Q3 2021 NAPCO Security Technologies Inc Earnings Call
Greetings and welcome to the NAPCO Security technologies fiscal third quarter 2021 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 on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to our host Patrick Mckillop Director of Investor Relations. Thank you you may begin.
Good morning, Patrick Mckillop.
Director of Investor Relations for NAPCO Security technologies.
Thank you all for joining us for today's conference call to discuss our financial results for our fiscal third quarter 2021.
By now all of you should have had the opportunity to review the press release discussing the results.
Not a copy of the release is available on the Investor Relations section of our website.
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 forecasts and projections of future performance based on management's judgment beliefs current trends and anticipated profit performance.
These forward looking statements include without limitation statements relating to growth drivers of the Companys business, such as school security products and recurring revenue services.
Potential market opportunities.
The benefits of our recurring revenue products to customers and dealers.
Our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenues.
Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
These factors include but are not limited to such risk factors described in our SEC filings, including in our annual report and form 10-K.
Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward looking statements.
Although we believe that.
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 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, except as required under applicable law.
I will turn the call over to <expletive> in a moment.
But before I do I just wanted to mention a few things in the iPhone I Osborne.
On may 17th we will be presenting and hosting one on one meetings at the Needham conscience Needham conference virtually.
Look forward to a great conference.
We are planning for more virtual roadshows throughout the remainder of the year and look forward to when we can meet in person again.
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, Inc. 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 results.
We are very pleased to report a record Q3 sales results of.
$28 2 million.
Our record Q3 net income results.
$4 4 million, both of which beat street consensus estimates.
Our EPS and EBITDA figures also came in above street consensus estimates.
Our recurring revenues continue to grow at an even higher rate than recent quarters 43 per cent in Q3 and now we have an annual run rate of 36.7 million based on March 2021.
Recurring revenues.
Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth.
Yeah.
Our balance sheet remains strong with a cash position.
Continuing to grow.
We remain focused on capitalizing on key industry trends, which include wireless fire and intrusion alarms pools.
Total security solutions, plus enterprise access control systems and architectural locking products.
The management team here at NAPCO continues to focus on the metrics of growth.
Profits and returns on equity and controlling costs.
These metrics are important for us as well as our shareholders.
We continue to execute our business strategy and our interest are aligned with our shareholders as senior management at 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 show.
He will provide an overview of our fiscal third quarter results and then I'll be back with more of our strategies and outlook.
Evan.
Thank you <expletive> and good morning, everybody.
For the third quarter net sales were a third quarter record.
$28 $2 million.
As compared to $26 $2 million.
The same period last year and.
An 8% increase.
Net sales for the nine months ended March 31, 2021 increased <unk>, 3% to $78 6 million as compared to $78 4 million for the same period a year ago.
The increase in sales for the quarter were primarily related to increases in recurring services revenue as.
As well as intrusion and access products.
Recurring monthly revenue continued its strong growth, increasing 43 per cent for the quarter and 40% from the nine months.
This strong growth is primarily attributable to the continued strength of our commercial business, which has not been affected by the COVID-19 pandemic as buildings must remain secure.
Recurring revenue now has an annual run rate of $36 7 million based on March 2021 recurring revenue.
The sales increase for the nine months was also primarily due to increases in recurring services revenue as well as intrusion and access products.
Gross profit for the three months ended March 31, 2021 increased 8% to $12 9 million with a gross margin of 46%.
As compared to 11.9 million with a gross margin of 46 per cent for the same period a year ago.
Gross profit for the nine months ended March 31, 2021 decreased 2% $35 million with a gross margin of 45% as compared to $35 6 million with a gross margin of 45% for the.
The same period a year ago.
Gross margin for recurring revenue in the third quarter continued to improve coming in at 86% compared to 84% for the same period, a year ago, a 200 basis point improvement, which also beat the street consensus estimate of 83% by 300 basis points.
For the nine months the gross margin for recurring revenue was 85% as compared to 81% last year a.
400 basis point improvement.
The increase in gross profit for the three months was primarily due to increased sales of recurring revenue products. The decrease in gross profit for the nine months was primarily due to an unfavorable shift in product mix as well as lower overhead absorption, which resulted from the company's lower purchasing and production levels.
<unk>.
The lower purchasing and production levels were primarily due to our continued effort to reduce inventory levels, which now has been reduced by $5 $7 million since June 32020.
Research and development expenses for the three months ended March 31, 2021 increase.
<unk> increased 5% to $1 9 million or 7% of sales as compared to $1.8 million or 7% of sales for the same period a year ago.
Research and development expenses for the nine months ended March 31, 2021 increased 5% to $5 $7 million or 7% of sales as compared to $5 $4 million or 7% of sales for the same period a year ago. These.
These increases were primarily due to increased payroll.
Selling general and administrative expenses for the three months ended March 31, 2021 decreased 2% to $6 million or 21% of sales.
As compared to $6 $1 million or 23% of sales for the same period a year ago.
Selling general and administrative expenses for the nine months ended March 31, 2021 <unk>.
Decreased 3% to $18 million or 23 per cent of sales.
Compared to $18 $6 million or 24% of sales for the same period a year ago.
The decrease in selling general and administrative expenses and as a percentage of sales for the three and nine months was primarily due to decreased travel and trade show expenses as well as increased sales levels for the three months ended March 31 2021.
Operating income for the quarter was $5 million as compared to $4 million for.
For the same period, a year ago, 24% increase.
Operating income from the nine months ended March 31, 2021 was $11 $4 million as compared to $11 $6 million for the same period, a year ago, a 3% decrease.
The company's provision for income taxes for the three months ended March 31, 2021 Inc.
Increased by $199000 to $624000 as compared to $425000 for the same period a year ago. The.
The company's provision for income taxes for the nine months ended March 31 2021.
Increased by $197000 to $1 $4 million as compared to $1 $2 million for the same period a year ago.
The company's effective rate for income tax was 13% and 11% for the three months and nine months ended March 31, 2021 and 'twenty 'twenty respectively.
Net income for the quarter was $4 $4 million or 15% of sales as compared to $3 $6 billion or 14% of sales for the same period, a year ago, representing a 21% increase.
Earnings per share diluted for the quarter was 24 cents as compared to 20 cents per diluted share for the same period a year ago.
Net income for the nine months ended March 31, 2021 decreased by 5% to $9 9 million or 13% of sales as compared to $10 4 million or 13% of sales for the same period a year ago.
Earnings per share diluted for the nine months was 54 cents as compared to 56 cents for the same period last year.
Adjusted EBITDA for the three months ended March 31, 2021 increased 13% to $5 $5 million of 30 cents per diluted share.
As compared to $4 $9 million or 26 cents per diluted share.
Same period last year.
Adjusted EBITDA for the nine months ended March 31, 2021 was relatively constant at $12 $9 million or <unk> 70 cents per diluted share.
As compared to $13 million or <unk> 70 cents per diluted share for the same period last year.
Moving on to the balance sheet.
At March 31, 2021, the company had $34 $1 million in cash cash equivalents in marketable securities as compared to $18 $2 million as of June 32020.
Working capital defined as current assets less current liabilities was $70 million at March 31, 2021, as compared with working capital of 61 million at June 32020.
Current ratio defined as current assets divided by current liabilities was 5.5 to one at March 31, 2021, and it was 4.5 to one at June 32020.
Cash provided by operating activities for the quarter increased 314% to $7 $5 million.
Compared to $1.8 million last year and.
For the nine months increased 148% to $16 $4 million as compared to $6 $6 billion last year.
Inventories at March 31, 2021 it decreased by $5 $7 million from June 32020.
The steep decrease primarily the result of.
The company utilizing some of the additional inventory it had built up during the COVID-19 pandemic.
As well as a company wide effort to reduce inventories to more appropriate levels.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Kevin Thank you.
Our third quarter was a record breaker and we delivered the highest sales and net income for a Q3 in the company's history.
We are witnessing more and more opportunities for our deal is to get access to the residential and commercial buildings, where they install our products and thus driving sales to record levels.
As the country continues to vaccinate more people.
We recover from the harshest stage of the COVID-19 pandemic NAV.
NAPCO is positioned to capitalize on new business opportunities.
Every recurring revenue products that we sell is the beginning of a new relationship not the end.
The recurring revenue annual run rate is now $36 7 million as of March 2021.
And we believe we are on the coast the cusp of achieving our previously discussed goal of exiting fiscal 2021 with a run rate of approximately $40 million.
Also we continue to see positive positive signs from several of our key distributors.
That sell through rates continues to increase by a healthy double digit percentages.
The communication paradigm is now shifting away from legacy copper lines and aging three G infrastructure, which creates opportunity for our Starlink line of Universal fire intrusion and Iot communicators.
They are playing a vital role in the need for the upgrade of older three G. H T N T communicators and legacy copper lines.
Integrators and dealers need to complete the upgrades for their customers.
As AT&T and Verizon have both announced the sunset of the three G networks in the calendar year 'twenty.
'twenty two.
Our starlink communicators offer the widest coverage in the U S. The deal is with both AT&T and Verizon LTE surface.
The school security market continues to be a significant opportunity.
The availability of grants for schools to fund these security projects has never been better.
Options for funding are available from the U S Federal government and state governments.
The total.
Funding available for schools is in the billions of dollars.
We remain focused on providing schools of products and solutions they need to protect their students and faculty.
While we have seen some delays in planned security upgrades.
They have not been significant cancellations.
In the U S. Many students our back to school full time already.
And it is expected that by this September it will be the beginning of a more normal school year.
Sadly, we've already witnessed a handful with school shootings. This year. So we believe that these projects that had been delayed will move forward.
We look forward to sharing more news about project wins in the future.
Press releases regarding school and University security products projects.
<unk> issued when the opportunities allowed for as we must receive approval from these institutions prior to release.
Over the last 18 months, we have launched several new products and I would like to highlight the two most recent which are the ice secure commercial and residential 80 zone.
Alarm system, and our latest product offering called air access.
These products are designed to be recurring revenue generators for NAPCO and our dealers.
Importantly, air actions will bring recurring revenue to the locking and access control divisions of our company, which if not had recurring monthly revenue products until now.
Air access is the industry's first cellular access control system, which we believe is a billion dollar market opportunity.
The benefits of air access include no need for upfront investment and expensive hardware.
No need to.
It's a fear with corporate networks, which can be a major problem for installers and no onsite database backups or software updates.
The ice secure line is designed for the new breed of professional installers and savvy consumers.
I secure has installation times of one hour and offers the feature rich sets.
That many residential and small and midsized businesses are looking for today.
Plus it offers the most cost effective functionality in the industry.
We will begin our Q&A session portion of this call in a moment.
Our third quarter 2021 was a very successful one.
Before the COVID-19 pandemic began to significantly impact our country back in March of 2020, NAPCO. It achieved 23 consecutive quarters of year over year record sales.
We have now started a new sales growth streak.
We remain excited about the fiscal year 2021, and beyond NAPCO Senior management maintains a high level of ownership in our equity approximately 22%.
And I would like to thank everyone for their support and for joining us in this exciting future we have.
Our formal remarks have now concluded we would now like to open the call for the Q&A session.
Operator. Please proceed.
Thank you.
Ladies and gentlemen at this time, we will be conducting our question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
You May press the Star key followed by the number two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Yeah.
Our first question comes from Mike Walkley with Canaccord Genuity. Please state your question.
Great. Thanks, Kevin and Deca, congratulations on the results and it's great to see the recurring revenue goal you set a quite a while ago.
40 million annually by the end of fiscal 'twenty, one it seems like it's on track to reach those levels.
The spike.
This unexpected year of COVID-19.
Question are in that area as you know coming off this good growth.
One can it even reaccelerate as more things reopen or given the law of large numbers should we think about the growth rates kind of maintaining high thirties going forward. Thank you.
I think that the opportunities are great for us because of the three G net were going down or being eliminated.
But I would be conservative and.
Follow the path that we have been following.
Kevin you have the stat on that right.
Yeah. So.
Obviously, you've seen the growth go up to 43% this quarter on a recurring and it was 42 last quarter, we were in the thirties last year.
I hope we hit 50% as we go forward.
As <expletive> mentioned, it's good to be conservative.
High thirties, because as the numbers get larger it's harder and harder to have these big percentage increases we've managed and we'll hopefully keep doing that.
But you.
Healthy high thirties, as pretty good even by itself and if we could be in the forty's even better.
Okay. Good.
I mean, it's just explained the two products that I mentioned in.
My conversation, which are a secure and air axis.
These have long legs, and those should continue to add recurring revenue, especially in the access control and locking area, which we don't have recurring monthly revenue.
As we said be conservative because these products have to be adopted by the dealers. The focus groups that we've put together show that the deal is a love the concept it's perfect for them they can build their businesses.
Make it easy for them to get more sales. So we're really paying a lot of roads going forward.
No great. That's helpful. It sounds like lots of good tailwind, but will maintain some cautiousness in modeling just.
Follow up question from me and now I'll pass the line to the other people on it.
It's great to see you hit your goals of lowering inventory levels and generate a really strong cash flow this quarter.
Can you provide maybe some additional color on trends you know one from your distribution partners and then too.
The overall supply chain dynamics, you know theres a lot of shortage of components.
So you feel like you have enough.
Components should your distributors start to ramp demand back quicker than expected given their their sell through trends and do you think your distributors knowing there's industry shortages you might be willing to take on a little extra inventory given the signs of reopening that you mentioned in your script. Thank you.
So the sell through stats.
Which I've been talking about for.
Several quarters in a row.
Are still very good.
Some of our key distributors really had.
Significant increase sell through stat in March.
March 2021, and that's compared to <unk>.
March 2020.
One distributor was up 79%.
Another one was up 68% another one was up 54%. The other one was up 35. These are healthy increases.
What I believe is still going on as the cautiousness of carrying inventory.
Inventory levels below where they used to be.
And I understand the cautious it's COVID-19 times.
But now we're coming out of it.
And things are going to pick up.
And Youre right, Mike they should.
Bump up those inventory levels, because they're going to be quite short.
If they don't increase inventories and when demand starts to really pick up and it looks like it's happening already.
I don't want to be caught short.
So, but right now they've been acting conservative.
And that's why I think we've seen the.
The sell through stats.
Seed, what we're seeing on the factory sales.
There are component shortages out there you know the supply chain is a big mess, we all read about it.
We've been very lucky.
We had extra inventory.
Bearing before COVID-19 even started.
And we've kept.
The extra inventory on those certain important items.
Like chips that you need to build these key products, we watched it like a hawk.
We are the squeaky wheel with any supplier who has any any issues.
We've been doing pretty well.
We've been we've expanded our night shift and the Dominican Republic.
Because they can't keep up the radio business is just so strong which is a great thing.
And.
We expect that we're not gonna have any supply chain issues.
But we do watch it.
We're not taking anything for granted simple.
And that we don't run out of any key components.
Great.
It's great to hear it sounds like you guys are managing it better than a lot in the industry. So I'll pass the line. Thank you Mike.
Our next question comes from Jason Schmidt with Lake Street. Please state your question.
Hey, guys. Thanks for taking my questions just following up on those comments. If there is a pretty sizable replenishment cycle, coupled with the tightness of the supply chain and maybe the school market per King back up would you be able to meet any potential upside demand.
Yeah, I believe that we.
We put all the building blocks in place.
Where we have the factory.
Both of them are Dominican in New York.
Building whenever we need we have enough personnel to do that.
People have had.
Have come back to work.
And we can keep the production lines going and then are the.
The components that we use we have duplicate vendors and we are important customers.
Customers of those vendors, so we get our share.
Share of what we need we were on a computer based purchasing system, which gives us enough lead time to the vendors.
So that they can get parts for us.
Some of the larger vendors, where small compared to the car companies you know that so we get what we need where the large car companies may not get what they need to run their production lines, but we get we need because it's small.
More quantities in the big picture, but plenty for us and plenty for getting the products out to.
The distributors, which resell them to the dealers.
So where were right now watching it with vigilant.
But things seem to be working are working well for us.
Okay. That's helpful. And then just as a follow up it sounds like the commercial business continues to see some nice momentum, but curious if you could discuss what you're seeing on the residential side.
Well the residential side, which is only a portion of our burglar alarm and fire alarm division they're.
There are concerns on the residential side because of the fact that.
Consumers don't have the amount of cash spend on systems as they had.
Still many people still are at home and they don't want outsiders coming in.
So there's some impact on that but in the commercial side. We are the buildings all have to be protected they have lots of materials and computers and all kinds of equipment, there and many of the buildings have fire alarms most of all the building Jeff that fire alarms.
So those systems has to be kept working they have to be upgraded to meet the latest specs by the.
The fire marshals, so where our original goal was to be a commercial security supplier and that's what we do we do like the residential business and we do have nice residential business, but all of our businesses and the commercial side and now that we've introduced.
Recurring monthly revenue products to the commercial side for locking and access control that gives us the vision that we've always wanted to have and that vision is to have.
Recurring monthly revenue on all of our product line.
Divisions.
And over the next years.
Years going forward.
As I said, we're laying a lot of pipe to make sure that we keep the recurring revenue to a new high level and we're gonna be setting a lot of goals for the industry where.
You'll be able to that recurring revenue if youre locking dealer, you'll be able to get recurring revenue, if you're and access control dealer just like we've done in the commercial and residential alarm business, we're bringing in the opportunity for these dealers to build equity in their business, which locking people in.
Access people don't really do that the way an alarm company does so we're using that footprint in that.
A direction to help.
Recurring revenue for them and for us.
Okay. Thanks, a lot guys.
Jason.
Our next question comes from Raj Sharma with B Riley. Please state your question.
Hi, Good morning, guys congratulations on another good quarter.
I had some just wanted to.
Follow up on the comments around the sell through dealers.
And.
How are their inventories of the still low and also any sort of color around.
Any specific products that contributed to really good.
Results.
Last quarter, you had very good results on fire alarms.
Any sort of breakdown on on what worked at this time and.
We usually don't break it down that fine but.
<unk> always said was that the commercial business is growing.
Growing nicely and then all the commercial buildings. Additionally, need a fire alarms and fire loans have to be maintained and even if the people aren't in the buildings. They have to maintain the fire. They have to have good intrusion burglar alarms to keep people from coming in and doing destruction will take.
<unk> property.
People need.
Money, there and Theres a lot of his.
As criminality, where they have to take equipment and resell. It. So these buildings have to be protected.
Big investments and all kinds of computers and equipment in these commercial buildings. So look at it is across the board it's not just one area.
Right.
And.
Equipment sales I know that.
In the last few quarters volume.
The established had not been have not been open.
Is that sort of improving your more axis.
Sell more equipment and also.
Around seasonality wood wood.
Seasonality trends sort of.
Paul.
Similarly, the last few years.
June being.
One of the highest quarters.
Kevin you want to do that.
So seasonality is still a factor at least on the hardware side.
Doesn't matter on the recurring side.
Right and things are starting to open up so I wouldn't say at least if I was projecting and trying to be conservative I wouldn't say, it's business as usual like it was in.
Traditional Q4.
But I would say with the company the country opening up again.
And there is a certain factor in Q4 being better than the rest of the year. It is the end of the end of the year, it's the selling season, the weather's better et cetera et cetera.
That you know, we're very optimistic about Q4, if I'm projecting.
Yes.
But I'm cautiously optimistic that things are going to be better and also because I see those sell through stats.
Think about a distributor can carry.
He can't continue to carry low levels.
It's gonna burst keep having a 79%.
Year over year sell through month it's.
It's got to lead to something very positive. So that's what we think's going to happen.
The way the way we look at it is we have multiple distributors in multiple markets and the dealers don't necessarily go to the distributors locations and pick up merchandise and products for each job like they used to do.
And days the olden days, they order online a lot of them.
And if it distributors doesn't have.
The merchandize that the dealer wants he goes to the second distributor that's on his list and he gets it from them. So.
Attribute is have to have enough inventory of all the different models of equipment when they put together a system commercial system or residential system.
To supply the dealer with that merchandise.
And if they don't have it the deal we will move on and.
<unk> has multiple accounts multiple distributors so the distributors.
Need they need to watch what they're doing and make sure they have enough inventory of all the different products.
And and keep it.
To a point, where the dealers arent disappointed so there's a lot of pressure on them to do that.
<unk> you have a distributor that are for some reason can't do it may be the company was.
Being sold like we had the anixter thing.
While ago.
But that's abnormal.
One thing is for them to supply these dealers integrators locksmiths with merchandise have everything in stock and if they don't have it.
Dealer, we'll move on to another distributor and that's what we find so.
It's good to have multiple distributors just in case the distributor doesn't.
Watches PS and Qs where is inventory levels.
Alright, Thank you for that and then and then on the schools and University side I know that.
I guess part of the seasonality in the past.
June being June being better.
Ohio was because of the schools and universities or are you seeing anything on the on the locks in the access could call any indications that I know you've said in the past that it's tough to kind of tell where the business is coming from but do you see a pickup in schools and universities.
There's a lot of quoting activity more than ever.
You got to realize that these schools.
Preoccupied with.
With whether or not students should come back or should they not come back or should it be hybrid combination.
They really weren't focused on school security.
And a lot of a lot of the school jobs.
They didn't want the integrators on the campus if the students are there they didn't want anybody there.
And I think that impacted.
The ability to get more jobs. These last.
Six nine months.
But that's starting to change kids are coming back.
We're in a lot of discussions with a lot of schools. Okay now that theyre coming back when do you think we could do this job that kind of thing.
So school security hasn't gone away.
As we mentioned.
In our comments, it's been shootings even since.
The small amount of time that the kids did return.
It was one in Tennessee that it's been there's been several.
That issue is not going away, we're there to supply the solutions that these schools need.
And I think.
Youll start to see that.
Happen at.
At least we will be able to announce it over these next several quarters.
Got it. Thank you. Thank you answered my questions I'll get back in the queue.
Thanks Raj Congratulations again yeah.
And just a reminder to ask a question press star one on your phone to remove your question from Q Press Star two.
Our next question comes from Jeff Kessler with Imperial capital. Please state your question.
Thank you and it's great talking to you guys again.
In terms of the assets.
The timing of when.
When our quoting.
Quoting and talking turns into revenue for you.
In talking to the <unk>.
The large.
Installers and monitoring companies.
And also the.
And the integrators, who are either cover publicly or privately.
They are seeing and they have been seeing.
Record amounts.
<unk>.
Record amounts of let's say pipelines and backlogs.
Some which are at record levels, some which is just at increasing increasingly high levels.
They're hoping that.
They are hoping that these discussions turn into real revenue for them. Later on later on this year later on is it kind of in Fabulous term, but let's hope for the fourth quarter can you just talk a little bit about when the.
When the people who are in Sterling.
In in weather, whether it's whether it's access control or whether its intrusion et cetera.
When the store is getting in but how long how long a period of time, where are you in that cycle in terms of in terms of you being able to get paid and book revenues.
Hi, Jeff Hi.
Well, we have Vic we sell to three different types of dealer groups, we sold to alarm dealers.
Switch to a fire in burglar alarms, we show two access control do you lose.
Which put in larger jobs and we sold the Locksmiths.
So typically what.
What happens is the.
The customer.
Of any of those companies wants to get more protected or he needs to expand as a building or he needs to renew his certificate of occupancy for the building. So the dealers will come in especially on the commercial side.
And and quote on those jobs a lot of people a lot of these companies and these buildings get two or three different quotes.
And and.
In the system.
Really has to go with.
Because the fact that it's a kind of a crazy world today, and those dealers and NAPCO or in the rate.
The industry at the at the right time.
So those jobs go in.
Large larger jobs may take a little bit longer ecosystem.
Funds that have to be granted from the from the company.
The approvals from the board of the company.
Building. So there's no particular, one answer we have a lot of irons in the fire remember we have more than 10000 of these companies season installing type of companies out there canvassing the streets.
And doing jobs, so there's no one answer but.
You can see that we're putting together a continuous growth pattern.
Recurring revenue, which means that a lot of our alarms with radios and our style links with radios and now our air access.
We'll generate the recurring revenue because remember with US a sale of a recurring revenue product is just the beginning of a relationship.
Our relationship goes on for many many years because the building has to be protected from many many years. So once we make that sale. So at the end, it's a new beginning with our new relationships. So this whole thing keeps building its like a snowball and and we're the leader in.
Recurring <unk>.
Radios.
With a great performance working in all the networks so.
That's what's driving our growth in addition to supplying locking which will have recurring revenue soon and the access control. The same thing will have recurring revenue soon so.
It's everything is moving forward Jeff.
Okay.
One other question is related to actually what you just said and that is.
One of the things about recurring revenue product I mean, one of the great things is that it's you said it's recurring.
Recurring obviously and that the margin that it can be high and you can you can plan.
You can plan. Your you can plan your budget more easily with this company going.
With your clients going out one of the challenges of recurring.
Recurring revenue is that.
Over a period of time that at the beginning but certainly getting into it after two or three years, you have to prove yourself over and over again.
Two sometimes different regimes that come into the companies or for that matter, if you're working with the state different secretaries of state.
Who's ever Whosever whosoever, giving out the contracts that you are still you.
Still.
<unk> the best service for in some cases, the best price it doesn't always have to be the best price, but you know what I'm getting at is that you have to prove yourself over time because there are there are it is not easy, but there are incumbents, who do get knocked out of recurring revenue projects from time.
At the time.
Again, it's probably not going to happen with you, but the question is what are you folks doing in advance to make sure that you remain the.
The value proposition for them so that they.
So you don't ever think of having to leave you for some other.
Somebody who says we can provide the same thing as NAPCO for a lower price, which probably will happen in two or three years.
We don't see it that way because the fact that we give.
The the best radio coverage.
That can be gotten with unique circuitry of unique product at a very very good price very value price. So if a new regime comes in a new installation company that wants to knock out the old installation company.
Uh huh.
Our units can be reprogrammed to go into the new installation companies network.
And it's been very reliable and why would somebody want to rip out all kinds of equipment we.
And that experience.
They reprogram it.
With our blessing to get them, what they need to get a code wise.
They use our back end network, we have multiple backend networks now clouds.
We keep adding more and more capacity to our systems and now we're going to be hitting the capacity we've already added the capacity for.
Our access.
Access control. So we have very little churn. This is not a residential thing where people are leaving residential is more as you know more of a flaky type of business people stop paying but on commercial.
Got to keep the systems going as long as they work well.
They keep upgrading them. So we don't see much of a churn compared to the residential companies okay.
Okay.
Sneaking one one final quick question.
As you know there's been a lot of if you want to call. It crazy valuations a lot of hype.
On access control of late.
And I'm not going to mention the companies, but valuations.
On some of these specs that have been combined.
Over several billions of dollars for companies that are generating.
Less than $1 million or just a couple of million dollars and it appears that that for several reasons access control is going to become.
Is being recognized for what it's always been but probably never value that way, which is which is absolutely key to not just getting in and out of out of our premises, but also visitor management and things like that.
Can you discuss a little bit more what your plans are in access control. When you when you talk about going beyond blocks into recurring revenue.
Well access control is really two different industries NAPCO is the only company that is in both of those industries.
Control is the network and which locks go onto <unk>.
So the locking companies make walks, but they don't make the actual access.
Access equipment.
We make both so we make it in.
Access control system or enterprise class and now we have a.
Cellular version, which puts all of the equipment up in the cloud for.
Mid sized jobs, which is a very important part of the business. The enterprise class, we manufacture a fantastic enterprise class system, where you have world renowned companies using our access control across the world, where it's a network, but all locks hook onto.
Our access control and give functionality that you can't get when you put in.
Our brand of Locke.
You may now of Jeff and you attach it to an access control system. It doesn't have the same functionality with totally integrated and we're the only company doing that so as you say the billions of dollars of.
Our valuation today of the access control business people are really recognizing that and we're the only guys that make both sides of it so the opportunities for us are great and now that we introduced the recurring revenue for the dealers to build equity in their business rather than just selling a service contract, but they can build equity income.
<unk>, that's a very exciting future for us I expect a number of years going forward as we laid this pipe.
Access control and the radio communications is going to be.
An exciting business for us and per our agreement.
Great. Thank you very much I appreciate it.
Thank you Jeff.
Thank you. Our next question comes from Abba Horovitz with OSP. Please state your question.
Hey, guys congratulations on another great quarter.
No surprises there are two questions one is the cash.
That keeps building every quarter and I think last time, you said, it's a good problem to have and I agree and certainly we both remember the days when you had $35 million of debt.
But it's still at the same time you are then he used to you used the inc.
The near term for that cash.
The bathroom to take that one of the best options for US which is what we're studying.
Is.
Cash dividends.
Investing acquisitions.
All of those are on the table.
Right now our focus is so away from any of that.
Because we're trying to finish the year.
On a strong note very strong note.
After year end.
We will have meetings, we'll figure out which way to go.
Theres a lot of bankers who've knock on our door and we always say if you bring us the right deal.
We're interested we'll we'll hear what you have to say so we don't rule out acquisitions, but we're very specific we want something accretive from day, one it's got to be the right multiple we want it to be a product we can make and the D are we wanted to be able to give us more recurring revenue all of those things where all of the years.
We did an acquisition of them.
When created to $35 million of that years ago. Like you mentioned why wouldn't we be interested now it'll help us get to where we want to go that much faster.
Right now nobody has brought anything of interest.
And again our focus is.
On finishing this year on a very strong note.
And the same thing really goes with the dividends because that's come up also we're studying that and eventually we might see something in that area.
Okay.
Yeah, it's not there have a little bit of dry powder waiting in the wings. So certainly right I agree with you we don't consider ourselves.
The spending wildly it.
Gotta be the right type of deal so we love it when the when the dry powder. It keeps building up and eventually will come to a conclusion and utilize it.
In a conservative way.
Okay, I mean, just to point out that that with the debt and now the cash position that really is a reversal of almost $4 a share in terms of cash that means the generation of crack cash on your balance sheet.
It's pretty strong over that period of time, reducing the debt and increasing the cash.
Impressive.
My second question is actually about I wanted to understand what's the lag time between installation and then turning on the recurring revenue.
Products that have recurring revenue.
Get turned on immediately.
As part of the installation.
Okay. So there is no lag time right.
The only lag is.
We sell it to a distributor.
<unk> right the distributor that has to sell it to the dealer wants the dealer has it it gets activated.
Okay, and what would you say that timeframe is.
Well the way theyre carrying such tight inventory levels, it's not as long as it used to be might be a month or so month and a half.
So when we when we look at that those levels, we can actually meaning if I. The minute you sell to the distributor its about a month timeframe until you actually activate the recurring revenue and I would say on average something like that.
Wow, Okay, and just finally, the Dominican Republic factory, what was your utilization for the quarter.
We've been at about 80% utilization.
B.
Misleading part of that is.
The radio part of the equation, we can't keep up with that.
We can't keep up with that demand.
We started a night shift for radio business.
About six months ago, maybe not maybe a little more.
We just hired a lot more people because the demand for the radios.
As strong as stronger than ever.
So while it's 80%.
Capacity in total where overcapacity from one shift anyway for radios and now we're in that second shift mode Big time.
So shouldn't that increase the gross margin or already or soon as you get closer and closer to 100% utilization yeah as it were.
Well, we have to get back to the levels of hardware that we had before and.
And you'll see that margin expansion.
Okay. So in theory, you could have with these two things come together the recurring revenue becoming much more significant part of your business and also the expansion of the gross margin on the hardware part as the utilization.
It's closer to 100 per cent.
Yeah.
One of the things we've talked about and we mentioned that we hit our goal.
Of $40 million run rate on recurring revenue, we talked about it years ago people looked at US Cross side, because these guys talking about they only have $10 million of recurring they're going to be at $40 million by 2021, Yeah, where we're on the cusp of doing that one of the other goals. We talk about is five years out we wanted.
Get to $150 million of recurring but we also want to get to $150 million of hardware.
When we get to that $150 million of hardware.
The margins will be tremendous it'll be over 50% gross margin on the hardware part.
We want both we know the recurring is fantastic the margin during the eighties, we want the other side also to be into the 50. So that's our long term goal and we think we will get there.
Our beautiful thank you guys again.
There are no further questions at this 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 any further questions. Please feel free to call Patrick Kevin or myself for further information.
We thank you for your interest and support and we look forward to speaking to you all again in a few months discussed snap goes fiscal Q4, 'twenty, one and fiscal year 2021 results Bye bye have a wonderful day.
Thank you. This concludes today's conference all parties may disconnect have a good day.