Q1 2021 NAPCO Security Technologies Inc Earnings Call
Ladies and gentlemen, thank you for standing by our conference would begin in just a couple of minutes. Once again. Thank you for standing by our conference will begin in just a couple of minutes.
[music].
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Question and answer session will follow the formal presentation my name.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Patrick Mckillop director of Investor Relations. Thank you you may begin.
Thanks, Daryl Good morning, My name is Patrick Mckillop on the director of Investor Relations here at NAPCO security.
Thank you all for joining us for today's conference call to discuss our financial results for our fiscal first quarter Twentytwenty one.
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 releases available in the Investor Relations section of our website.
Www Dot NAPCO security Dot com.
On the call today is what you saw way President CEO of NAPCO Security technologies, and Campbell Shell Senior Vice President and CFO.
Before we begin let me take a moment to read the forward looking statement.
This presentation contains forward looking statements that are based on current expectations estimates.
Forecast and projections of future performance based on management's judgment beliefs current trends and the anticipated product performance.
These forward looking statements include without limitation.
Mitch relating to growth drivers of the company's business, such as school security products and recurring revenue services.
Central market opportunities there.
The benefits of our recurring revenue products to customers and dealers.
Our ability to control expenses and costs and expected and and expected annual run rate for Hsas recurring monthly revenue.
Forward looking statements involve risks and uncertainties that may cause actual.
The results to differ materially from those contained in the forward looking statements.
These factors include but are not limited to.
Such risk factors as described in our SBC filings, including our annual report on form 10-K.
Other unknown or unpredictable factors or underlining assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in forward looking statements.
Although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future 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 and this conference call is as of today's date unless otherwise stated.
And we take undertake no duty to update such information, except as required under applicable law.
I will turn the call over to get get a moment before I do I just want to mention a few things in the IR front.
We will be attending the Needham growth conference, which is taking place January 11 through the 15th.
Oh 2021 also we are planning for more virtual rug sales throughout your name to be here and.
Investor outreach is crucial especially for small cap companies such as NAPCO now we'd like to thank all those folks that assist us in this call such as the marketing trips.
With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO security technologies kick the floor is yours.
Thanks, Patrick.
Good morning, everyone and welcome to our conference call.
Thank you for joining us today to discuss our results.
I am pleased to report that because of our efforts and strong business model. We have delivered significantly improved results compared to the fourth quarter fiscal 2020.
Despite the ongoing cope with 19 pandemic.
First quarter recurring service revenue gross margin, they did and adjusted EBITDA all exceeded analysts' expectations.
Our recurring revenues continue to grow at a rapid rate.
Our recurring revenues increased 36% in Q1, and now have an annual run rate.
I mean I'd point Sevenmillion.
As of September.
Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth.
Our balance sheet remains strong and our cash balances continued to grow.
We remain focused on capitalizing on key industry trends, which include school security solutions.
Wireless fire and intrusion alarms, plus enterprise access control systems and architect.
Architectural locking products.
And that's all management team continues to focus on the key metrics of growth.
Profit and returns on equity and controlling cost, especially during these difficult times.
These metrics are important to us as well as other shareholders.
We continue to execute our business strategy and our interests are aligned with our shareholders and senior management at NAPCO currently owns 36% of the equity.
Before I go into further detail I'll now turn the call over to our CFO Kevin Michelle.
We'll provide an overview of our fiscal first quarter results and then I'll be back with more on the strategies and outlook.
Kevin.
Thank you Dick and good morning, everybody.
And the first quarter financial performance was significantly better than last quarter as we generated major increases in each of these categories recurring service revenue.
Gross margin for both equipment sales and recurring service revenue.
Net income.
Adjusted EBITDA.
And we also exceeded analysts' expectations in each of these metrics.
Net sales for the quarter was $23.2 million compared to $23 million in the fourth quarter of.
Physical 2022.
$26.3 million for the same period a year ago.
The 12% decrease in sales for the quarter versus a year ago were primarily related to increased equipment sales, which were caused by the ongoing COVID-19 pandemic, which.
Just cause difficulty.
At least for security equipment professionals.
Adding access to both commercial and residential installation sales.
We believe this is an industry wide issue.
And not due to the loss of any market share unique NAPCO or any longer term negative view of the post pandemic health up the security industry.
On the positive side, Starlink radios and fire products continued to significantly increase in Q1.
Pad to both Q4 and Q1 in fiscal 2020.
This is important as these are the products that generate recurring revenue.
And to that end recurring monthly revenue continued its strong growth.
Increasing 36% for the quarter.
Recurring revenue are now has an annual run rate of $29.7 million.
Based on September 2020 recurring revenue.
As I mentioned on our last earnings call. The majority of the company's factory costs are fixed costs.
As you'll remember when equipment sales for the quarter increased about $20 million.
Overhead absorption increases gross margins expand.
Firstly when equipment sales are below 20 million.
That occurs.
We're in the midst of Covance, 19, pandemic, which temporarily affected the volume of our equipment sales.
To combat this issue, we have taken certain cost cutting measures, which contributed to a significant improvement in the gross margin up equipment sales.
Which increased by 1400 basis points as compared to the equipment sales gross margin last quarter.
In addition, the gross margin of 29% for equipment sales for Q1.
Was 400 basis points better than the street consensus.
Gross margins for recurring revenue continued to improve coming in at 84%.
500 basis point improvement versus the year ago period at.
And also beating the street consensus estimate of 80%.
Our blended gross margin for Q1 was 46% as compared to 44% last year and also beat the street consensus estimate by 500 basis points.
The increase in gross margin for recurring revenue was primarily due to increased sales of our starlink commercial fire radios.
Which generate higher margins.
We continue to become a larger part of the overall recurring revenue mix.
Gross profit for the quarter was 10.7 million, which was a 34% increase compared to the fourth quarter of fiscal 2020.
Which was $8 million.
And a 7% decrease compared to last year's gross more gross profit.
7.5 million.
Research and development costs for the quarter were $1.9 million as compared to $1.7 million.
In the year ago period, and 8% increase.
And were 8% of sales 7% of sales for the quarters ended September 32020, and 2019, respectively.
The increase was due primarily to increased payroll from salary increases.
Selling general and administrative expenses for the quarter remained relatively constant.
At $6.1 million or 27% of sales.
As compared to $6.2 million or 23% of sales.
Same period last year.
The increase as a percentage of sales profit was primarily due to the aforementioned decrease in sales while last year. They remained relatively constant as compared to the same period a year ago.
Operating income for the quarter was $2.7 million as.
As compared to operating income before a onetime charge.
A $1 million in the fourth quarter of fiscal 2020.
And that represents a 161% increase.
And $3.6 million for the same period, a year ago, which is a 26% decrease.
Income tax expense for the quarter was $329000.
Which represents an effective tax rate of 12% SK.
As compared to $369000 with an effective tax rate of 10% last year.
Net income for the quarter was $2.3 million or 13 cents per diluted share.
As compared to net income before one time charges.
$1.5 million or eight cents per share in the fourth quarter of fiscal 2020.
53% increase.
And $3.2 million or 17 cents per share for the same quarter last year, a 28% decrease.
Adjusted EBITDA for the quarter was $3.2 million was 17 cents per share.
As compared to $1.5 million or eight cents in the fourth quarter of fiscal 2020.
Representing an increase of 115%.
And $4 million were 22 cents per diluted share for the same period last year, representing a decrease of 20 cents a 20%.
Moving onto the balance sheet.
At September 32020, the company had $21.9 million in cash and cash equivalents.
As compared to $18.2 million as of June 32020.
Working capital was $62.7 million at September 32020.
As compared with working capital of $61 million.
At June 32020, the current ratio was 5.5 to one at September 32020, and it was 4.5 to one at June 32020.
Net cash provided by operating activities for the quarter increased 29% to three.
$3.8 million as compared to $2.9 million for.
For the same period last year.
Capex was $143000 during the quarter versus $181000 in the year ago period.
That concludes my formal remarks, and I would now like to return the call back to Dick.
Thank you Kevin.
Our first quarter equipment sales were impacted by the ongoing COVID-19 pandemic.
However, as Kevin mentioned sales of Starlink radios and buy a product we're not impacted.
And as a result, we continue our strong recurring revenue growth.
Along with 84% gross margin.
Oh seasoned executive team here at NAPCO performed well by managing cost.
Living improve margins and beating street consensus earnings per share estimates.
We have recently seen positive signs from some of our largest distributors.
So through rates have increased.
We continue to believe that we are well positioned to rebound.
The economic recovery.
Our business is comprised of 80% commercial and many of our products are deemed essential.
Such as non discretionary commercial firewall good indicators.
NAPCO also plays a vital role in the health care vertical.
Locking and access control divisions, which for example provide entry exit devices and push pull locks with anti microbial penetrations.
The trend the violence in cities across America continues to happen every day and these events are driving the need for more security.
Maybe businesses, such as stores restaurants and offices.
Preparing for more.
Volatile times and here.
The growth of recurring revenue, which in part is being driven by the commercial scalding fire radios <unk>.
You didn't used to be a bright spot in our business.
In fire radios particular also helping recurring revenue gross margin expansion as evidenced by the virus.
Basis point improvement versus the year ago period.
As the communication paradigm continues to sunset away.
Legacy copper.
And the Threeg infrastructure and it creates a significant opportunity for our proprietary starlink radios and alarm systems fire and burglary to generate additional steady streams, a recurring service revenue growth.
The school security market remains a significant market market opportunity.
Well, we have seen some delays in planned security upgrades they have not been any significant cancellations.
You are available the grants the school to fund these security projects and has never been better with options from the U.S. Federal government and the state governments being ratable.
In September the Department of Justice, the Justice issued $50 million the grants schools across the U.S.
And in the state of Indiana as an example, the school board approved $19.4 billion in state matching grants the security upgrades in school.
We remain focused on providing schools the products and the solutions they need to protect the students and faculty.
Well schools are having students return full time.
I'd reiterate mode.
Varies from state to state, we still witnessing schools seeking to upgrade and implemented systems. During this time as they continue to plan for the future.
Press releases regarding school and University security projects are issued when the opportunity is allowed as you must receive approval from these institutions prior to a release.
During our fiscal 2020, we launched the ATM T. L. P E stalled link line of Universal fire intrusion, and I O T communications, which you're playing a vital role in the need for the upgrade of older three G.H.T.D.
Give me indicators.
Stalling communicators offer the widest coverage in the U.S. the dealers with both 18, you de ever rising LG Easter.
I used to secure commercial or residential 80 zone alarm system that goes way. This recurring revenue product innovation continues its rollout.
Fourth quarter.
We are still in the early days, but private boards and continue to receive favorable feedback from our dealers.
Hi, secure designs to the new breed of professional installer and savvy consumer.
As you know has installation times, the one hour and office the feature rich sets of specifications that many residential and small midsize businesses looking for today.
Yeah I secure off is the most cost effective functionality in the industry and has stalled they communicators inside which will generate recurring revenue with every sale and installation.
Looking into the future expanding our cellular communications technology. The other areas in the security interest is a focal point of our strategy.
During the end of this calendar year, we plan to introduce a cellular based locking and access control product line using our Starlink technology.
It'll be known as anywhere access.
This will allow dealers NAPCO generate recurring revenue from locking and access control products.
The benefit that end users will enjoy include no need for upfront investment in hardware and additional <unk> personnel and no onsite.
Database backups software update.
We will begin our Q when they said should portion of this call in a moment.
Oh first fiscal quarter 21 was a challenging one but.
Successful.
For the COVID-19 pandemic began significantly impact our country back in March NAPCO had achieved.
23 consecutive quarters of year over year record sales.
I am confident we will well position, we are well positioned for the economic recovery to come I.
I will soon start another record sales streak.
Despite the challenges posed by over 90, we remain highly focused on successful execution of driving sales growth and increasing profitability and are confident that our strategies will enable us to deliver strong financial performance in the future.
Napcos senior management maintained a high level of ownership and our equity currently 36%.
I'd like to thank everyone for their support and for joining us in the exciting future we have.
Our formal remarks I have now been concluded.
We would now like to open the call for UQM They show up.
Operator. Please proceed.
Thank you so much we will now be conducting a question and answer session. You would like to ask a question. Please press star one on your telephone keypad.
A confirmation total indicate your line is in the question queue Cuba.
You May press Star two if you would like to remove your question from a Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys one.
One moment, please while we poll for your questions.
Our first question will come from the line of Matt Pfau with William Blair. Please proceed with your questions.
<unk>.
Hey, guys. Thanks for taking my questions.
Wanted to start off with the sell through that you're seeing from your distributors and wondering if you can provide any more details on what you're seeing there and then when.
We could potentially see some computers ramp up there they are purchasing activity again.
So you want to take that yes, sure so Matt.
[music].
We talked about sell through.
On the last call.
And we had at that time.
Well three stats from we talked about a couple of distributors we had it through.
Our July and August So now I have July August and September at the whole quarter.
And I looked at.
Couple of two biggest ones R&D alarm side.
And I looked at a few of the locking side.
And here's what I saw it was very interesting so.
On the alongside.
Our biggest customer weve talked about that last year.
Had a 25% increase in sell through stat.
Compared to the prior quarter, so sequential a sequential increase of 25%.
Year over year, it was up 28%.
Pretty good pretty strong.
Another big.
Alarm distributor had a 35% sequential increase.
And a 39%.
Craig.
Year over year sales.
That is for the.
July August September quarter.
On the locking side.
I look there as well.
We have looked at the three biggest ones we have the first guy as part of that big customer that we have.
Sequentially they were up 32%.
They were down only 4% year over year.
The next big customer I looked at was up 55% sequentially.
It was up 16% year over year.
And the third one I looked at.
It was up 30% sequentially and up 15% year over year.
So.
That bodes well for the future I said on the last call I get just don't know.
When the distributors are going to actually place orders.
They're probably playing it very conservative.
Try to be just in time distributors.
But with stats like piece they got to have no choice. So.
I expect.
This to translate into.
Factory sales soon.
Should be in this quarter the quarter, we're now Q2.
One would think so when stats like that how.
How low could their inventory levels get.
Certainly for the balance of 22.
21, you know Q3 and Q4 for us.
I.
I think that's the expectation we have unless something changes I know the pandemic hasn't gone away yet but.
But more and more dealers that are getting access it.
These are pretty powerful stacks.
So we continue to monitor it and as we learn more we'll share it with everybody, but right now we are.
Very encouraged by the sell through stat.
Great and then the other thing I wanted to ask about what's the the fire business. So all of your recurring businesses seem to be doing well, but in particular, the the fire business seems to be doing or at least seems to be a stand out there.
What what are you seeing that's driving that business right now and maybe just sort of an update on how you think about that that opportunity longer term.
We love the fire business, because it's a mandated business to keep a certificate of occupancy in the building.
So there there are lots of fire logs millions and millions of them that use copper.
As the communications link to the Central office copper is going away not being supported by the carriers anymore and therefore, the dealers are looking to replace.
The copper with a radio solution and stole like seems to be a very important radios choice to the dealers. So we have many many years of the retooling of commercial buildings of all types from copper to radios.
And as far as I can see in the future. It's Ah we're talking about huge quantities of jobs that are going to be converted using starlings.
We also have fire panels for new work, so when a new job goes into building. They can use the starlink fire panel so automatically besides having zones for smoking carbon monoxide.
It also has a built in radio which communicates to the Central office reports these fire condition. So it bodes very very well for us its mandated not elected.
And ER and we're gonna be keep building upon this sector of our communications business.
Great.
Thanks, guys. That's it for me I'll pass it along.
Thanks, Matt Thank you.
Thank you. Our next question does come from the line of Mike Walkley with Canaccord Genuity. Please proceed with your questions.
Great. Thank you I hope everybody has a safe and well on the call.
Kevin or Dick just wanted to follow up on that the strong gross margins in the quarter can you help us think about you the cost savings is there or not how a new level below 20 million. When you start to see kind of cost improve from on the hardware front or maybe just think about.
Maybe a product mix versus some permanent cost reductions that are going help the gross margin trends.
Well in this quarter and last quarter, we saw we took a big hit the gray.
Gross margin on.
On equipment sales.
And we didn't want to go through that again, because we won.
While we while were seeing improvement and people are getting more access to building.
And the sell through stats are strong.
Yeah, we can't live our life waiting for the.
Distributors to necessarily place to kind of orders that they should.
So we reacted to it they have a lot of experience in reacting in difficult times.
The recession.
Evault nine taught us well and.
So we made cost cuts.
That affected the margin on.
On equipment sales.
It's probably a combination of that and mix, but a lot of it was cost cutting.
We saw this trend of declining hardware sales.
Tail end of Q3 of last year.
Each quarter.
We obviously saw it continue in the June quarter.
We wanted to react to it we're not going to sit back and just watch it happen.
So that's why you saw.
The margin increase on equipment sales.
Go up so dramatically.
To about 29%.
We think things are going to be coming back.
So these cost cuts are not permanent.
Because once things are back.
A lot of these costs will go up again, but.
But we want to be our margins should be.
At a $20 million level in the mid Thirtys.
And again as we get the hardware sales to.
Go to 25 million like they've been in say the Q4 period.
Then it starts to hit 40%.
Those are still our goals, we we want to grow hardware sales just like we want to grow.
Recurring revenue sales in both import.
Carrying revenue has that dramatically high margin the 80% plus.
The hardware sales will get dramatic.
Margins as it grows we believe it will grow.
We'll cut costs that if necessary.
But when we don't have to will restore them.
At $25 million it will be at close to 40% gross margin on hardware sales as it goes above that we want to get into the 50% range.
So.
It's very important just like recurring both.
And the mix will help us to depend.
Spends on the mix the mix helped us this quarter versus last year, but it's a combination.
Great. Thanks.
Just a follow up question just on on the hardware business you know historically, there's been a lot of end of quarter buying in and thanks for sharing some of those encouraging trends on your large customer sell through trends. You know is there any early sign here in October that maybe they're going to more linear buying so you're starting to see signs of recovery or you know.
I guess another way to ask it is how much lower can some of these customers going inventory until they really need to start buying product to begin to start start seeing a little better growth trends with things opening in recovery.
We have.
I've encouraged.
The distributors to not sit back and wait.
And we've seen on some of them.
That they've been doing more by Inc.
On a week to week basis.
Than we've seen before.
So as I look at the October stat.
It's just one month.
The factory sales, but on some of these guys are very encouraging.
I think they.
Want to buy as they go they don't want to wait till the end because they're not even sure what's going to happen.
To wait until the end of December and put in a big buy they can't afford to wait.
They are running low as they sell through stats remain strong so some of them have.
Done what we've told him to do by.
Biweekly noxious weight to the yet it's crazy that it all comes down to the last two weeks of the given quarter.
So I think in these cautious time and.
And them not wanting to run out well.
We're seeing that.
That's encouraging also.
Great. Thanks, and last question for me and I'll pass along just just on the on the school market. It certainly makes sense with education, just just struggling to to open operator in the Pandemics. It makes sense some opportunities have been pushed out a little bit. The <unk> can you just talk about you.
So what you're seeing in terms of the pipeline and and feedback on when timing of these projects might happen, if they're not not a loss, but more delayed just given you had such a challenging environment for the education system. Thank you.
But we're not seeing cancellations.
We're seeing delays in some cases.
Schools are wrestling with.
At my open for students.
Hi, My hybrid 100% I.
My somewhere in the middle.
Uh huh.
They want to get the job done that's what we're hearing and in some parts of the country.
Where we're seeing that happen and we're getting jobs.
In parts of the country.
In other parts, it's like on hold type of situation.
We're encouraged that we haven't seen any cancellations were encouraged that quoting still remain strong.
When.
These integrators are going to be able to get into certain schools, it's hard to say schools.
Schools are wrestling with.
Overall problem of trying to keep the school safe from coal.
But we were encouraged by seeing department of Justice issuing $50 million in grants the schools across the U.S.
We're encouraged what we saw in the state of Indiana are improving.
$19.4 million and state matching grants.
School security is not going away.
It slowed up somewhat understandably.
But for US it remains a big part of the business.
There are some jobs that we've gotten.
And we're in the midst of trying to get approval on them. So we can announce it.
We have to get approval in order to announce it.
And as we get that we will announce it.
But believe.
Believe me, it's it's school security here to stay.
It's just a question of when it really starts to ramp up again, we feel the sales come through.
Great. Thanks for taking my questions.
Thanks, Thank you.
Thank you. Our next question comes from the line of Jason Smith Schmidt with Lake Street. Please proceed with your questions.
Hey, guys. Thanks for taking my questions. Just curious if you could comment on what customer reception has been on air access and just up the current macro backdrop has changed your thinking on when that potentially could be a meaningful revenue contributor.
Air access is a.
Very unique product in the industry. It will be the only one that uses the cellular network.
Such that you don't have to go through the ice tea departments network.
Yeah, I'd say the government doesn't like that.
Product on their network, which could create a an entrance for hackers to commit so it will also allow the dealers.
Connect.
To the building that protecting.
With although it equipment up in the cloud you won't have to have equipment on site equipment to servers and things like that that will all be in the cloud and make it easier for upgrades or.
And changes to the software and it will also allow the use is to be able to use apps to be able to interrogate find out what's going on within systems allow the dealers to due time and attendance Ross.
Roster list do remote management or through the cloud so that the end user will be able to access data and the deal to be able to introduce that or be able to get data from the cloud.
And it'll allow the deal is depend to treat the monkey quicker and not having to have equipment, which is expensive on site.
A lot of the equipment, we don't make its other equipment that is communications network.
But so we're not going to see any loss, we're going to pick up a lot more business, we're going to pick up recurring revenue in a whole vertical where we don't have recurring revenue. Our recurring revenue comes from buyers systems burglar alarm systems, and we want recurring revenue from our locking.
In axis system, and air access will allow us to.
Introduce it to that part of the trade, which does locking in access control and they can build equity in their business is by putting in our systems. So that business is valuable and they can treat accounts like a lot of deal is due to each other and get a very nice multiple when they want to raise cash.
From their businesses right now dealers that are in access control locking they put a job and maybe they'll get a service contract, but they don't have a continuous flow of recurring the way we're going to do it they will.
We're going to have it out this year towards the end of the year.
And typically this is a takes nine to 12 months.
Who are product to mature in the case of this one it's going to be the same way because this is a complex system and it's a whole new development in the access control and locking business for the dealers are having all this communication using starlings having.
The ability to give services to their end user offering the end user.
Ability to look at things throughout the whole building, so I figured I'd give it nine months a year and it should be a nice contributor and it's going to go up to use use in years. It's unbelievable. How many buildings will lead this upgrade so that they are in supply better communicate.
And not have equipment on site. The deal is one that the role Trups anymore to do upgrades were due to a change and equipment.
We'll be done remotely and it's the new way and the new order of things and I will first to do it.
Okay. That's very helpful. Appreciate that color and then just as a follow up previously you guys were targeting exiting June 21 with that annualized recurring revenue target of 40 million. Just curious if you think that's still on the table.
We're at 30 million now chase.
Jason.
Basically at 29.7.
As of September.
So three more quarters to get it to 40.
I don't see any big.
Bake delay.
We could get there a little early.
We can get there a little after but basically.
Our target is unchanged.
The strength.
Of the recurring revenue products.
Isn't diminished.
If we saw that the.
Hardware sales on radios had diminished in this quarter or even in last quarter and.
Maybe we would feel differently and revised the 40 million target, but we didn't see that we.
We see the continual stress.
So.
That target remains intact.
Okay perfect. Thanks, a lot guys.
Thanks, Thank you.
Thank you. Our next question comes from the line of Jeffrey Kessler with Imperial Capital. Please proceed with your question.
Thank you.
And congratulations on the continuing referred the recurring revenue sales throughout but a tough period and my question does relate.
The late too when you begin to wouldn't you be do begin to see some on premises installation.
From the somebody in stores or the integrators begin to happen again.
And do you begin to start.
You need to start having are you are you in a position now where you are ramped up internally to take on that.
That type of business or what type of flex between the the actual installation of equipment installation business and your recurring and <unk> and that you are bickering sales use your workload force Oh, well you have to basically when we begin to see.
Pent up demand come back as the pandemic waves whenever it does.
I guess, Jeff what you're asking is can we handle a large volume of more recurring revenue right. It can be flat sure can you flex your in your can you flush your expenses and your sales force.
And your installation for she didnt feel sufficiently inch units in a short amount of time to maintain efficiency and margin.
[noise] Oh, let me add and you as far as a recurring revenue we built out a very scalable network operating center all cloud. So can handle all kinds of volume we expect it will be in the 40 million dollar run rate.
And bye.
End of this fiscal year, a which is June 30 on her abouts and we can go beyond that much beyond that because it's a matter of just dating memory onto our expandable knock and we have a couple of docs now in different locations. So we're ready for all of that.
As far as getting ER and employees you know the American factory, we have no problem is a high unemployment rate down there. We can scale up we have the we have we're running on one shift we can scale up to second shift we go to a third shift we can handle all the volume we get.
We can get our ports in from around the world. Some of the made in America, Southern made and Asia are and some of that and including China, There's no duty or there's no tariffs of components into the men again, it's all converge there to finish.
Product comes up so we can scale up pretty quickly get delayed but to do anything we have to do we get the parts the vendors are.
Clamoring for us to start buying more and more so I think it's going to be a very smooth transition to handle the highest heights with all the recurring revenue starlings and or the air access, we expect very exciting or recurring revenue and we scaled up our business both from the manufacturing.
Why did you and the not point of view to handle it all.
All right great. The second thing is on the <unk> on the <unk> the product, particularly specific to air access, but in terms of remote and local cloud based access in general.
[music].
You are are you use your saying at the moment you are about the only folks out there doing it I have to believe that.
Companies like I don't know, whether they'll just rather name you know just like we don't really go any all the best.
We are the only company that it's going to be doing it with cellular okay. Okay. They're all there are companies that are doing it the old fashioned way through the I.T. department not limits, but that causes all kinds of grief for the I.T. management.
People in the company and it causes are hotter penetration for the dealers to get business or.
So we're going to do it as one aspect of it. So you know the the deal as a choice go the traditional way where it can go into using our cellular radios and some unique technology that weve developed to do all of that so he can go either way we.
Expect that this is going to be a tremendous boost for the business.
Yeah I was that was my question is basically are you going to give your are you are you going to give your your your your folks to choice with regard to if they want to go. The you know if they want to use the traditional way or they want to or just simply because there may be some there may be no. The maybe some specifiers that demand for.
You know integrators that demand it that way because that's what they can do they don't know how to do the cellular yet.
You have a up and how [laughter] and given.
Given the ease of use I'm, assuming that that go into that that you are using cellular is not a big education process and you have that capability of getting your people up to getting your clients up to speed quickly or at least the distributors do a.
In in in being able to.
Good.
Them to understand how to use these cellular radios quickly.
Exactly where we were going to do a lot of lunch and learns seminars, but it's not Oh you made it very simple. So you didn't have to be a rocket scientist to utilize it it'll just cut out the interference you get from the I.T. departments and companies and there'll be no quick.
Required onsite that'll be up in the cloud the no rolling of trucks by the dealers once it's installed and program well changes we've done at the cloud the deal that can interrogate the cloud it and give valuable a management services to businesses and it.
It's you visit his badges all remotely and the consumer that's working in the in the companies can get data, but also the apps so it's going to be.
Thing that worked very well in the alarm business, you know how well recurring revenue Wasnt a lot business the integrators and a locksmith will now be able to join that party and be able to get a recurring revenue from their jobs not just sell one off jobs.
Interesting okay [laughter]. Thank you very much.
Thank you.
There are no further questions at this time I'd like to hand, the call back over to management 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, but further information.
Thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss Napcos fiscal Q2 21 result.
Bye-bye.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.