Q2 2021 NAPCO Security Technologies Inc Earnings Call
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Greetings and welcome to NAPCO security technologies fiscal second quarter 'twenty 'twenty one the earnings release conference call. At this time all participants are in a 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 and you.
Telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to Patrick Mckillop the vet.
The rest are of Investor relations. Thank you you may begin.
Thank you good morning.
Richard Mckillop director of.
Investor Relations here at NAPCO.
Thank you for joining us today for todays conference call to discuss our financial results for our fiscal second quarter 'twenty 'twenty one.
By now all of you should have had the opportunity to review of the press release discussing the results. If you have not a copy of the release is available and the Investor Relations section of the website at Www Dot NAPCO security Dot com.
On the call today is Richard Soloway, President and CEO of NAPCO Security technologies, and Kevin Michel 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 judgments beliefs current trends and the anticipated product performance.
These forward looking statements include without limitation statements relating to the growth drivers of the company's business such of school security products and recurring revenue services the.
Potential market opportunities.
Benefits of recurring revenue products to customers and dealers.
Our ability to control expenses and costs.
And the expected annual run rate for SaaS recurring monthly revenue.
Forward looking statements and involve risks and uncertainties that may cause actual results to differ materially from those contained and the forward looking statements.
These factors include but are not limited to such risk factors.
Described in our SEC filings, including our annual report on form 10-K.
The other unknown and unpredictable factors the underlying assumptions subsequently provided to be incorrect could cause actual results to differ materially from those and the 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.
And you should not place undue reliance on these forward looking statements.
All information provided in today's press release and this conference call is as of today's date, unless otherwise stated and we undertake no duty to update such information.
Net debt as required under applicable law.
I will turn the call over to kick in the moment before I do I just wanted to mention a few things for me.
And I offline.
We are planning for more virtual road shows.
The remainder of the year and look forward to when we can meet in person again.
Also we reached in the game New research coverage from B Riley and need of analysts and we're excited to have them help to increase awareness of the exciting NAPCO story.
Investor outreach is crucial, especially for small cap companies, such as NAPCO and I would 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 to Richard Soloway, President and CEO of NAPCO security technologies take the floor is yours.
Thank you Patrick Good morning, everyone welcome to our conference call.
Thank you for joining us today to discuss the results.
We are very pleased to report a record Q2 sales results of $27 2 million.
Our recurring revenues continue to grow and and.
And even higher rate in recent quarters, 42% and Q2.
And now we have an annual run rate of $33 8 million as of December.
Our focus on targeting the professional installation and mostly commercial and the markets is driving the continuous growth, especially in the fire alarm sector.
Our balance sheet remains strong with our cash balances continuing to growth.
We remain focused on capitalizing on the key industry trends, which include wireless fire and intrusion alarm.
School Security solutions and.
The price access control systems and architectural locking products.
The management team here at NAPCO continues to focus on key metrics of growth right.
Profits and return on equity and controlling costs.
Especially during these difficult times.
These metrics are important to us as well as our shareholders.
We continue to execute our business strategy and our interests are aligned with our shareholders and senior management and NAPCO owns approximately 22 per cent of the equity.
Before I go into greater detail I'll now turn the call over to our CFO Kevin per share. It will provide an overview of our fiscal second quarter results.
And then I'll be back with more on our strategies and the outlook Kevin.
Thank you Jack good morning, everybody.
For the second quarter net.
Net sales were a second quarter record of 27 and $22 million.
As compared to $23 2 million last quarter.
Which represents a 17% increase.
And $25 8 million for the same period last year, which is of 5% increase.
Net sales for the six months ended December 31, 'twenty and 'twenty decreased 3%.
And $54 million as compared to $52 $1 million for.
For the same period, one year ago.
The increase for <unk> and sales for the quarter.
Primarily related to increases in recurring services revenue as.
And as well as intrusion and access products.
Recurring monthly revenue continued its strong growth for.
<unk> 42 per cent for the quarter.
And 39% for the six months.
This strong growth is primarily attributable to the continued strength of fire radios, which are becoming a larger part of the recurring revenue mix.
Recurring revenue and now has an annual run rate of $33 $8 million.
Just on December 2000, Twenty's recurring revenue.
The sales decrease for the six months was due primarily to decreased sales of door locking products, which were impacted by COVID-19 pandemic.
Partially offset by increased sales of intrusion products and the associated recurring revenue.
Equipment sales it should be pointed out did however increased by 20% and Q2 versus Q1.
Gross profit for the three months ended December 31, and 2028, 6% to $11.4 million with the gross margin of 42% as compared to $12 $1 million with the gross margin of 47%.
Same period a year ago.
Gross profit for the six months ended December 31, 'twenty, and 'twenty decreased 7% $22 $1 million with the gross margin of 44%.
As compared to $23 $6 million with the gross margin of 45%.
At the same period a year ago.
Gross margin for recurring revenue and the second quarter continued to improve coming and its 85 per cent of 400 basis point improvement versus the year ago period, while also beating the street consensus estimate of 81% by 400 basis points.
For the six months of the gross margin for recurring revenue.
Also 85% to 80% last year of five.
500 basis point improvement.
The increase in gross margin for recurring revenue was primarily due to the increased sales of our starlink commercial fire radios, which generate higher margins and as I previously mentioned continue to become a larger part of the overall recurring revenue mix.
The decrease in gross profit and gross margin for the three and six months.
Due to lower gross margins from equipment revenues.
Primarily due to an unfavorable shift and product mix.
From door locking products, when intrusion products, especially out of line of Starlink cellular radios, which of them still very strong.
And which while generating lower gross margins on the equipment and door locking products.
Pete to the phenomenal gross margin from the associated recurring revenue.
And additional factor affecting gross margin from equipment.
It has lower overhead cost absorption, which resulted from lower purchasing and production levels in Q2 versus a year ago and that led to an inventory decline of $4.4 million from last quarter. So we're very happy about that.
Research and development costs for the quarter increased 3% the one.
1.9 million as compared to $1.8 million for the same quarter a year ago.
And were 7% of sales for each of the quarters, ending December 31, 'twenty, and 'twenty and 'twenty and 19.
Research and development costs for the six months ended December 31, 'twenty and 'twenty increased 6%.
$3 8 million as compared to $3.6 million for the same period, a year ago and were also 7% of sales. The six months ended December 31, 'twenty, and 'twenty and 'twenty and 19.
Selling general and administrative expenses for the quarter it decreased 7% for $5 9 million for 22% of sales as compared to $6 3 million of 24 per cent of sales for the same period last year.
Selling general and administrative expenses for the six months ended December 31 and 2020.
Decreased 4% for $12 million or 24 per cent of sales as compared to $12 $5 million or 24 per cent of sales for the same period last year.
The decreases and SG&A for the three and the six months were primarily due to decreased travel and trade show expenses.
Operating income for the quarter was $3 $7 million as compared to $2 $7 million last quarter of 38 per cent increase.
And $4 million for the same period, a year ago and 8% decrease of.
Operating income for the six months ended December 31 of 2020 was $6 $3 million as compared to $7 $6 million.
For the same period, a year ago of 17%.
And.
The company's provision for income taxes for the three months ended December 31, 'twenty and 'twenty increased by 38000 to 469000 and.
As compared to 431000 and same period a year ago the.
The company's provision for income taxes.
And at December 31, 'twenty and 'twenty remained relatively constant.
And at $798000 compared to $800000 last year.
The company's effective rate for income taxes.
With 13% and 11% for the three months and the six months ended for both December 31, 'twenty and 'twenty and 2019.
Net income for the quarter was $3 2 million as compared to net income of $2 3 million at quarter, That's just 38% increase.
And net income of $3 6 million for the same period, a year ago of 10%.
Earnings per share diluted for the quarter was 17 cents as compared to earnings per share of search and.
Last quarter.
And earnings per share of <unk> 19 cents for the same period a year ago.
Net income for the six months ended December 31, 'twenty and 'twenty decreased 19%.
$5 5 million of 30 cents per diluted share as compared to $6 8 million of 37 cents per share for the same period last year.
Adjusted EBITDA for the quarter was $4 2 million as compared to $3 2 million last quarter, that's the 31% increase and.
And for $7 million for the same period, a year ago and 11% decrease.
Adjusted EBITDA per share for the quarter was 23 cents as compared to 17, and said last quarter and 25 cents for the same period a year ago.
And adjusted EBITDA for the six months ended December 31, and 2020 decreased 15% to $7 4 million of 40 cents per share per diluted share as compared to $8 7 million.
47 cents per diluted share for the same period last year.
Yes.
Now moving on to the balance sheet.
At December 31, 2020 of the company had $26 $8 million and cash and cash equivalents that compares to $18 2 million as of June 30, 'twenty and 'twenty.
Working capital defined as current assets less current liabilities was $65 8 million at December 31, 'twenty and 'twenty that compared with working capital of $6 1 million at June 32020.
Current ratio defined as current assets divided by current liabilities was 591 at December 31, and 2020 and that compared to 4.5 to one at June 32020.
Cash provided by operating activities for the quarter increased 174% for <unk>.
$5 $2 million as compared to $1 $9 million last year and.
And for the six months increased 86% to $8 $9 million as compared to $4 $8 million the same period last year.
And the inventories at December 31, 'twenty and 'twenty decreased by $3 $7 million from June 30, 'twenty, and 'twenty and decreased by $4 $4 million from September 32020.
These decreases were primarily due to the company utilizing some of the additional inventory and it built up during the COVID-19 pandemic and as a result of the aforementioned 20% increase and equipment sales.
Versus last quarter that led to the drop in and Corey.
That concludes my formal remarks, and I would now like the return the call back to Dick.
Thank you Kevin.
Our second quarter sales were a record.
Driven by the increase the ability of security equipment professionals the.
The access to commercial and residential job sites during the quarter.
The recurring revenue annual run rate is now $33 8 million.
As of December 'twenty and 'twenty.
And we believe that we are on track to achieve our previously discussed goal of the.
Exiting fiscal 'twenty 'twenty, one with the run rate of 40 million.
Also we continue to see positive the signs and see.
Several of our largest distributors that sell through rates continue to increase by healthy double digit percentage.
We continue to believe the we are well positioned to rebound for the economic recovery.
The fire alarm business continues to be strong.
And it is met and mandated business in order for buildings of all types have the certificate of occupancy.
Must comply with fire codes.
The fire radios particular of helping recurring revenue gross margin expansion.
Evidenced by the 400 point.
The basis improvement for the quarter versus the.
The year ago period, and the 500 basis points improvement for the six months.
The school security market remains of significant opportunity.
The availability of grants for schools the fund the security projects and it's never been better.
The options from the U S Federal government and the state government being the state governments being plenty of them.
Well, we have seen sort of delays of play and security upgrades.
That's been significant cancellations.
We remain focused on providing schools of products and solutions they need.
The students and faculty.
We recently issued a press release of better project and let.
And Montana state North and and.
And the opera, Montana and.
We look forward and sharing more news about the project wins and the future.
The press releases regarding school and University of the security products are issued when the opportunity for loud for.
US as we must receive the approval from these institutions prior to release.
Our E T C L.
Paresh and Starlink line of Universal fire intrusion, and Iot communicators are playing a vital role and the need for it.
And the upgrade of older three G H T communicate.
AT&T and Verizon and both of them now it's the sunset of the three G networks, which will happen during the calendar 'twenty 'twenty two year.
And the clock is ticking for integrators and dealers the complete the upgrades for the customer.
On the Starlink communicators or for the widest coverage and the U S dealers with both AT&T and Verizon the L. T. He served.
Our I secure of commercial and residential a D zone and the alarm system NAPCO is the latest recurring revenue and product innovation is continuing its launch and we continue to receive positive feedback from the deal and I used to cure the disease.
And for the new breed of professional installers and savvy consumers.
The secure as installation times of one hour and all.
And as the feature rich debt.
And all functions and many residential and small and midsize business of looking for day.
Plus and offers the most cost effective functionality and the industry.
Looking into the future.
Expanding our cellular communicator technology to other areas and the security industry is the focal point for our strategy.
We have started to introduce a cellular based locking and access control product line quote air access, which use the starlink technology.
This new product will allow dealers and NAPCO generate recurring revenue.
The benefit the highlight that and users will enjoy include no need for upfront investment of expensive hardware no need to interfere with corporate I T networks, which can be a major problem for installers and no onsite database backups.
Well the software updates.
We will begin our Q&A session portion of this call at the moment.
Our second quarter, physical 'twenty 'twenty, one and.
And was very successful before the COVID-19 pandemic began to significantly impact our country back in March of 'twenty, and 'twenty, NAPCO and achieved 23 consecutive quarters of growth.
The year over year.
Oh sales and we have now started the new sales growth streak.
The main excited about the fiscal year 'twenty 'twenty one M B a.
And that the senior management maintains the high level of ownership and our equity approximately 22% and I'd like to thank everyone for their support and for joining us and the exciting future we have.
Our formal remark remarks are now concluded.
Now the opening.
The call and the question and answer session of.
Operator. Please proceed.
Thank you and if he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line. This isn't the question Kim.
You May press star two if he would like cream of your question from the queue and for participants using speaker equipment and it may be necessary to pick up of your handset before pressing the star of keys. Our first question is from rich Valera with Needham and company. Please proceed.
Thank you and congratulations on the strong results the gentlemen.
First just the encouraging commentary with respect to the sell through trends that you are large distributors are are providing for you can you just clarify if the double digit percentage you were talking about was that year over year growth that you were referring to and the sell through comments.
Yeah, I could tell you I can do this one Richard so yes, I'm looking right now at it just to give you some flavor.
So year over year I'm looking at our our top guy.
He was up the 15%.
I'm looking at all of a second Guy he was up 31% this year year over year.
I'm looking at another one up 50% of another one of 37 per cent.
All year over year.
So.
It bodes well.
I could predict and say everything is gonna be great in the March quarter, because that's what I don't know is inventory levels I was happy.
The distributors and they have no choice when the sell through was that strongly has to buy so we don't know what kind of inventory levels and they're gonna want to look and I want to keep but when you have those kind of year over year type of growth they have to they have to buy.
And we're optimistic.
No a lot as the quarter comes through and and a lot of them buy a lot of at the free and more and more of them of buying throughout the quarter.
But obviously with the 20% increase.
And equipment sales versus last quarter, we think we're back on track.
Yeah Richard.
Yeah.
The <unk>.
Most of the set of the sales when we talk about sell through those of that's equipment going into the jobs more and more opportunities for the dealers to get them into our buildings and the they're.
And they're doing the installation of most dealers don't carry a lot of it and.
So they're being pulled the inventories and go through and install and so that's a very good sign.
Yeah. It seems like a great leading indicator of the future service revenue growth and then just on the on the product side.
Dick It sounds like Youre, making continue to make progress with ice secure is there anything more you can say about that in terms of just kind of the revenue trends of revenue contribution from from high secure sounds like you have good momentum there.
Well I secure and with very feature rich Corrado.
And of dealer, putting it in you can do it and then the hour and it.
It takes a little bit of time to.
Make it a really powerful mainstream product, but it has all of the legs to be a very powerful mainstream product. So there's more and more dealers use it. They wanted to continue with it and make it the prime control panel of alarm system for commercial residential and so the hopes of.
For such that for what we see and what we hear it it's gonna have great legs to it we has added some functionality to it.
The to make it even better as we get feedback from the dealers. So that's gonna make it even more powerful than the deal is talk to each other they do send installations of stood the honors for awhile and make sure. It works are just the way they expect it to work and then.
So it's the pick up a lot of speed.
A lot of the competition has products, what's your and the category, but they don't have the feature set for this.
They don't have the efficiency of the way this works with all kinds of of control hours all across the country and it has very good sensitivity. So it works virtually every job that wanted to put it into its very very unique and its price point.
And as a fabulous we designed it so that it's very close the fact that the dealer can grow his business without spending as much for equipment and get a fabulous product, which is top of the market so and fun.
So we have a very strong hopes that this is gonna be a major a hip growth company.
Great. Thanks for that debt with that I'll pass it on and thank you.
Yeah.
Our next question is from Mike Walkley with Canaccord Genuity. Please proceed.
Great Thanks, and congrats on the strong results.
Just wanted to ask the question yeah. The sounds like the radio of business has been quite strong and which is great to see the reacceleration of recurring revenue, but just just looking at some of the other hardware businesses.
You guys talk maybe about how the pipeline is coming together for the locking side of the house you know assume with the economies hopefully reopening into the summer and you got the students back and forth school hopefully by this fall with vaccination debt.
It seems like there's got to be some pent up demand and that area can you can you talk at all about the pipeline on that side of the business.
Kevin you want to take that sure so Mike.
And the hardware sales.
On radios are doing phenomenal we.
And we haven't missed the beat.
It's better than ever and that's why you saw the growth at least for the recurring revenue, which is why you saw a 42% it couldnt be happier with that.
The hardware sales as it relates to state School security.
Has.
Slowed down a lot of the schools are not operational as we all know.
That if you don't have we don't have a lot of school.
The jobs.
And that those those stats of going to suffer.
But we are encouraged by a lot of jobs of repulsion.
For a job that we got from Montana.
The Montana to to me is the Guy who lives in New York is in the middle of nowhere.
But they are operating.
Like business as usual and we got this job from this school and Montana and its part of a group of 16 other schools.
And our hope is we're gonna get all 16 of them.
There are other school jobs throughout the country. Some are moving along because it depends on where they are and.
The summer on pause waiting for schools to open the schools will be opening soon and we know it vaccines of here things are going to get better and when we see that part of the business pick up and.
And you're going to see the hardware pick up even better hardware was up 20% this quarter versus last quarter that was very encouraged we're.
We're not the way we want to be yet we want to be over that $20 million threshold and we get over $20 million. That's when you start to see the margins expand but we're getting close and so we think as these next couple of quarters come about.
But to see tremendous improvement even on the locking side of the business.
Great and just my.
And I.
Well.
Let me just add something to it and.
So this is traditional hardware the schools and businesses and as more and more of the I saw was get into these places more and more of the traditional hardware will be installed and we can see that the sell through is picking up.
But the the long term vision for all of this is the recurring.
Recurring revenue versions of these products gun and the and a new way.
And be the leader and recurring revenue.
The hardware, which means access control locking which generates recurring revenue the bulk of the dealer.
And for NAPCO and that's that's what air access is all about so the sale of the unit into a building of school will generate of monthly stream of recurring revenue just like we do and the.
The arm business since we understand the cellular.
Networks, we do their own radios, we don't farm and the stuff out and do everything in house for experts and cellular.
Able to bring this new technology concepts into the locking and access control area and that's the vision so imagine a.
Where we're gonna be a couple of years and now it's going to create a recurring revenue stream for the dealers, who don't get recurring revenue streams right now on the alarm dealers get the integrators and locking people want the same recurring revenue stream and we were able to do this concept with.
Knowledge of the alarm business and how we do it and the Lora business and acquired business and the burglar alarm business and how the I O T. A portion of that business generates recurring revenue that's going to be done with air access. So that's the vision of the future of businesses that we have all of us since the cause.
And he is generating recurring revenue.
Yeah.
Great no. Thanks, Nick.
And the vision because of that's on the air access product and that typically it's for my follow up question and kind of for both both you and Kevin just in terms of more recurring revenue hardware projects are you willing to give up any hardware gross margin to drive.
Our recurring revenue or should we expect as the business scales, you'll usually see that June quarter seasonally strong I know, it's tough with COVID-19 to predict quarterly results, but you know assuming equipment revenue gets above $20 million. You know should we see gross margin start to get back above 30% on the hardware side are you willing to trade off a little bit of a gross.
The margins to accelerate that of recurrent revenue growth that's been that such strong margin. Thank you.
Yeah.
Yeah, Mike we the way.
Go ahead, Mike we don't need to.
Give up any margin.
And radio business, where aggressive as it is.
And being aggressive you know being in the 20% gross margin lets say on radio business.
That's good enough because obviously it leads to the 85% we get on the back and with the recurring revenue.
I don't think we have to be more aggressive.
I think the hardware sales are going to come.
They're gonna come because business is coming back.
And just by getting over that $20 million margins will go up.
It will go up into the 13th the higher we go over the $20 million the high of those margins will will get to.
It's the matter of how fast it happens.
We're encouraged because of the.
The growth we saw this quarter versus last that it'll happen sooner rather than later.
But I don't think we need to adjust our game plan at all as we go forward.
Great. Thanks, and that's very helpful. I'll pass the line.
Okay.
Our next question is from Jason Schmidt with Lake Street and ease.
Proceed.
Hey, guys. Thanks for taking my questions.
And to follow up on your comments on here and access when should we start to think that of that product of potentially impacting the P&L.
Oh, you have to give up the product nine to 12 months.
It's just coming out now it's in the.
New concept for integrators and locking people because they're used to doing a job and when they finish the job and that's it for them right.
Now the idea of up and getting recurring revenue stream.
And the equity in the business is new for debt.
Alarm dealers of learned that's the magic trick for making a very strong business. So a nine to 12 I would say would be where the where we should be thinking right now.
And.
And we think out a couple of years from what we do that's our vision and that's our plan. So we know that this is going to be very exciting for the deal is because it's the new revenue stream. They don't have to keep banging down and doing jobs and the doing another job once the.
And you start building their equity with recurring revenue it keeps coming in.
And then they can grow their businesses more strongly because the they're going to throw off a lot more profitability.
And that's that's the future for us were very unique and the fact that we're the only company and the security industry that has.
The sister companies <unk> and <unk>.
And all three key legs of security, we have access control of company. We have two locking companies and we have and alarm a matter of fact, you buy and vocal.
And with I O T. So we're able now to be able to bring the same technology to our whole product line.
And the locking and access which was and install it once and then get another job that type of business will change and thinking of nine to 12 months.
Okay. That's helpful and then Kevin looking at the Opex line understanding that it's probably a little muted here just given the lack of trade shows traveling et cetera related to COVID-19, but how should we think about opex ramping of the remainder of this calendar year.
Well, I think with Covid and still being somewhat prevalent.
And conferences and trade shows being virtual.
That's going to keep these expenses lower.
And then for us to tell if you're talking about the calendar year.
And by the summer things start to change and as soon as you know we're able to go to these conferences and person.
Which we like better whether it's and invest offering.
Our trade show and we'll do it we'll go and then you'll see those expenses.
The return to more normal levels, if not we operate like everybody else and zoom type calls.
And the cost of kept down.
And which is fine and eventually we'll get back to.
The more normal times.
Okay.
Perfect I'll jump back into queue. Thanks, a lot guys.
Thanks, Jason.
Thank you.
Our next question is from David Robinson with William Blair. Please proceed.
Oh, Hi, guys. Thanks for taking my question I, just had a quick one related to the kind of commentary about the.
The <unk> sunsetting and I was just curious do you anticipate any acceleration and I guess and sales and the radio business as we kind of approach are closer to the calendar 'twenty and 'twenty two and the.
Pay the sunsetting of three D or have you heard kind of any feedback.
From dealers and and anticipation.
Of the sunsetting.
There's the sunsetting of is extra wind at our back.
All of the old radios have to be upgraded so there's a lot of fire alarm radios as well as burglar alarm radio. The other thing has to be upgraded so between that wind at our back and the wind of the fact that copper is dead.
As of communication.
The.
And link for alarm systems.
Its flights out of the copper all around the country and different sectors of the country.
And that's happening also simultaneously.
And of the deal is the very motivated the convert lots of buyer of law and burglar alarm jobs from the copper because they have to.
To cellular and the three G. Sunset that's the wind at our back so that's helping to drive the business and we and the Sunset of two years on the three G and the copper I would say, it's going to be over the next five years for.
Longer and has more and more of the country's phased out of copper.
The phone carriers don't want to support copper anymore. So the deal is the use of installing and solve and kind of such a wide footprint. It goes everywhere throughout the country and it has the best sensitivity of any radio on the marketplace. So of deal and those when he puts the starlink and he gets communication, which is symbol at the copper.
Yeah.
Okay. Thanks, guys.
Thanks, David.
Our next question is from Raj Sharma with B Riley. Please proceed.
Hello, Good morning, guys, congratulations and a solid quarter.
I wanted to follow up on the equipment sales and again and just you mentioned the sell through.
Moving and distributors double digits.
Can you address again, the pricing power and the equipment sales and I know you mentioned that the the lower gross margins.
Kevin you mentioned lower gross margins would locking doors versus the intrusion. So with the current sell through up double digits here and you can you sense how that.
The impacts gross margins going forward.
And the next few quarters or how should we kind of look at that.
Hi, Raj so when the locking sales improve.
And they started to and this past quarter their margins are much much better.
And the margin on the radio so of radio margin it'll be 20 net.
Margin on.
The door locking device B 40 per cent it could go as high of 50% if it's in a school on of locked down and system, combining with our access controls of products.
So when you get more of those 40% to 50% margin products, obviously, you're going to start seeing hardware margin go up.
That's what we always have experienced.
It's on a temporary halt the sort of.
And the schools being a slower than we'd like but as that comes back margins of go right back up and then some of the thing that we're very happy about is that throughout this and like we haven't seen any decline at all.
And the radio business and that's great. So while they're not the highest gross margin items.
From a hardware point of view boy and they can run rate the recurring revenue side. So that's the good news and all of this and all the rest of the hardware will come back.
Right. So so the rate of you of course, the radio sales of of course, the generate the recurring revenues and that's the incredible.
So in addition to the product mix change would locking doors, you're also going to get the scale as you know the double digit sort of the sell through is pushing up the equipment sales you're going to get an improvement there as well.
Yes, so as I and as we go over that $20 million per quarter, right and you get into the Dominican Republic manufacturing leverage, whereas the higher and shows over the 20 million dollar Mark the high of the margins go because you don't have to add any.
Real cost structure is in place you can do $100 million of annual revenue per shift and the Dominican Republic. It's a low cost facility. The factory worker earns you know $2500 a year.
And if that's the only thing we're gonna add to the equation because we have face the have the supervisors and place we have the machinery and then you're going to get overhead absorption gross margin expansion, which is what we like to happen every quarter and you know as we approach the fourth quarter. This year, hopefully we'll be back getting.
The strong leverage again.
Got it and then on the recurring side no debt.
And why isn't the fire and the book of the alarms, where they were spread across and even sort of broad segments of any particular segments the performed better than the others.
You mean within recurring revenue yes.
Yeah, we didn't come revenues and the fire alarms burglar alarms and in the commercial different commercial segments that you cater to.
Yeah, we do.
When I look at it I think fire radios as the main thing I don't have it broken down within fire radios fire radios, just as the segment was very strong it's come as I've mentioned before it was the the.
The last of of a late comer the radio business right.
It's the only a few years old.
And it's becoming a more and more of.
Larger part of the fix.
That's why you're seeing the kind of growth, we're seeing and the margin expansion.
So I don't really have anything within fire radios and I will say, we are talking to some large players.
And the industry, some well known names that I can't mention.
At this point, but as that becomes more and more of a reality and the fire business can get even better.
So that's that's what our hope is that as strong as it is now and will get even better.
Got it well. Thank you again, great results and I'll take this offline. Thank you. Thanks Raj.
Thank you.
Our next question and from Abba Horowitz fifth.
O S. P. Please proceed.
Hi, Rich Hi, Kevin.
I don't remember ever seeing so much so much cash on your balance sheet.
Remind me and when the last time you guys carried so much cash.
You know if I bet. This.
12 years ago, we had $40 million of the debt now.
And now here we are of years later, we're approaching $40 million of cash on the balance sheet.
That's right.
Okay.
Any plans with that cash what are you going to do.
And we're talking about utilization of the cash it's a high class problem and.
And we'll work through this.
The a lot of opportunities and you have cash, but also the doing hard times, we'd like to have cash and keep our cash a little bit of dry. So the you never know what could happen with the economy, but there's a lot of opportunities there.
I have been shown to us.
Okay.
Okay. Now just one other question is you said that and the next two quarters essentially that your recurring revenue.
We'll get to $40 million correct.
Run rate yes.
As you know okay run rate predicted this years ago and I don't know if people thought we were nuts, but here we are with six months to go I think we're right we're right there.
Okay. So.
Are you going to give us a physical a 2022, our projections for recurring revenue.
Yeah.
We probably should have been.
We should.
The gate, we have a plenty of 26, which I know it was five years further out.
And we'll get to 150, but yeah, we should probably do that.
Okay.
Company into the into a recurring revenue service the.
Where the five year at your plan our goal.
It was doing 50, 50 would be about 300 million and.
<unk> hundred and $50 million of that will be recurring revenue. That's our goal. That's what we're striving to do so with the new products.
The recurring revenue generated plus the existing products keep growing our market share.
That's that's all planned.
Okay and then.
So on that if on the $40 million.
You're gonna sport, what and 85 gross margin.
Approximately.
Yeah.
We don't know what it's going to be I when I model.
I used the 80%.
It's been 80, 585 fire and so strong.
You know, we have a lot of radio products and the mix could shift a little if you're modeling 80 and be happy when we come in and 85.
Okay, but essentially okay and two quarters and this is my final point, so in two quarters, essentially you're going to be generating around $1 75 to the dollar, let's say 90 of share on the recurring revenue and just on the recurring revenue side of the business I understand there's all of the corporate costs and all of that you have to cover but essentially that the.
Recurring revenue businesses is approaching almost $2 of share on its own.
Is that correct.
Yes, which is why we're moving.
Getting this business to be more and more recurring.
Okay and the air access it's the beauty of retiring.
Yeah beautiful and by the way I was one of those guys. There that hurt your projections of years ago. So and you know I was there. So I just wanted to congratulate I want to say congratulations to you guys really you took care of the shareholders like banks like and so.
So much.
Okay.
Our next question is from Christopher Hillary with Roubaix capital. Please proceed.
Hi, Good morning couple of New York.
Yes.
And you hear me.
Yeah.
Thanks for taking my call just wanted to ask could you remind us and you have this growing recurring revenue business is there a typical price increase that goes in each year.
You know for both the company and for your dealer network.
Yeah.
We wanted to keep our price is competitive.
And will adjust to the market as necessary, but.
We're really not seeing any pressure right now and the offering is very very unique and the performance of the equipment is very very unique.
And quite nothing quite like it on the marketplace. So.
It's not of pressure that we're feeling at this point.
Okay.
And you should go up each year or do they tend to stay stable in terms of the share.
The monthly fees.
Yeah.
Stability.
Yeah, we haven't had that and maybe just one.
You haven't hasn't changed right thing.
At all it's it's it's a service that speaks for itself and the dealers of thrilled to get it and it just drives itself.
Yeah.
Okay.
And one more maybe obviously school.
The school budgets, it's been a pretty disruptive year excuse like a lot of district kind of down budgets going into next year at the same time, you know, perhaps there's going to be some.
National.
The spending support I mean is there anything that you're aware of that would shake your perspective on all of the outlook for spending as we head into the next school year and the fall.
Yeah.
We've seen more and more advancement of bills.
And Congress in certain states and.
I know, it's not top of mind school security because of lot of the kids are out of school of people or it just worrying about how to get out of the hole.
Remote learning.
Yes go.
But what we are seeing a lot of activity.
And again, depending upon what part of the country.
And there's still a lot of school jobs going in we know also of a few jobs that are going to happen towards the end of the calendar year.
I think ask as the kids get again, this will become more and more of a topic that we'll be talking about.
Beauty of 87.
Yes.
Yeah, It's Patrick day, Chris I, just want to jump in and.
You know just to add in terms of you talk about you know the school budgets, what's important to remember is that there's a lot of grant money that's available.
And and so you know we've we've.
<unk> talked about this and the past, but just as an example.
In December of 'twenty, and 'twenty at the end of last year.
The Virginia Department of bed.
A lot of $12 million and grants for.
For the 490 schools they have in the state.
So in terms of the budgets.
The schools can get the money they just need to fill up the grant application and the money is available and the federal government has committed.
Hundreds of millions per year. It started in 2018 for the next 10 years. So we've got all of them.
Little less than 10 years, you know to go but the there's there's plenty of funding in terms of Oh.
Helping the schools get the money and they need.
Okay. Thank you very much.
As a reminder, at the star one on your telephone keypad, if he would like to ask the question. We will just pause for a brief moment of Paul for any final questions.
Okay. There don't appear to be of any more questions do we have any closing remarks.
I do.
So I want to thank everyone for participating in today's conference call.
As always you two of any further questions. Please feel free to call Patrick Kevin or myself for further information.
Thank you for your interest and support and we.
And look forward to speaking to you all again and a few months the discuss NAV goes physical Q3, 'twenty one results bye bye and have a great day everybody.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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