 38% and I'd like to thank everyone for their support have a joining us in the exciting future we have.
Our formal remarks are now concluded.
I'd now like to open the call for the Q with a session. Operator. Please proceed.
Thank you at this time, we will be conducting the question and answer session. You would like to ask the question. Please press star one on your telephone keypad.
Confirmation total indicate your line is in the question Q you May press Star too if you would like to remove your question from the Q per participant using speaker equipment and may be necessary to pick up your handset before pressing the star.
One moment, please why we poll for questions.
Oh.
First question comes from the line of Matt Pfau of William Blair. Please proceed with your question.
Hey, guys. Thanks for taking my questions one of the first ask on the ice secure product.
When was that released into the dealer base or when will it be released and how should we think about when that product will start to contribute to both hardware revenue and recurring revenue.
Typically what happens is it takes nine to 12 months for the dealers.
To do trial on it.
And.
Then it starts to pick up momentum it has a unique feature sets unique pricing.
We have many many dealers who already signed up to see that the CE show.
We expect to release the first group of it.
In this calendar year.
And then.
And then keep pushing more and more production as a deal is demand.
Great and.
On the gross margin hardware gross margin improved year over year in the quarter can you, maybe just talk about where that leverage came from and how we should think about hardware gross margin going forward.
Sure.
That.
Being the margin of 30 it was 34.8.
And last year it was 33.6.
Increase came because of leverage from the CR factory.
The hardware sales.
20.9 last year at this time for Q1, it wasnt even over 20, so as you know over a million dollars less last year.
When it goes over the Magic 20.
With that many of you know that we've spoken about.
The leverage on the margins begins to kick in.
The higher we go above that 20, the more we expect the margins to go up.
When we get to the point, where it's I'd say, a 25 million dollar quarter and the margins I'm talking hardware and the margins go close to 40%.
We expect our goal we've talked about it.
Well, we get to the point, where hardware as 100 million, where it's an average of 25 million a core.
We expect the gross margin on heart hardware to be in the neighborhood 40%.
That's what we're shooting for and you know, we're getting closer and closer to that goal.
Yes.
Okay and last one for me on the school opportunity you mentioned that the pipeline there continues to build nicely.
Maybe just give us an idea of how long the lead times are with these projects that are that are in your pipeline to the ones that you're seeing come and now are they more projects that are going to be implemented into this upcoming summer while schools out a session or how should we think about the visibility into that area of the business with those.
Projects that are in the pipeline.
Some of the school a jobs are they happen pretty quickly if it's a K through 12 job and we know about it.
Typically that could be done even when the kids aren't out of school it could be they just changing the locks on all the classrooms, because a lot of the classrooms.
Doors are locked from the outside.
We've been talking for a while about how all the classroom should be like from the inside so that when there's an active shooter. The teacher doesn't have to go out into the hallway and look for the custodian to lock the classroom up so they make that move to getting locks for block from the inside I can be done.
During when schools and session.
And we see we're getting a lot of locking jobs you know throughout the year.
When it's a bigger job.
Those jobs tends to happen when the kids are at a school.
Happens when the kids, it's a university job it tends to happen when the kids are out in December January .
For.
Between sessions and of course, it happens light at times, the universities and in April so you'll see jobs in May and June .
We're seeing it all year round and there's no set time.
That's when the schools are down you know the kids are out, but we're seeing it all year round. There is no no magic time, specifically went for us.
There is a lead time from the time that the school generates interest and quoting.
And then.
The award of the job that takes a few months.
But.
What we're encouraged by is so much more quoting activity than we've had before that's why we know this area is going to keep growing.
We see it in our numbers that we expect it to keep going.
Most schools still have nothing I know, we talk about it we've been talking about it for years.
Most schools still are not up to the standards that they should be.
Got it that's all I had a nice job on the quarter and thanks for letting me ask some questions guys.
Thank you.
Our next question comes from the line of Jason Schmidt of Lake Street. Please proceed with your question.
Hey, guys. Thanks for taking my questions just following up on your commentary on the school security market. I know you don't break out why the percentage of revenue, but at least Directionally What school security revenue up sequentially in September .
School security.
Compared to the jobs compared to Q4.
Remember Q4, as our biggest quarter.
So sequentially I would say its was not up versus Q4, because Q4, we had a lot of big jobs and.
In that quarter.
But it was up compared to last years Q1.
And we were encouraged by that.
And we expected to be up in Q2 versus last year's Q2 Q.
Q4, as the hardest quarter to be up sequentially a lot happens it's.
For schools also a lot happens because that's when that's the biggest time when schools schools are out.
But the encouragement still is there up versus a year ago expected to be up next quarter expected to be up in Q3.
This is you know it's going to be up every quarter as schools finally get to the point.
Doing something about.
Fact that they're not protected.
Beyond schools I will point out.
That our business also gets aided by a lot of houses of worship now meeting the same thing churches synagogues. They need to same thing we're seeing a lot of activity in that in that arena as well.
Okay. That's helpful. And then I know in the last call you mentioned targeting equipment revenue growth in that high single digit range for fiscal 20, if that's still the ballpark target for this year.
Yes, we came in right at 7% this quarter.
And.
We have been doing.
7% type growth quarters.
For the last few.
Maybe a little less in Q4, but 7% this quarter.
Yes, the goal is to be high single digits eventually double digits.
As we head into.
The back end of fiscal 2000 in as we head into 2021.
As a lot of reasons why we feel good about that.
The ice secure where that's released is going to help.
The new anti Lake is going to help.
Which is the product he is a product intros, we're doing.
The new ATM TLC radios, it's going to help.
That was not only going to help hardware that's going to help recurring revenue.
So you know that we have reasons to believe.
That 7% could be high single digits and eventually.
Double digits in the near future.
Okay and the last one from me and I'll jump back into Q, how should we think about opex needing to ramp that's here.
Opex historically.
We've been controlling that pretty well right.
So this quarter you.
You saw R&D and as DNA, they were pretty flat compared to last year.
I wouldn't expect it to be flat in the upcoming quarters.
I would expect probably a 4% increase.
Year over year.
As you know salary increases things like that we haven't really added a lot of personnel, maybe an engineer or two here or there.
One thing we have talked about on the sales side.
Getting making a change going from outside reps to payroll salespeople.
That process is pretty well along.
And we think thats going to mean a lot better.
Sales for us in the future. Because these are guys that are 100% dedicated to us and not guys who.
Our selling different product lines, which with the outside reps were doing so.
If I was building a model I would assume 4% growth on R&D and 4% on SGN a.
Okay I appreciate the color thanks, guys.
Thank you Jason Thank you.
Our next question comes from the line of Mike Walkie of Canaccord Genuity. Please proceed with your question.
Hi, This is a anthony on for Mike actually Ah Thanks for taking my questions.
So just wanted to confirm to product gross margins they were not reflecting any discounting on like we saw last quarter beauty TD LTE radios, correct and and also on the TNT roll out in terms of the recurring revenue associated with it how many quarters of a lag is typical before you see that.
And it had been numbers.
There was no discounting.
Like last quarter, we thought there might it might be a 100 basis points.
Effect it wasn't.
We didn't have to do it you know we make these decisions as we see as we see fit wasn't necessary is tremendous excitement on getting those radios out people want it people willing to pay for it.
Recurring revenue eventually will come.
So what happens as you know you salaries radios, a lot of times, you're selling them to distributors.
The distributors may have it on their shelf for a month.
And they'll sell it to the dealer.
So does that dealer gets it the radio is activated.
That's when the recurring revenue should begin to happen.
Sometimes there there are things that delay it a little more but generally you got to figure that once the deal or gets it that's whether the switches turned on.
Not a big gap, but there is you know a month maybe too.
Got it Okay and then in terms of the recurring revenue now you know rapidly growing to 22 million on a run rate. That's month can you help us think about the timing expectations.
On June 21 target to get your 40 and getting there maybe if you could provide color on what's growing fastest across the different recurring revenue categories, whether its spire intrusion now you're doing locking is recurring up any color on the breakdown would be great.
Our goal remains.
To be at a $40 million run rate.
By June of 21.
So essentially.
By the end of that this fiscal year by the end of the following fiscal year.
Why do we feel.
Pretty comfortable about that.
Well.
We've been we've introduced all these radios that you see out there.
Fairly recently.
The fire radio.
Is doing really well that's the one that was introduced last that one is maybe a couple of years old.
And as we say the fire radio business is on fire.
And.
That.
Helps drive to things that helps us get to our 40 million dollar goal.
It also helps us drive up the margin.
On the recurring revenue.
That's the highest.
Margins radio of the group.
And so you keep seeing recurring go up.
The margin go up this quarter it was what 79%.
I wouldn't be surprised if we see 80 in in the near term.
A lot of that's because of the fire radio business.
In the early stages.
A lot more to be done a lot of buildings that are making this switch over.
To cellular from the hard line as not being supported anymore by horizon.
Its a.
This is a big area for us.
We expect that the conversion from copper to cellular.
Millions and millions of commercial buildings that have to be done for the fire systems that we think this is going to go on for years to come. So it's a radios are being well received and we wanted to put out the LTE radio.
At a good price and we did last quarter and that seeds.
The business.
For the future.
As I said it could just keeps building nine to 12 months typically when you really start to feel a lot of volume, but the radios are installed within a few months after the.
The shipped to the distributor as distributors push them out to the dealers. So it's a very important aspect of our business and also the connected home part of our business using or Starlink connect that's doing very very nicely that's for sure.
A little business residential where you can get app control of the alarm system and a lot of functionality at alarm system at a very very.
Good price and the ice secure will add more and more volume on the residential and small business side when that comes out this year and it builds as I said nine to 12 months. So we see lots of.
Alarmists for retrofit to homes and small business of existing alarms using that connect and we see lots of new business, that's going to be generated from the ice secure product line.
Which goes into our it has all kinds of great features as price very attractively. So the dealers ROI is very quick so.
We have that and then we have additional.
Cellular performance, that's going to be put into our access control business and locking business, because we want to get recurring revenue from each of our product lines each of our verticals and that's our goal over the next couple of years to do all of that for the other lines of products that we manufacture.
All right, Great and just last one from me out that's on the Q any progress up you know the Asia component sourcing efforts when we might see it's not around the margin benefits from from that.
We've begun to see that.
<expletive> took a.
The team of buyers to Asia.
With the the goal of buying more components direct.
From Asia versus going through distributors.
You know paying a higher price is he going through a middle man so to speak.
And.
It takes time first you go there you identify you sources.
Then you qualify the sorts because you don't want to.
Have poor quality.
We have an ISO certified high quality, Dominican Republic manufacturing facilities, we don't want to.
Mess with that Formula.
We.
We get the quality on the new source.
Passes tests.
Introduce it we have to use up existing inventory and then you could fully get.
The benefit of the new source.
It's having an effect we had said originally we want to save over a million dollars.
From the on an annual basis or more than a million dollars on annual basis from that effort.
And.
Were not there yet but were saving a lot.
And as we use up the inventory on the older.
From the prior vendors.
That goal should be realized.
It's having an impact it's helping the margin somewhat.
It will help more in the future.
And the other big part of that whole story is by buying direct.
And going from Asia to the VR.
Again are not faced with any terra issues.
The Asian sources ship directed T R bypasses that whole tower.
Discussion that we will hear about where were immune from that problem.
Thank you again.
Take care.
Our next question comes from the line of Jeff Kessler of Imperial Capital. Please proceed with your question.
Thank you I was interested in your comments on.
On how you were moving into.
You're moving into.
Well I secure but also.
Starlink.
Your store old you experience as it begins to move into your main body of ins.
Installations, which is.
Which is not on the residential area, which is in the commercial area you mentioned electronic locks.
Access control.
And there is definitely a quick and rapid moving trends going on in that business for anybody used to take you look at it.
Allegion were a number of M&A transactions that have gone on more just recently.
I'm wondering how you view this part of your business.
With regard to one what it does for the growth.
Have you were locking business and your.
And your access control business number to what it does for.
Your margins and your recurring and the recurring revenue.
Growth in your business.
Hi, Jeff that.
What we're doing is something that.
Hasn't been done in the locking business.
And are they access control business and that is having cellular.
Have a reporting functionality.
Such that the dealers that do the those type of jobs the them locksmith system integrators can now start to feel what recurring revenue is all about and that's a big part of what drives the dealer install burglar fire losses.
They want the recurring revenue they do job, sometimes or just signing up a three year monitoring contract.
So the locksmith and system integrators and not familiar with this because they're not in that business is a different type of business, but we have these two major verticals locking vertical axis vertical and we're going to.
Show the dealers.
Certain functionality that they can get and charge their end user customers for and we built out our knock to be able to handle this and over the next two years to be a number of new products coming out which is going to be very very attractive locksmith system integrators because those.
To be able to build equity and have these accounts generating more than just a yearly service, but they'll be able to get monthly recurring revenue out of them and it's going to go out in the help all the locks integrators to market, they're going to want to sell services.
To the end user customers using our cellular network.
And we'll refine that very exciting it's all business, it's not residential it's all type of business, which has greater margins.
And it's an untouched Virginia area.
In these industries.
When you know what when one of the small companies that started this years ago revoke tried to get.
Tried to get there the channel to take on a to take on this.
You want to quote you want this recurring revenue model, obviously, they've got all types of pushback because there was no upfront the gross margin.
Are you do you believe that you have number one the relationships and number two you have the business model in place already to get.
Bogey, particularly will Smith.
Some of the systems integrators I figure probably have dealt with some of you know some recurring revenue business before but it's going to it can take it can take a lot of education and convincing and relationship on your part to do that.
You have the ecosystem in place in the and the people in place to do this.
You know we've been doing a recurring revenue for a four years and from previous to that we've been doing a law service sales to deal is the 25 years. So we know the philosophy and easy human being.
Human beings want to make profit they want to build equity are these people are entrepreneurial. They don't want to just put a lock on a door and leave and maybe a break and we'll come back and fix it they want to be able to get.
Recurring revenue out of that lock and they want that lock to be able to be something that there and use it customer that uses that lock wants to get data out of that lock.
And that we know how to do with the dealers because we do with alarm systems and now we're going to carried over with the only company in the entire security industry that owns a locking company and it along manufacturing company.
So it's a natural for us to kind of move the the dealers and integrated into this and we have the people. We have we've been doing it for years you know we trained dealers to utilize our radios you can see the growth in our radios you can see other dealers are going from dial up which they've been using.
To cellular very successfully and now we're going to do the same thing with locking and access that's our goal now nothing happens overnight.
But over the next two years going to start introducing the product, but it's got such long legs, because it's such a motivational thing for a a locksmith or or an integrated to want to get recurring revenue.
And rather than working job by job. So we know it's a it goes along with human nature of these type of people.
Okay, great. Thank you very much appreciate it.
Thanks, Jeff Thank you Jeff.
We have reached the end of the question and answer session I'll now turn the call back over to Richard solidly for any closing remarks.
Thank you everyone for participating in today's conference call as always should you have any further questions. Please feel free to call Patrick Kevin or myself for further information.
We thank you fear interest and support and we look forward to speak as you all again and a few months to discuss Napcos fiscal Q2 20 results.
Bye.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
[noise].