Q4 2020 NAPCO Security Technologies Inc Earnings Call
Fiscal fourth quarter 2020 earnings conference call.
This time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on or telephone keypad.
Please note that this conference is being recorded.
I'll now turn the conference over to your hosts Patrick Mckillop Director of Investor Relations. Thank you you may begin.
Thank you good morning.
Mckillop director of Investor Relations here NAPCO security.
Thank you all for joining us for today's conference call to discuss our financial results.
Fiscal fourth quarter in fiscal year Twentytwenty.
Now all of you should have had the opportunity to review the press release discussing their results. If you have not a copy of the releases are available on the Investor Relations section of our websites.
W.W. adult NAPCO security Dot com.
On the call today's Richard Soloway, President and CEO NAPCO security technologies.
Michelle Senior Vice President and CFO.
The board again, let me take a moment to read the forward looking statement.
This presentation contains forward looking statements that are based on current expectations estimates forecasts.
Rejection of the future performance based on managements judgment beliefs current trends.
And anticipated product performance.
Forward looking statements include without limitation statements relating to growth drivers of the company's business.
Just school security products and recurring revenue services.
Your market opportunities.
The benefits of our recurring revenue products to customers and dealers.
Our ability to control expenses and cost.
And expected annual run rate for SAS recurring monthly revenue.
Forward looking statements involve risks and uncertainties that may cause actual results to differ materially and that was contained in the forward looking statements.
These factors include but are not limited to such risk factors described in our assets you filings, including our annual report on form 10-K.
Other unknown or unpredictable factors underlying assumptions.
Subsequently proving to be correct could cause actual results may differ materially from those forward looking statements.
Although we believe that expectation for collection in the forward looking statements are reasonable we cannot guarantee future was results level of activity performance or achievements.
You should not place undue reliance on these forward looking statements.
All information provided in todays press release in this conference call. It just doesn't today's date.
Otherwise stated we undertake no duty to update such information, except as required under applicable law.
I will turn the call over to dig in a moment before I do I just want to mentioned a few things on the I often.
In terms of Oh upcoming Investor outreach, we will be.
Virtually attending and hosting one hour meetings at the C.L. King Conference on September 16th.
And the Lake Street Big four conference on September 17.
We're also planning for more virtual road shows we ought to fall.
Mr. Outreaches, crucially, especially is crucial especially for a small cap companies such a NAPCO.
I'd like to thank all of those folks that assist us.
Assist us in these conferences and marketing trips.
But that all the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security technologies.
The floor is yours.
Thank you Patrick good morning, everyone and welcome to our conference call.
Thank you for joining us today to discuss our result.
Fourth quarter fiscal year 2020 equipment sales.
Acted by the ongoing cobot 19 endemic.
Well, we're now beginning to see a pick up the bar business because buildings or reopening.
And our installing dealers are gaining more and more access control equipment.
End user customers, which consist of businesses of all types as well as homeowners.
We are pleased to emphasize that despite the academic.
Recurring revenues continue to grow at a rapid rate.
Our recurring revenues.
Increased 35% in Q4.
The gross margin of 83%.
And now has an annual run rate of 27.5 million as of June.
Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth.
Our balance sheet remains strong with zero debt.
As of this report and I cash balances continue to grow.
We remain focused on capitalizing on key industry trends, which include school security solutions wireless wire and intrusion alarms.
Plus enterprise access control systems and architectural locking products.
The management team here at NAPCO continues to focus on the key metrics of growth.
Profits and returns on equity.
Controlling costs, especially during these difficult times.
These metrics are important to us as well as to our shareholders.
We continue to execute our business strategy and our interests are aligned with our shareholders as senior management NAPCO old 38%.
The equity.
Before I go into great detail I'll now turn the call over to our CFO Kevin to show you provide an overview of fiscal fourth quarter at this school year.
Financial results and then I'll be back with more on a strategies that outlook Kevin.
Thank you Dick and good morning, everybody.
For the fourth quarter net sales decreased 22%.
$23 million has compared to $29.6 million.
At the same period a year ago.
For fiscal 2020 net sales decreased 2%.
The $101.4 million as compared to $102.9 billion a year ago.
Decrease in sales for the quarter ended the fiscal year were primarily related to decrease equipment sales, which what caused by the Cobiz 19, pandemic, which caused difficulties for the security equipment professionals getting access to both commercial and residential installation sites.
We believe this access issue is an industry wide issue and it's not reflective of the lots of any market share unique to the company or any long term negative reflection of the post pandemic vibrancy of the security industry as a whole.
Recurring monthly revenue continued its strong growth, increasing 35% for the quarter and 38% fiscal year.
Recurring revenue now has an annual run rate of $27.5 million based on June 2020 recurring revenue.
The majority of the company's factory cost of fixed costs as we discussed in the past when equipment sales for a quarter increase above the 20 million dollar mark overhead absorption increases in gross margins expand.
Firstly when equipment sales are below 20 million the opposite cars.
That's a result at the lower equipment sales gross profit for the fourth quarter decreased 38% $8 million with a gross margin of 35% as compared to $12.9 million, where the gross margin of 44% last year.
Gross profit for the fiscal year 2020 decreased slightly to $43.6 million.
The gross margin of 43% as compared to $43.9 million with gross margin of 43% last year.
Gross margins for recurring revenue continued to be very strong increasing by 500 basis points for the quarter <unk>, 83% as compared to 78% last year and for the year increased by 400 basis points.
82% as compared to 78% last year.
Increasing gross margin for recurring revenue was primarily due to the increased sales of our starlink commercial fire radios, which generate higher margins and continue to become a larger part of the overall recurring revenue mix.
Research and development costs to the quarter were $1.9 million with each other quarters ended June 30, Twond like 2020 and 29 team.
And were 8% of sales and 6% of sales for the quarters ended June 30, 2020 2019, respectively.
Research and development cost for fiscal year 2020 remain relatively constant.
7.3 million or 7% sales as compared to 7.2 million or 7% of sales last year.
Selling general and administrative expenses for the quarter decreased 19% to $5.1 million were 22% itself.
As compared to $6.3 million or 21% themselves.
Same period last year.
Selling general and administrative expenses for the fiscal year ended June 30 2020.
Increased 2% to 23.7 million or 23% Upsells.
As compared to $23.2 million for 23% of sales.
[noise] read last year.
Yes, DNA decrease for the quarter was primarily due to strong cost containment measures that were implemented.
As well as reduced trade show in travel expenses related to the Kogan 19 pandemic.
During the year ended June 30, 2020, the company experienced a decline in revenue related to a trade name intangible asset that was capitalized back in 2008 as compared to such revenue in the prior year.
Well this decline was primarily attributable to the cobot 19 pandemic. It was determined that such declines in revenue constituted an impairment of the aforementioned intangible asset.
And as a result, we recognize the one time impairment charge of $1.852 million into fourth quarter.
Operating income for the fourth quarter before the impairment up the intangible asset was $1 million as compared to $4.8 million for the same period a year ago.
Operating income for the fiscal year before the impairment charge was $12.7 million as compared to $13.5 million.
The same period a year ago.
The operating loss for the quarter after the impairment charge was $835000 and operating income for the fiscal year assay the impairment charge was $10.8 million.
In July 2019, the company received the proposed adjustments from the IRS.
Approximately $1.8 million relating to the 2016 tax year.
While we strongly disagreed with this assessment and we felt we would ultimately prevail.
To avoid legal costs, including the cost of litigation, we came to a settlement with the IRS for approximately 40% proposed adjustment.
The company is also on their audit with the IRS for 2017 for the same tax issue.
While we have not received any assessment, yet and we strongly disagree with the IRS regarding the issue would had we've provided an additional tax reserve that is consistent with the 2016 settlement.
As a result income tax expense for the quarter increased by 1 million in $24000 $1.059 million as compared to $35000 last year.
Income tax expense for fiscal 2020 increased $1.1 million to $2.3 million.
As compared to $1.2 million for the same period a year ago.
As a result of it are these onetime charges and cobot 19 impact that income for the fourth quarter decreased two until a loss of $1.9 million or negative 10 cents per diluted share as compared to $4.7 million or 26 cents per share for the same.
Quarter last year.
Net income for the fiscal year was $8.5 million, a 46 cents per diluted share.
As compared to $12.2 million, what 66 cents.
Same period last year.
Adjusted EBITDA for the quarter as outlined in the schedule included in todays press release was $1.5 million or eight cents per diluted share.
Compared to $5.2 million.28 per diluted share last year.
For the year, adjusted EBITDA was $14.7 million or 80 cents per diluted share as compared to $15 million or 81 cents per diluted share.
Onto the balance sheet, the cash balance at June 30, 2020, with $18.2 million as compared to $8 million at June 32019.
Our working capital as of June 30, 2020, with $62.8 million as compared to $51.1 million at June 32019.
Our current ratio was 5.0 to one at June 30, 2020, as compared to 4.6 to one at June 32019.
And that remained at zero at June 30, 2020.
Capex was $291000 during the quarter versus $388000 in a year ago period.
And was $1.615 million for the year versus $1.988 million into a year ago period.
That concludes my formal remarks, and I would now like to return the call back to Dick.
Thanks, Kevin.
Our fourth quarter and fiscal year sales were impacted by the covert 19th pandemic. However, as a result with the continued strong recurring revenue.
83% gross margins combined with a seasoned executive team near that go who performed well by managing costs, we are able to generate.
Adjusted EBITDA of 1.5 million for the quarter and 14.7 billion for the year.
We recently I've seen positive signs from some of our distributors that their sell through rates have increased in the months of July and August and also the trend of more home sales and non urban areas are picking up.
We continue to believe that we are well positioned to rebound for the economic recovery.
Business is composed of 80% commercial and many bought products are deemed essential such as non discretionary commercial fire alarm communicators.
NAPCO also plays a vital role in the healthcare vertical with a locking in access control divisions.
Which for example provide entry exit devices and push pull locks with anti microbial finishes.
We continue to witness violence erupting and many cities throughout the country and these events are driving the need for more security.
The need for security is no greater than ever for many businesses, such as stores restaurants and offices.
We are pleased with the growth of recurring revenue, which is part in part being driven by the commercial start Starlink fire radios.
The five radios in particular also helping recurring revenue gross margin expansion as evidenced by the 500 basis points improvement versus year last year.
The school security market remains a very significant market opportunity.
The availability of grants the schools. The fund these security projects has never been better with the options from the U.S. Federal government and the state governments being plentiful.
We have highlighted these different types of legislation.
And have been approved during or during our.
Past earnings Conference calls, we remain focused on providing schools the products and solutions they need to protect their students and faculty.
While many schools have students a return this fall some are doing revolt learning it varies from state to state, but it's important to note that we are witnessing schools universities using this time to upgrade and or implement systems. During this time as they continue to play.
Land for the future.
Press releases regarding school and University security projects are issued when the opportunity is allowed as we must receive approval from these institutions prior to release.
A few quarters ago, we launched the ATM T. L. T E stole link line of Universal fire intrusion and I O T. Communicate is what you're playing a vital role in the need for the upgrade of older Threeg 80.
The communicators.
Our star like communicators offer the widest range and coverage in the U.S. deals with both 18 p. ever rising LT service.
This market is large and growing we believe we have a very strong product line that will ultimately add to our recurring revenue stream.
That goes latest recurring revenue product innovation, the ice secure commercial residential eighties on alarm system continued its rollout during Q4.
While we are still in the early stages of the product launch we continue to receive favorable feedback from our dealers.
The I secure offers the most cost effective.
Functionality in the industry and has historically communicated technology inside which will generate recurring revenue with every sale and installation.
This product is designed for the new creative professional installers and savvy consumers.
I secure as installation times of one hour and office feature rich.
Functionality for smart home.
Capabilities that many residential and small to midsize business businesses are looking for today.
As we look into the future expanding our cellular communications technology to other areas and the security industry is a focal point of our strategy.
During the late fall early winter months, we plan to introduce a cellular based locking in access control product line using our Starlink technology.
This new product cool air access will allow deal is and that go to generate recurring revenue.
A few of the benefits to highlight the end users will enjoy include no need for up credit upfront investment in hardware or additional I T personnel.
No I'd say database, no backups or software update.
In conclusion.
Our fiscal year Twentytwenty was it challenging the successful year.
Before the coal that 19 pandemic began to significantly impact our country back in March NAPCO. It achieved 23 consecutive quarters of year over year record sales.
I am confident we will emerge well position for the economic recovery to and will soon start another record sales streak NAPCO is in a strong position in the future and they continue to add products and services that will enhance our rapid growing recurring revenues were.
Cited about fiscal.
2021, and beyond I would like to thank everyone for their support.
And for joining us in this exciting future we have.
We appreciate your time today, and we're ready for any questions. Operator. Please proceed thank.
Thank you.
At this time it will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad. That's the Starkey followed by the number one key on your telephone keypad.
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My first question.
Comes from Matt Pfau with William Blair. Please state your question.
Hey, guys. Thanks for taking my questions.
One of the start up on the common summit Dick about seeing some improvements in sell through and metrics post the close of the fourth quarter over July and August maybe you can just provide some more detail. There. So as you look to sell through you know activity demand where are we at versus where you would sort of.
Expect to be and a more normalized first quarter.
No. There we were we're seeing so through which is checkout and our distributors counters and when that happens. It means that the dealers are doing more installations, both commercially and residentially they've been blocked from getting into commercial buildings and.
People didn't want them in the homes during the Ur Cobot times, So we're seeing a nice increase.
And Ah Kevin do you have the stats on some of that why don't you.
So.
I look at our big distributors and without mentioning names like you guys know who our biggest distributor is.
And I saw that they were up 41% in July.
I was very encouraging.
I looked at August it wasn't quite 41% it was very strong also.
I wanted to see if it was just one distributors I looked at another one.
A pretty large ones not as large as our number one guy.
It was up 25% in July.
I looked at August same type of that.
So.
It's not a guarantee that we're gonna get big orders in September.
But if they're sell through was a strong as that.
Be crazy not to be ordering equipment, because they're going to run dry.
So those are the things we look at.
To be encouraged.
That we're going to get some nice orders come the end of this month ended this quarter.
And that business is starting to come back.
[noise] got it and you didn't want to touch on on ice sicker secure seems like you're you're encouraged by what you've seen early on there when would you expect this.
To become even more material contributor to to the recurring revenue line or or is it already.
It's going to be having I believe a lot of recurring revenue to a company.
It's a kind of an irresistible.
Alarm system, which is good both commercially residentially.
With this one product they can carry the deal and carry one product on their van and they can do all kinds of commercial and residential jobs. This is 80 zones.
As I O T Bill to do it as cellular built into it and it's priced at a kind of an irresistible price to the deal as compared to anything else in the market. So it's got more functionality.
And its price is much much better deal is can build more equity in their business by.
Buying this because about laying out as much cash for equipment as they've been doing in the past with the competitors. So.
Typically <unk> typically but wasn't other covert times. It typically take nine months to 12 months for a product to get or an okay by the dealers they talk to each other they meet each other a distributor counters they talk to each other it.
Get togethers, neither emailing and talking and they're buying but it slowed it up a little bit but the potential is tremendous it is an anchor for the industry. This product and I figure isn't and another nine months and so it should be coming at the strike.
Right, it's got a tremendous upside it does all types of businesses at homes as I said, so everyone that is bought by a dealer and installed isn't rolled on our backend knock at every one of these then generates recurring revenue somewhere between seven and 13.
So as a month.
For us from the dealer and he pays us not a credit card.
The dealer then we'll market up to whatever type of job he's doing with the other accessories, adding how many zones to it smoke detectors, he's enabling io d., but we get a seventh 13 and then he marks it up whatever the market will bear so it's a very exciting Fred.
Like let a lot of volume to our recurring revenue as well as our equipment sales.
[laughter] Perfect then last one for me just wanted to ask about the new air access product and you talk about what the market for this product is who who's the targeted for and then I'm sure you've been talking to your dealers with this and getting some feedback what are the you know early indicator.
Given the of interest from your installed base for the full year access product.
The the Big picture here the vision is to get all of our equipment to generate recurring revenue.
And therefore, it's more than a onetime sale.
Oh, the locking and access control is a onetime sale and the sales department is selling them to enterprises of all sizes. So they have a locks hospitals or businesses of all types high rise buildings.
Office buildings. So we are well, we enjoy building the product and getting nice sales out of the product, we Wanna get recurring revenue for the product.
So we've developed air access, which is gonna be using as a communications or our cloud our endosee.
Up to this point access control products are utilized typically the I.T. departments network that network is something the I.T. group of people doesn't want to I have infected by any possibility of hacking.
So there's always a political situation in the building.
You want to get access control, but you don't want to affect the network. So we've now eliminated all of that air access is the first.
Cellular access control a system that has a recurring revenue for us and for the dealers by using the cloud the deal it no longer has to buy thousands of dollars worth of equipment and keeping it on the site.
All that equipment is in all cloud so it's as simple as installing it on doors with radios and goes up to the cloud. The equipment is all in the cloud deal doesn't have to pay for it. He just pays a fee for utilizing our system and we think this is going to be a.
Major home run for the company.
Great. Thanks, a lot guys appreciate it.
Thank you are in next question comes from.
Mike Walkley with Canaccord Genuity. Please state your question.
Great. Thanks for taking my question.
Kevin or Dick just wanted to.
Follow up on you know the improving sell two trends at some of your larger distributor customers can you give us any any additional color just on maybe inventory levels from your distribution or dealer partner channels, where there any kind of pre buying with cobot worries you know kinda over stocking inventory.
That they're working through or any kind of direction you can give us on just a channel inventory would be helpful.
Oh.
Yeah, Mike that no none of our distributors seem to load up on inventory.
Ah so that their supply chains would not be interrupted.
Which is something we did we loaded up on inventory, so that our supply chain with that being interrupted.
They did so.
So when we see the.
Good strong sell through stats that we've seen for July and August what that means they gonna have to buy because they didn't load up.
Nothing nothing out of the norm and I guess I understand that they weren't show what was gonna be what the sales were gonna be.
Until they have more clarity what was going to happen with covance.
But now that the country seems to be opened up more than it was.
Versus last quarter.
I think they're seeing by the sell through stats.
At a they're gonna have to step up in.
Play some nice orders come the end of this quarter, that's our whole that's our expectation.
When you're dealing with distributors you never know, but always the best sign is when you see strong sell through.
Great. That's helpful can it get this good to know that.
True could lead to better sales and just leading to sales trends I know a heavy six cost that you highlighted in the script to with the Dominican Republic facility can you just to help investors on the call you. If if equipment sales rebound to say 18 million where to gross margins jumped to and you. If they just go up 4 million more to overtime.
20 million when they go away back to you know the 30% range. Thank you.
Right so.
Fixed costs are a great thing, especially when.
Hardware sales when the equipment sales are growing.
20 million as magic number get to 20 million.
Margins typically 33%.
Get above that they go above the 33%.
When we get to 24 25 million of equipment sale doesn't take that much.
And your Mark gross margins get to 40%.
Project that when we get to $100 million of equipment sales, which is an average of 25 million per quarter.
Gross margins would be 40%.
At 18 million, you know that be lower than than the bar the margins would probably be into high 20.
You know at.
At 20 million, we'll be back to the 30 33, 32% range. So working hard recurring revenues the name of the game around here, that's what we care most about 80, some odd percent 80, 384% margin, but we don't forget about the hardware sales because that gives you.
A nice margins also the larger we luxury grows.
And we're working hard to restart 20 million at beyond.
Our goal still we still want to be $100 million of hardware revenue by next year and beyond go out five years beyond that our long term goals.
We want to have $150 million of.
Recurring revenue of $150 million of hardware sales were 50 50 split.
Today.
Recurring revenues, 25% of sales not bad for five years, but we wanted to get to 50% five years out.
Those are the long term goals.
Great and just building on that Kevin, Yes, very strong gross margin nonrecurring revenue again that you know 83, I think correct you put the company sounds like fighter radios are big driver of that it does things like I secure and the new air access products grow in the mix how might that impact gross margin.
Percentage, obviously, it's going to be positive gross margin dollars, but yeah. I was a should we think about recurring revenue gross margins are just other products scale in the model.
You know at fire radios with and the only thing with selling.
The recurring revenue.
Gross margin on recurring revenue would probably be into nineties.
Right, but not everything and fire.
The mix today.
80, 384%.
As we introduce these other factors.
Whether it's a ice secure access they're not going to be as strong as fire radios margins.
But.
Hi, radios haven't hit their potential either.
They were introduced after all the other radio so they're still not the lion's share a radio that we sell and yet still their impact is to get the gross margin into the 83% range.
The other ones are going to help us get to the 50 50 split by 2026.
Not gonna be is as 90% type as fire radios.
But all the whole mix, we should be an 80% range when it all when it all gets added up in the end.
Great. Thanks, a lot lot squish money and I'll pass the line.
Obviously difficult time Youre schools opening and closing can you just talk about maybe the pipeline for school projects with all the federal and state money set aside are these starting to pick up again here into the fall or or the slowing down just because students are starting to come back.
We're seeing a lotta universities.
That have been awarded that have awarded jobs.
Two integrators.
And the integrators are ready to give us the purchase order.
And the only thing that's holding it back is the integrated doesn't know exactly when they're getting into the school.
And we'll get a we say to the integrator, let us give us the PEO now.
I will ship. It now you know whenever you get in to get in and they go though I want to time it right I don't want to be sitting with this equipment.
Say, we'll give you extra time.
And so they say to what don't worry he got a job. It's just let me let us figure out when we get in there. So there's a certain amount of uncertainty when they integrate it could get in there.
So we've been awarded [noise].
We've been awarded a bunch of or will be awarded a bunch of job.
Bunch of school jobs, and they're just trying to time, it right and I understand that they don't want to place the water and then habit fit if they can't get into the school, but they want to do these jobs now.
Because the schools, even though they're back.
Hi, Brad that's not it's not the activity on a campus that it usually is it's a perfect time.
For for the job to get installed so we're working with the integrator.
And you know our expectation is we're going to win a bunch of jobs soon.
We hope by the end of September if not it'll be shortly thereafter.
Committed that they want to do this work.
And on the K through 12 front.
What we've seen there is any money that had been awarded by the state to the schools the K through 12.
That money has to be used physical security.
Schools today with the cold, but they have tremendous budget problems they can't touch that money.
Yes, it's for school security So that's a good thing otherwise.
I would use that money because they have tremendous deficits all over the country, but school security money.
That's been funded for the security, that's what it's going to before and nothing else and that's a good thing too.
Great. Thanks for taking my questions hopefully you're a partner seen improve sell through your comes back here in the future quarters for you guys. Thanks, Mike you.
Our next question comes from Jason Smith with Lake Street. Please state your question.
Hey, guys. Thanks for taking my questions. Just following up on that last question. What do you guys, maybe seeing some pent up demand across your businesses and then to be ability you may be too.
It back into schools and do some installs on diesel left populated campuses do you think all these forces will impact sort of its seasonality you typically see him up here, meaning could seasonality for fiscal 2001 be different than historical patterns.
Probably Jason because.
It's darkly.
Schools only want us they only want to do the installs in the summer months and the kids are completely at school.
Or even in the winter months when there is like an intercession other kids are at a school.
Different now I think they they didn't do it during the summer months.
And they want to do it now and campuses are not that busy.
Even though school as return it's not like it normally is.
And so they want to forge ahead.
And we do also and as soon as the university's give the integrators to go ahead a lot of its is going to start up again. So I don't think the whole seasonality just get a hold true anymore. They want to get this thing done now they're behind and remember most schools have no security maybe 10%.
I could have security and the schools.
And the Big open area, probably 90% of schools have nothing.
Hard to believe despite all the shootings and events that have gone out so still a big opportunity, it's up to us to push forward with the integrators and with universities and with K through 12, there's many schools out there over 100000 came through Twelves overt over 10000 University.
And I'll add it's not just schools any place where people gather it's an opportunity.
Whether it's a houses of worship.
Whether it's a restaurant chain anywhere they're all subject to the same chaos that could happen.
So we're working hard to get our products into all these places.
Yeah, there's a demographic change here.
The population is theres more chaos in the streets.
The police or as we know our.
Thing marginalize and that insights a lot of tension in schools and places of worship because you never know what can happen even restaurant business when people come breaking it the rest are as well that people are there. So there's definitely an on.
Going changes taking place we're more security is going to be necessary and our dealers are going to say, we predict they're going to be busier than ever.
Going forward and and then the products that we have them and so we'll have recurring revenue component to them.
So they'll be more protection for the businesses what protection for the homes dealers will be motivated to put more jobs them because there's a big a demand for this type of equipment and they will make a recurring revenue for themselves.
And we get the recurring revenue from these jobs for ourselves so.
We predict that this is going to be a big sea change going forward.
And were constantly putting money into engineering, we keep our engineering budgets in line.
What we come out with more efficient products.
The efficiency of developing products and there's a lot of new things on the horizon everything all the have recurring revenue component to it that we're developing now.
Okay, that's helpful and but actually leads me to my next question it might be hard to pinpoint exactly but do you think you've noticed a inbound and significant uptick in inbound interest in quoting activity due to the civil winter I suppose here.
I think it's a natural you pick up any newspaper listen to any TV reports you see that the police a marginalize you see what's going on and many of the cities and that bodes for more security.
And we have our dealer base is 12000, a security dealers there all over the country. So a they're very entrepreneurial type guys. They go out and they market well.
As soon as they're going to be able to get into buildings, 100% residencies, 100% they've got to be pushing very hard to put in more security equipment. Since we make very reliable equipment priced right.
Offer the recurring revenue services to the deal is in a very easy way for them to install it which also allows the end user whether it's still the jobs a into the I O T control of video on your smartphone and lighting control and the service.
Control.
All remotely it becomes a great marketing opportunity for the dealers worst security for the population and more security work for the dealers. So that's how we see it going forward.
And we expect a level to be ramping up.
Okay and last one for me and I'll jump back into queue did you repurchased any shares in the quarter interrelated Lee how should we think about capital allocation going forward.
He did not.
Purchase repurchase any shares in the quarter.
We're always looking as a potential that we might to it.
As you can see our cash is growing.
Nice problem to have we havent exactly decided.
How to use that cash is a good problem to have.
Buyback as bid one of the things we've done in the past then.
You know, we'll see what happens it could always be done in the future.
Okay. Thanks, a lot guys.
Thank you Jay Thank you.
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Our next question comes from Rohit Sharma with B. Riley FBR. Please state your question.
Hello, Good morning, guys good morning, Richard Kevin.
Hi, I had.
So I know you numerated, how the decline in gross margins in hardware and would you too just lower sales volume below 20 million is there any pricing power all last year in hardware sales onto mutant lower gross margins.
He did not have any pricing issues. This this quarter was strictly volume.
And.
Our expectation is.
When the hardware sales every Stuart.
The pricing will be as it was.
And once again, we go over that 20 million magic number it Mark right margins will come back as strong as ever.
That's great. That's good that's great and so what we hear what we hear from dealers just give me a flavor of what this is about so the dealers and telling US you know we want to get back in but were shut out.
So we're going to live all of our recurring revenue.
And they were going to push very hard to get in and do more jobs to build up that recurring revenue base, we hear that a lot.
And that'll only happened for a certain period of time and that'll be coming back as we read and hear about.
Places are opening up now starting to open up and therefore that sell through that Kevin was talking about before at the distributors bodes for.
Growth coming forward because it distributor must have all the products on the shelf in order to satisfy those 12000 dealers. So a deal is doing a commercial job residential job all the S.K. used to do those jobs have to be it the distributor so as a distributor rugs.
Lean he has to backfill with more products, if he doesn't backfill with what product he's going to lose the sales the dealers can shop at other distributors.
We have more than 200 different distributors summer networks, the large ones that work groups and some are independent they may have one or two or three locations, but a dealer wants to do jobs. It's his life blood if you can't get it for one distribuio get it from another and.
We look at distributors as wonderful shelves for us, but the dealers are tenacious guys wanted to put jobs, it and build a recurring revenue base.
That plays well into air access we want to give the integrators, which are different type of installation company a product like where they can start building building recurring revenue like alarm dealers do.
And that's gonna be coming out in the fall winter and that's going to be a very popular product because we're going to show the integrators, how they can make money like the alarm dealers do on a recurring revenue basis. So there's a lot of wonderful things going on unfortunately covert.
Yes, and close down a lot of facilities. So the mechanics, you can't get into the into the homes into the jobs or into the businesses, but that will change temporary.
Bump in the road as we talked about before we get 23 consecutive quarters of growth.
We want to get back into that trend of growing again, and we have more window sales with better products.
That offer recurring revenue than ever before so should be a nice voyage going forward for the investors that can appreciate and understand what's going on.
Right and then on on a secure sales into this quarter or are these both.
Hardware and recording sales.
For the only recurring cells.
So the what happens is the jobs to go in with every ice secure.
There's a recurring revenue part of it.
Recurring revenue if its uses a basic communicating a alarm system to the central station, it's roughly $7 a month to us if it's enabled through our system to be Aiotv Internet of things video cameras.
As a service that lighting that goes up to $13 of up to us. So.
We don't we don't want to make a product that doesn't have a recurring revenue components of it.
Right and any indication how big businesses this quarter in what you expected to be.
The year or is the too early.
Well, we we don't make predictions, but if you've got a product that's.
Feature rich beyond anything that's on the market.
That's priced at a price points because it was automated and it's built in our Dominican factory that's half the price.
Has the NAPCO reputation for reliability.
It's got to be a winter.
So I if I was a dealer I wouldn't do you want to use anything else because it's a less equipment cost for me and I get more functionality out of it and I don't have to go back and that really service it because of the fact that it's NAPCO reliability.
Which is a step beyond all the other product brands on the market.
Right. So any is it a is that still immaterial pieces of business this quarter.
As just sort of started to ramp up.
It's in the beginning stages of the growth we put it out in December we sold out all the production.
The Jennifer March quarter.
Because we.
We sold all the products, we want to put it out kind of slowly so that we can a monitor its performance.
And get feedback from the dealers and then the covert aspect that came into play, but it's a wonderful product.
Brett Claire Sandisk and then let my last question just following up on the schools.
We've seen seem continues seemed like a great opportunity here what percentage of the coastal business do you do in schools, and and and How's that split between hardware and recurring and and what kind of growth are you seeing in schools or do you expect to see for this year.
Can you.
Give some indication there.
We don't breakout how much.
School Security is a total sales because we don't know.
Because a lot of times, we will sell products to a.
Lets call it a locking distributor.
Right locking distributed will sell it to the school so we don't even know.
But what we do know is that since school security came onto the scene.
Which so I'll say it I'll call it five years ago.
Locking became a bigger and bigger part of our business is the largest part of the hardware business.
60% of the equipment business so.
That's not an accident that because of the various school job that we've done over the years.
Potential is tremendous.
And.
The fact that 60% tells you a lot, but I can't tell you specifically how much it is.
Got it. Thanks, you think you guys when they look Oh God awful exit.
Thank you there no further questions at the time I'll turn it back to management for closing remarks. Thank you.
Thank you everyone for participating in today's conference call.
As always should you have it any further questions. Please feel free to core Patrick Kevin or myself further information.
We thank you for your interest and support.
We look forward to speaking to you all again in a few months to discuss Napcos fiscal Q1 21 results.
Bye bye.
Thank you all parties may disconnect have a good day.